Question 1

Given the bank rate of 3 percent,purchasing an investment with a 9 percent risk premium means

Accepted Answer

The investor expects a return of 12 percent because the risk premium (9 percent) is added to the bank rate (3 percent), totaling 12 percent. However, due to the nature of risk and investments, the exact amount may not be guaranteed.

Question 2

Given the bank rate of 3.5 percent,and a corporate bond that will pay 10 percent.What is the risk premium?

Accepted Answer

The risk premium is calculated by subtracting the bank rate from the bond's interest rate: 10% - 3.5% = 6.5%.

Question 3

For your retirement you want to have enough funds in your RRSPs to provide an income stream of $22 000 for 30 years.How much money would you need to have accumulated if your RRSPs averaged a real return of four percent per year? (Round to the nearest thousand)

Accepted Answer

The answer of For your retirement you want to have...

Question 4

Your investment portfolio matches your risk profile perfectly but you are not meeting your investment goals.You should remedy this by

Accepted Answer

If the portfolio matches the risk profile, then increasing the high-risk portion might lead to excessive risk-taking. Cutting expenses can only increase savings, but not necessarily help in achieving investment goals. Selling all the investment assets would not be a wise decision, as it could lead to losses. Therefore, reviewing investment goals and making adjustments to align them with the portfolio's risk profile is the best course of action.

Question 5

You want to save $10 000 toward the down payment on a house in five years.If you can earn 8 percent (compounded monthly),approximately how much should you save each month to reach this short-term goal?

Accepted Answer

We can use the formula for future value of an annuity to determine how much we need to save each month:

FV = PMT * [(1 + r/n)^(nt) - 1] / (r/n)

Where:
FV = future value (which is $10 000)
PMT = monthly payment
r = annual interest rate (which is 8%)
n = number of times interest is compounded in a year (which is 12 for monthly compounding)
t = number of years (which is 5)

Plugging in the numbers, we get:

$10 000 = PMT * [(1 + 0.08/12)^(12*5) - 1] / (0.08/12)

Solving for PMT, we get:

PMT = $135.88

So we should save approximately $136 each month to reach our goal of $10 000 in five years. The closest answer choice is B.

Question 6

You are investing a lump sum of $7200 with a goal of saving $200 000 total in 30 years.What annual interest rate on your investments would you need to reach your goal?

Accepted Answer

Using the compound interest formula, we can solve for the annual interest rate necessary to reach the goal:
$200,000 = $7,200(1+r)^{30}
(1+r)^{30} = 27.777... 
1+r = (27.777...)^{1/30} 
1+r = 1.117... 
r = 0.117...
r = 11.7%

Therefore, the annual interest rate needed to reach the goal is 11.7%. Choice B is the correct answer.

Question 7

Investing in growth stocks usually refers to

Accepted Answer

Growth stocks refer to companies that are expected to have higher than average growth rates in earnings and profits. Younger companies with potential for large capital gains are often considered growth stocks because they have more room for growth compared to older, established companies that may pay large dividends instead.

Question 8

Stocks that provide investors with periodic income in the form of large dividends are called

Accepted Answer

Income stocks are stocks that provide investors with periodic income in the form of large dividends. Large cap stocks refer to companies with a large market capitalization, growth stocks are stocks of companies that have high growth potential, and value stocks are stocks that are undervalued by the market but have the potential to provide good returns.

Question 9

If the market value for ABC Ltd.is $70 000 000 and its number of shares outstanding is ?35 555 555,the value of stock per share is

Accepted Answer

The answer of If the market value for ABC Ltd.is...

Question 10

How much more will you earn on a lump sum investment of $20 000 if you increase your risk tolerance to improve your return from 6 percent to 8 percent over a 20-year period?

Accepted Answer

The difference in earnings can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount (the initial sum of money), r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the time the money is invested for in years. For simplicity, we'll assume the interest is compounded annually (n=1). For a 6% interest rate over 20 years: A1 = $20,000(1 + 0.06)^20 = $64,143.62For an 8% interest rate over 20 years: A2 = $20,000(1 + 0.08)^20 = $93,219.22The difference: A2 - A1 = $93,219.22 - $64,143.62 = $29,075.60, which rounds to $29,077.

Question 11

In December 1977 the TSX index was 1059.In December 2007 the TSX index was 11 980.What has been the historical return on equities during this period?

Accepted Answer

The answer of In December 1977 the TSX index was...

Question 12

You have invested $16 000.How long it will take to accumulate $100 000 at the fairly conservative rate of 6 percent?

Accepted Answer

The answer of You have invested $16 000.How long it...

Question 13

You have been very risky with your investments but,having just turned 50 years of age,your investment adviser suggests you reallocate to reduce your risk.He advises you that your returns will be lower but it would be a wise move.You have $236 000 saved and wish to retire with $300 000.When will you be able to achieve this if the return is now 5.5 percent compounded monthly?

