Deck 1: The Investment Setting

Question 1

Mutual funds are a form of direct equity claims.

Answer 1

False

Question 2

Investment is the commitment of current funds in anticipation of receiving a larger future flow of funds.

Answer 2

True

Question 3

The age and economic circumstance of an investor are important variables in determining an appropriate level of risk.

Answer 3

True

Question 4

An investor can totally eliminate time consuming investment management activities by participating in a mutual fund or limited partnership.

Question 5

Diamonds represent a form of real assets,but cattle does not.

Question 6

To achieve maximum diversification benefits,an investor should invest in projects which are highly correlated.

Question 7

The tax Act of 2003 offers greater potential for wealth accumulation.

Question 8

It is generally thought that young,upwardly mobile people should take less risk than elderly people living on a fixed income.

Question 9

Rare painting and baseball cards may be considered as forms of an investment.

Question 10

In an efficient and informed capital market environment,those investments with the greatest return tend to have the greatest risk.

Question 11

Pension funds are a form of indirect equity claims.

Question 12

Unlike the risk free rate,the level of the risk premium varies by investment.

Question 13

Common stock represents a direct equity claim.

Question 14

Commodity futures are a form of financial assets.

Question 15

The only compensation anticipated from an investment is for inflation protection.

Question 16

The riskiness of an investment is measured by the dispersion of possible outcomes.

Question 17

Diversification is the process of determining the risk premium.

Question 18

The Ibbotson study showed that high risk investments generate high returns.

Question 19

In general,if inflation is expected to increase,bond prices will increase.

Question 20

Warrants are a form of direct equity claims.

Question 21

Common stock investments that do not pay dividends are likely to provide relatively low total returns.

Question 22

Finding high income (yield)and growth in the same investment is a relatively standard practice.

Question 23

Silver is an example of a financial asset.

Question 24

Real estate may be favored by investors in high tax brackets.

Question 25

An aggressive portfolio might include real assets.

Question 26

Risk is not correlated with return in the capital markets.

Question 27

Those who engage in short-term market tactics are considered traders.

Question 28

Liquidity refers to how little the sales price of an asset has decreased from its cost.

Question 29

The "Stocks,Bonds,Bills and Inflation Yearbook" is an annual reference book publishing return data on a variety of securities.The data shows that the large company category had a negative return in only one decade and that was the 1930's.

Question 30

A lack of immediate liquidity cannot be justified even if there is an opportunity for large gains.

Question 31

Dividends and long-term capital gains are now taxed at the same maximum rate.

Question 32

Common stock is a good example of an investment that lacks liquidity.

Question 33

Retirement questions should be asked 5-10 years before retirement.

Question 34

In the financial world,risk is defined as variability of returns.

Question 35

A public utility is likely to appeal to an income oriented,conservative investor.

Question 36

A share in a money market fund is an indirect equity claim.

Question 37

Technical analysis is based on market indicators and charting to determine buy and sell decisions.

Question 38

Investors desiring to assume low risks would probably invest in short-term securities.

Question 39

Real estate is a good example of an investment that lacks liquidity.

Question 40

Real assets tend to be more liquid than financial assets.

Question 41

The tax Act of 2001 lowered the capital gains tax rate.

Question 42

One of the problems that investors face in determining required rates of return is the forecasting errors involving interest rates and inflation.

Question 43

When comparing returns by decade,the Ibbotson study shows that small stocks outperformed large stocks in every decade since the 1920's.

Question 44

A direct equity claim arises through investment in

A)Bonds and other debt instruments
B)Common stocks,warrants and options
C)Preferred stock and commodity futures
D)Mutual funds
E)None of the above

Question 45

The commitment of current funds in anticipation of receiving a larger future flow of funds is called

A)A financial asset
B)A real asset
C)An investment
D)Gambling
E)None of the above

Question 46

The Taxpayer Relief Act of 1997 has made stocks that pay high dividends more attractive than they previously were.

Question 47

A(n)_____ is a legally documented claim on an asset,while a _____ is an actual,tangible asset which may be seen,felt,held,or collected.

A)Real asset; financial asset
B)Financial asset; real asset
C)Indirect equity claim; direct equity claim
D)Direct equity claim; indirect equity claim
E)None of the above

Question 48

Which of the following statements is the most accurate concerning security returns over the eight decades since the 1920's?

A)Returns on large common stocks were very stable
B)Returns on long-term corporate bonds were very stable
C)Returns on long-term corporate bonds were very stable
D)Returns on treasury bills were very consistent from period to period
E)All securities exhibited very unstable returns over the eight decades in question.

Question 49

When ranking security returns,the data shows that the annualized returns are as follows,ranked from highest return to lowest return.

A)Large stocks,small stocks,long-term corporate bonds,long-term government bonds,treasury bills
B)Small stocks,large stocks,long-term corporate bonds,long-term government bonds,treasury bills
C)Small stocks,large stocks,treasury bills,long-term government bonds,long-term corporate bonds
D)Treasury bills,long-term government bonds,long-term corporate bonds,large stocks,small stocks
E)Large stocks,small stocks,long-term government bonds,long-term corporate bonds,treasury bills.

Question 50

Liquidity can be measured by the ability of the investor to convert an investment into cash within a relatively long period of time at its fair book value.

Question 51

Beta measures a security's return relative to the market.

