Deck 1: An Introduction to Investments

Question 1

Investors seek to minimize risk for a given return.

Answer 1

True

Question 2

Unsystematic risk considers how firms finance their assets and the nature of their operations.

Answer 2

True

Question 3

Which of the following is an investment as defined by an economist?

A) equipment
B) land
C) stock
D) savings account

Answer 3

A

Question 4

Inflation,which is a general decline in prices,is the source of financial risk.

Question 5

Investors must bear the systematic risk associated with fluctuating securities prices.

Question 6

Which of the following is not an investment in the lay person's general use of the term?

A) equipment
B) land
C) stock
D) savings account

Question 7

The informed investor can expect to consistently outperform the market.

Question 8

Reasons for saving and investing include
1)need for funds to meet emergencies
2)retirement income
3)desire to leave an estate for children

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 9

By accepting more risk,the investor will increase the realized return.

Question 10

Investments are made in anticipation of a return.

Question 11

Capital gains and income are the sources of the return on an investment.

Question 12

Investors may reduce risk by constructing diversified portfolios but not eliminate risk.

Question 13

Exchange rate risk refers to fluctuations in the prices of foreign moneys (i.e.,foreign exchange).

Question 14

The term "investment" in economics generally does not refer to the purchase of securities.

Question 15

The investor should specify the goals of investing.

Question 16

The negative relationship between interest rates and securities prices is the source of interest rate risk.

Question 17

The anticipated and realized return may differ.

Question 18

Risk is the uncertainty that the anticipated return will not be realized.

Question 19

Unsystematic risk refers to factors that are unique to the specific asset.

Question 20

Reinvestment rate risk results from higher stock prices in the future.

Question 21

Unsystematic risk

A) is increased through diversification
B) is reduced when markets fluctuate less
C) is affected by the nature of how a firm finances its operations
D) increases during periods of volatile interest rates

Question 22

Sources of risk to the investor include
1)loss of income when funds are reinvested
2)fluctuations in security markets
3)the financing decisions of the firm

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 23

Diversification reduces

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

Question 24

Reinvestment rate risk refers to fluctuations in

A) a stock's price
B) a stock's dividend
C) rates earned when funds are reinvested
D) the cost of an investment

Question 25

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 26

Exchange rate risk refers to fluctuations in

A) the prices of stocks on the New York Stock Exchange
B) the values of bonds and other debt instruments
C) the price of one currency relative to other currencies
D) the value of the investor's portfolio

Question 27

Many investments have common characteristics including
1)existence of secondary markets
2)risk
3)potential for capital gains

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 28

Financial investments are made in efficient markets.The existence of these markets 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 29

Risk

A) depends solely on price fluctuations
B) should be maximized to increase returns
C) is reduced through specialization
D) refers to the uncertainty of returns