Accepted Answer

Using the formula for compound interest, the time required to grow $236,000 to $300,000 at a 5.5% annual interest rate compounded monthly is approximately 4.37 years.

Question 14

An income trust

Accepted Answer

DIncome trusts distribute all or most of their cash flow to investors, which can lead to price volatility similar to stocks (C). The distributions from income trusts often have tax implications similar to dividends, where part of the distribution may be treated as a return of capital or other income, affecting the tax treatment (D).

Question 15

Buying more of a stock that has just plummeted in value is an example of

Accepted Answer

The answer of Buying more of a stock that has...

Question 16

It is now 2030 and you have saved $250 000 since you started saving in 2007.During the same period inflation averaged 3 percent.What would your $250 000 be worth in 2007 dollars?

Accepted Answer

To find the value of $250,000 in 2007 dollars, considering an average inflation rate of 3% from 2007 to 2030 (a period of 23 years), we use the formula for the present value: Present Value = Future Value / (1 + inflation rate)^number of years. Plugging in the values: $250,000 / (1 + 0.03)^23 ≈ $126,673. This calculation adjusts the future value back to its equivalent in 2007 dollars, accounting for the decrease in purchasing power due to inflation.

Question 17

Your after tax return on your investments is 2.8 percent compounded monthly.Approximately how much will you have to save per month in order to have $80 000 in 25 years to buy a retirement cottage? Assume your investments are not tax sheltered.

Accepted Answer

The answer of Your after tax return on your investments...

Question 18

If you wish to supplement your retirement by saving $200 000 in 25 years,how much more would you have to save monthly if you saved the money outside rather than in an RRSP? Consider that investment returns should provide a yield of 8.5 percent compounded monthly and your tax rate is 30 percent,so the after tax return would be 5.95 percent.

Accepted Answer

Using the compound interest formula A=P(1+r/n)^(nt), where A is the amount after 25 years, P is the initial investment, r is the annual interest rate, n is the number of times compounded in a year, and t is the number of years, we can calculate the amount needed to save monthly to reach $200,000 in 25 years:

For RRSP:
A = $200,000
P = 0 (monthly savings)
r = 8.5% / 12 = 0.70833%
n = 12 (compounded monthly)
t = 25

200,000 = 0(1+0.70833%/12)^(12*25)
0 = 200,000/(1+0.70833%/12)^(12*25)
0 = $285.14 (monthly savings)

For outside savings:
A = $200,000
P = 0 (monthly savings)
r = 5.95% / 12 = 0.49583%
n = 12 (compounded monthly)
t = 25

200,000 = 0(1+0.49583%/12)^(12*25)
0 = 200,000/(1+0.49583%/12)^(12*25)
0 = $382.19 (monthly savings)

The difference between the two amounts is:
$382.19 - $285.14 = $97.05

Therefore, the answer is C: $97.05.

Question 19

Which portfolio provides the advantage of asset allocation?

Accepted Answer

A portfolio invested in a variety of assets to maximize return with less risk provides the advantage of asset allocation. This type of portfolio includes a mix of assets such as stocks, bonds, real estate, and commodities in order to spread risk and maximize returns. By diversifying across multiple asset classes, investors can reduce the impact of any one asset class on overall portfolio performance.

Question 20

You are investing to achieve the following goals: A down payment for a cottage in the amount of $8000 in six years,$4000 for a trip to Europe in three years,and $150 000 to supplement retirement income in 24 years.If you can earn 7 percent compounded monthly on your investments,how much should you be saving each month?

Accepted Answer

To calculate the monthly savings needed to achieve each goal, we use the future value of an annuity formula: $FV = P \times \left( \frac{(1 + r)^n - 1}{r} \right)$, where $FV$ is the future value, $P$ is the monthly payment, $r$ is the monthly interest rate, and $n$ is the total number of payments. Since the interest rate is compounded monthly, we divide the annual rate by 12. For each goal:1. **Cottage Down Payment ($8,000 in 6 years)**:   - $r = \frac{0.07}{12}$   - $n = 6 \times 12 = 72$   - Solving for $P$ gives the monthly amount needed for this goal.2. **Trip to Europe ($4,000 in 3 years)**:   - $r = \frac{0.07}{12}$   - $n = 3 \times 12 = 36$   - Solving for $P$ gives the monthly amount needed for this goal.3. **Retirement Supplement ($150,000 in 24 years)**:   - $r = \frac{0.07}{12}$   - $n = 24 \times 12 = 288$   - Solving for $P$ gives the monthly amount needed for this goal.After calculating $P$ for each goal, summing these amounts gives the total monthly savings required. The correct total, based on these calculations, is approximately $392, making option A the correct answer.

Quiz 10: Personal Investing - Investing Fundamentals