Question 52

Those who attempt to engage in short-term market tactics are termed traders.

Question 53

An IRA allows an investor to deduct $10,000 or more from taxable income and invest the funds tax-free until withdrawal at retirement.

Question 54

Every investment requires a total return comprised of a real rate of return,compensation for inflationary expectations,and a risk premium.

Question 55

Prior to the Taxpayer Relief Act of 1997,the maximum rate on long-term capital gains was 28%.

Question 56

Investment in a mutual fund results in

A)An indirect equity claim
B)A direct equity claim
C)A creditor claim
D)None of the above.

Question 57

What factors must be considered in choosing between investment alternatives?

A)Risk and liquidity
B)Interest or dividends vs.capital gains
C)Time frame for managing funds and evaluating performance and tax effects
D)Safety of principle
E)All of the above

Question 58

Research has shown that it is not that difficult to beat the market on a risk-adjusted basis.

Question 59

Real assets,because of increasing replacement value and scarcity,tend to perform better than financial assets during periods of high inflation.

Question 60

When ranking the riskiness of securities using the standard deviation,the highest risk security to the lowest risk security is as follows:

A)Small stocks,large stocks,long-term government bonds,U.S.treasury bills
B)Long-term government bonds,small stocks,large stocks,U.S.treasury bills
C)Large stocks,small stocks,long-term government bonds,U.S.treasury bills
D)Small stocks,long-term government bonds,large stocks,U.S.treasury bills
E)U.S.treasury bills,long-term government bonds,large stocks,small stocks

Question 61

What are the components in determining the real rate of return?

A)The risk premium
B)The inflation factor
C)The required rate of return
D)Both a)and b)above
E)Neither a)nor b)

Question 62

A stock that pays low or no cash dividends is

A)EBay
B)Duke Power
C)AT&T
D)All of the above

Question 63

Which of the following investments would theoretically always carry the highest risk premium?

A)U.S.treasury bill
B)Common stock
C)Preferred stock
D)Corporate bond
E)Any one of the above

Question 64

What would the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3.00 dividend?

A)12%
B)11%
C)10%
D)1.5%
E)5%

Question 65

Which of the following is not one of the considerations in setting investment objectives?

A)Risk versus safety of principal
B)Maximize wealth versus minimize expenses
C)Current income versus capital appreciation
D)Short versus long-term orientation
E)Taxes

Question 66

_____,because of increasing replacement value and scarcity,perform best in periods of high inflation.

A)Real assets
B)Common stock
C)Preferred stock
D)Financial assets
E)More than one of the above

Question 67

The two components that make up the risk-free rate are

A)Real rate of return and capital gains
B)Risk-free assets and capital gains
C)Real rate of return and the inflation factor
D)Real assets and the inflation factor
E)Capital gains and the inflation factor

Question 68

Wealthy investors may prefer the favorable tax treatment of investments such as

A)Corporate bonds
B)Municipal bonds
C)Common stock
D)Preferred stock

Question 69

What is the rate of return on a share of common stock that increased in value from $40 to $50?

A)5%
B)10%
C)20%
D)25%
E)None of the above

Question 70

One of the reasons a short-term trader has difficulty in beating the market is because of

A)Risk
B)Lack of information
C)Large institutional investors
D)Commissions

Question 71

Higher bond prices generally signal expectations of

A)Higher inflation
B)Lower inflation
C)Rising stock prices
D)Higher risk premiums
E)None of the above

Question 72

An investment requires a total return that comprises

A)A real rate of return and compensation for inflation
B)A real rate of return,compensation for inflation,and a risk premium
C)Compensation for inflation and a risk premium
D)A real rate of return,compensation for inflation,a risk premium,and compensation for time and effort devoted to researching alternative investments
E)None of the above

Question 73

The investor of a high-yielding utility can expect

A)Slow growth in earnings
B)Slow growth in the stock price
C)Slow growth in the stock price with a fast growth in earnings
D)Fast growth in the stock price with a fast growth in earnings
E)Both a and b

Question 74

An investment in common stock carries a higher return than a bank certificate of deposit.The difference in returns is called

A)The risk-free rate
B)The real rate of return
C)The risk premium
D)The beta
E)None of the above

Question 75

The holding period to qualify for a long-term capital gains is

A)At least 6 months
B)At least 12 months
C)At least 18 months
D)At most 18 months
E)12 months and a day

Question 76

Deposits in an IRA are

A)Allowed to grow tax free until withdrawal
B)Deducted from current income tax due
C)Deducted from current income to reduce income tax due
D)A and C

Question 77

What is the risk-free rate in an environment where the real rate is 3% and inflation is running at 3%? Use either method found in chapter one.

A)14.5% or just 14%
B)10.21% or just 10%
C)6.09% or just 6%
D)9.09% or just 9%
E)0%

Question 78

Common stock dividends are now taxed at a maximum rate of

A)10 percent
B)15 percent
C)20 percent
D)30 percent
E)38.8 percent

Question 79

The ability of the investor to convert an investment into cash in a short period of time is called

A)Short-term orientation
B)Low investment risk
C)Liquidity
D)Capital appreciation
E)None of the above

Question 80

Because most investors are risk averse

A)The riskier the investment,the more the investor will pay for it
B)The riskier the investment,the less compensation the investor requires
C)Only financial institutions invest in risky assets
D)They will require a higher rate of return for a riskier investment