Deck 20: Financial Planning and Investing in an Efficient Market Context

Question 1

While the investor is able to reduce asset?specific risk, other sources of risk remain.

Answer 1

True

Question 2

In a well-diversified portfolio, the risk associated with fluctuations in securities prices (i.e., the market) is reduced.

Answer 2

False

Question 3

Diversification reduces

A) systematic risk
B) unsystematic risk
C) market risk
D) purchasing power risk

Answer 3

B

Question 4

For diversification to reduce risk,

A) the returns on the individual securities should be highly correlated
B) the prices of the stocks should be stable
C) the returns on the individual securities should be negatively correlated
D) one firm should offer dividends and the other should offer capital gains

Question 5

Price bubbles may be evidence that
1) financial markets are inefficient
2) financial markets are rational
3) the investors have a herd instinct
4) investors do not have a herd instinct

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 6

The tendency of investors to follow a "herd" mentality helps explain financial bubbles.

Question 7

If financial markets are efficient, that negates the importance of financial planning.

Question 8

An active portfolio strategy is premised on

A) the stock market being efficient
B) the stock market being inefficient
C) the investor's being able to obtain public information
D) the portfolio manager's access to corporate management

Question 9

Possible investment objectives may include
1) capacity to meet financial emergencies
2) preservation of capital
3) desire to finance retirement

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 10

The process of financial planning requires the
Individual to
1) establish financial goals and objectives
2) identify and quantify the value of his or
Her assets
3) hire professional financial advisors

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 11

Portfolio risk encompasses
1) a firm's financing decisions
2) interest rate risk
3) loss of purchasing power

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 12

Asset allocation is important to help diversify a portfolio but has little impact on the portfolio's return.

Question 13

Sources of risk include
1) fluctuating exchange rates
2) a firm's financing decisions
3) higher interest rates
4) loss of purchasing power

A) 1 and 2
B) 2 and 3
C) 2 and 4
D) all four

Question 14

One of the first steps an investor should take is to establish the objectives of the portfolio.

Question 15

If an investor believes that financial markets are inefficient, that argues for the individual to pursue a more active portfolio strategy.

Question 16

Since virtually all investments involve risk, the
individual should develop a diversified portfolio.

Question 17

Even if financial markets have elements of inefficiency, the individual may still be unable to outperform the market.

Question 18

If financial markets are efficient, that
Suggests that

A) investors cannot earn superior returns
B) investors cannot expect to outperform the market consistently
C) security prices are random
D) bearing additional risk will not increase return

Question 19

In an efficient securities market, the investor can not earn, over a period of years, a return comparable to the amount of risk the individual bears.

Question 20

If the financial markets were not efficient,

A) all investors would profit
B) prices indicate the proper valuation of securities
C) prices would adjust rapidly
D) an investor may consistently outperform the market

Question 21

An implication of the efficient market hypothesis is

A) securities prices are random determined
B) stock prices reflect historical information
C) few investors can expect to outperform the market over a period of time
D) after adjusting for risk, money market securities offer superior returns

Question 22

Examples of a passive investment strategies include
1) buy-and hold
2) index mutual funds
3) specialized ETFs

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all three