Deck 13: Investment Fundamentals

Question 1

Savings is the accumulation of excess funds by intentionally spending less than you earn.

Answer 1

True

Question 2

A risk premium constitutes the difference between the riskier investment's return and the totally safe return on the T-bill.

Answer 2

True

Question 3

Bonds are shares of ownership in a corporation.

Answer 3

False

Question 4

Your goals and the time it will take to reach them dictate the investment strategies you follow and the investment alternatives you choose.

Question 5

Investment risk is the possibility that an investment may lose value.

Question 6

A good investment program replaces one's savings program.

Question 7

Conservative investors are fairly comfortable during rising and falling market conditions.

Question 8

Generally speaking,there is a trade-off between risk and rewards on investments.

Question 9

A portfolio is a collection of investments assembled to meet your investment goals.

Question 10

Ultraconservative investors should invest in instruments such as insured certificates of deposits and Series EE savings bonds.

Question 11

Long-term investors are usually willing to give up current income in favor of earning substantial future capital gains.

Question 12

Financial risk relates to the possibility that the investment will fail to pay a return to the investor.

Question 13

Generally investments with high capital gains potential also pay high current income.

Question 14

Capital gains (losses) are not realized until one actually sells the investment.

Question 15

Investment risk is speculative risk rather than pure risk.

Question 16

Dividends are distributions of profits an investor receives for depositing funds in a bank or savings and loan association.

Question 17

To earn the best returns,you should be invested in the market for only a handful of days each year.

Question 18

Aggressive-growth mutual funds are at the very top of the investment risk pyramid.

Question 19

Investment risk represents the uncertainty that the yield on an investment will deviate from what is expected.

Question 20

Your risk tolerance is your ability to weather changes in the values of your investments.

Question 21

The return on lending investments is limited to what the investor was originally promised.

Question 22

When comparing similar investments,your objective is to earn the best after-tax return.

Question 23

Short-term investing requires more diligent monitoring than long-term investing.

Question 24

Common or preferred stocks are often called equities.

Question 25

When investing,you want to select a portfolio of investments that will provide the necessary potential total return through current income and capital gains in the proportions that you desire.

Question 26

Being risk averse means that you focus primarily on preservation of capital with little desire for current income from your investments.

Question 27

A long-term investor generally has a high-risk investment philosophy.

Question 28

Having an investment approach that focuses on preservation of capital means that you do not want to lose any of the money you have invested.

Question 29

Aggressive investors must be willing to suffer substantial short-term financial losses.

Question 30

If you choose to strive for a very high return by accepting a high level of risk,you could be characterized as a risk seeker.

Question 31

Short-term investors are usually more interested in current income than capital gains.

Question 32

With a fixed maturity,the borrower agrees to pay the investor a specific rate of return for use of the principal.

Question 33

An active investor could be described as a long-term investor who makes regular investments in securities,such as mutual funds,and his or her assets are rarely sold for short-term profits.

Question 34

Most investors nearing retirement are aggressive in investment philosophy.

Question 35

Active investors earn higher returns than passive investors over the long term.

Question 36

The largest portion of return on equity investments normally comes from capital gains as opposed to dividend income.

Question 37

One should invest in a tax-free investment rather than a taxable investment whenever a tax-free investment opportunity is available.

Question 38

A passive investor carefully studies investment alternatives,regularly monitors them,and makes decisions to buy and sell with or without the advice of a professional.

Question 39

Lending investments are also called equities.

Question 40

Long-term investors seek growth in the value of their investments that equals the rate of inflation.

Question 41

Systemic risk is easier to avoid than random risk.

Question 42

To employ leverage,you should borrow funds to make an investment with the goal of earning a rate of return in excess of the after-tax costs of borrowing.

Question 43

Dollar-cost averaging forces an investor to buy more shares when the price per share is low and fewer shares when the price per share is high.

Question 44

A securities market in which prices have declined in value 20 percent or more from the previous high is called a bull market.

Question 45

In the leveraging process,your own money is used to make an investment with the goal of earning a rate of return in excess of the final selling price.

Question 46

Diversification reduces all risk.

Question 47

Houses,real estate,and other ownership investments are subject to the inflation rate risk in that the general price level in the economy might drop,thereby reducing the investment's value.

Question 48

Use of leverage will increase the rate of return on a capital gain and also will increase the rate of loss on a capital loss.

Question 49

Research indicates that an investor can cut random risk in half by diversifying in as few as five stocks and bonds.

Question 50

Ownership investments are more vulnerable to deflation risk than lending investments.

Question 51

Market timing entails shifting your money into cash or bonds when you think stocks and stock mutual funds are overpriced and then later reinvesting your money in stocks and stock mutual funds.

Question 52

Market volatility is the degree to which a market fluctuates up and down over time.

Question 53

Leverage is the speed and ease with which an investment can be converted to cash.

Question 54

The basis for the buy-and-hold philosophy is that investments go up over time and it is best to think long-term after selecting well positioned investments.

Question 55

An investment that faces high marketability risk also has high liquidity risk.

Question 56

Business-cycle and market-volatility risks are essentially the same..

Question 57

The real rate of return on an investment is the yield minus the effect of taxes only.

Question 58

Total risk comprises random risk and market risk.

Question 59

Historically,both common stock and corporate bonds have performed well in times of inflation.

Question 60

The largest transaction cost in investments usually is commissions.

Question 61

Investors in securities can diversify within an investment medium,such as different stocks in one industry,or across alternatives,such as in stocks,bonds,and mutual funds.

Question 62

The more efficient a market for investments the easier it is to find bargains.

Question 63

Generally,older investors should have a larger proportion of their assets in bonds than younger investors.

Question 64

The last step in the investment planning process is to decide on what actions to take.

Question 65

The asset allocation strategy is a form of diversification.

Question 66

Anticipated returns are not be part of the investment planning process as that is just guessing.

Question 67

Which of the following would not be considered as securities?

A)stocks
B)real estate
C)mutual funds
D)bonds

Question 68

The asset allocation strategy is a form of leverage.

Question 69

Market efficiency reflects the speed at which new information is reflected in market prices for investments.

Question 70

A limited management account allows workers saving for retirement through an employer-based plan to have the benefits of asset allocation without doing the reallocations themselves.

Question 71

The average share price is the actual cost basis of the investment used for tax purposes.

Question 72

It is time to sell a stock when the share price is much lower than what you believe the company is worth.

Question 73

A long-term investor can purchase a small number of extra shares in a company in a convenient,systematic,and inexpensive way through dividend reinvestment plans.

Question 74

Dollar-cost averaging requires that you continue to invest if the longer-term prospects suggest an eventual increase in price

Question 75

Most returns earned are derived from owning the right asset categories rather than specific investments.

Question 76

Dividend reinvestment plans are appropriate for investors who do not currently need dividend income.

Question 77

The average share cost is a simple calculation of the amount paid for the investment made by dividing the share price total by the number of investment periods.

Question 78

The first step in the investment planning process is to study available investment alternatives and learn as much as you can about the ones you like.

Question 79

The first step in the investment planning process is to write down your investment philosophy.

Question 80

Portfolio diversification is the practice of selecting a collection of investments that have dissimilar risk-return characteristics.