Question 1

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

Accepted Answer

Setting goals for the portfolio is an important first step in the investment process. This helps the investor determine the appropriate asset allocation and investment strategy.

Question 2

In a well-diversified portfolio,the risk associated with fluctuations in securities prices is reduced.

Accepted Answer

False

Question 3

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

Accepted Answer

Diversification is important in managing risk in investments. By spreading investments across various asset classes, industries, and geographical regions, the impact of any single investment's performance on the overall portfolio is minimized. This helps to reduce the overall risk of the portfolio.

Question 4

The individual seeking the help of a professional financial planner must be willing to reveal personal financial information (e.g.,salary and outstanding debts).

Accepted Answer

This is true, as a financial planner needs to have a clear understanding of the individual's current financial situation in order to create an appropriate financial plan. Without this information, the planner would not be able to provide adequate advice and guidance. However, all information shared with a financial planner should be kept confidential and not disclosed to others without the individual's permission.

Question 5

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

Accepted Answer

Financial planning is still important regardless of market efficiency as it involves setting personal financial goals, evaluating resources, and developing strategies to achieve those goals. Even in an efficient market, individual circumstances and preferences can lead to different investment decisions, and financial planning can help guide those decisions.

Question 6

A financial life cycle suggests that investors follow a period of accumulation by a period drawing down their financial assets.

Accepted Answer

The financial life cycle typically involves a period of accumulation when investors work to amass wealth, followed by a period of drawing down their financial assets, often during retirement.

Question 7

In an efficient securities market,the investor should earn,over a period of years,a return comparable to the amount of risk the individual bears.

Accepted Answer

This is known as the principle of risk-return tradeoff, where investors are compensated for taking on more risk with the potential for higher returns. In an efficient securities market, prices quickly reflect all available information, making it difficult for investors to consistently earn returns higher than the level of risk they are taking on.

Question 8

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

Accepted Answer

If an investor believes that financial markets are inefficient, they believe that there are opportunities to profit from mispricings or other inefficiencies in the market. This suggests that an active portfolio strategy, where the investor is actively seeking out these opportunities and making trades to take advantage of them, may be more profitable than a passive approach.

Question 9

The amount in a Keogh account appears on the investor's estimate of cash receipts and disbursements.

Accepted Answer

A Keogh account is a retirement account, and its balance would not typically appear on an estimate of cash receipts and disbursements, which is more concerned with current income and expenses.

Question 10

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

Accepted Answer

By diversifying their portfolio, the investor can reduce the risk associated with a particular asset, but they cannot eliminate all sources of risk such as market risk or systemic risk.

Question 11

The process of financial planning requires the individual to 1.establish financial goals
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 these choices

Accepted Answer

Financial planning involves establishing financial goals and identifying and quantifying assets. Hiring professional advisors is optional, not a requirement.

Question 12

Interest earned and received appears on the individual's balance sheet.

Accepted Answer

Interest earned and received is recorded in the income statement as it represents income for the period, not an asset or liability at a point in time, which would be shown on the balance sheet.

Question 13

An enumeration of an individual's receipts and disbursements is called an income statement.

Accepted Answer

An enumeration of an individual's receipts and disbursements is called a budget or a cash flow statement, not an income statement.

Question 14

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

Accepted Answer

Asset allocation is crucial in determining a portfolio's return as it involves selecting a mix of assets such as stocks, bonds, and cash, based on an investor's risk tolerance and investment goals. The allocation of assets impacts the portfolio's overall return, as each asset class has a different level of risk and returns. Therefore, proper asset allocation can help maximize returns and minimize risks.

Question 15

An individual's net worth is determined by subtracting liabilities from assets.

Accepted Answer

This is a commonly known formula to determine an individual's net worth. Liabilities are subtracted from assets to arrive at the net worth.

Question 16

Long-term bonds subject the investor to interest rate risk,purchasing power risk,and the possibility of default.

Accepted Answer

Long-term bonds have a longer maturity period which makes them vulnerable to interest rate fluctuations. If interest rates rise, the value of the bond decreases, leading to a decrease in the market value. Additionally, inflation can reduce the purchasing power of the future cash flows paid by the bond. Lastly, there's always a risk of default, which means the issuer could fail to meet their financial obligations, leaving the investors with losses.

Question 17

If an investor earns a return that exceeds the return on the S&P 500 stock index,that investor outperformed the market on a risk-adjusted basis.

Accepted Answer

This statement is true. The S&P 500 is a benchmark index commonly used to represent the overall performance of the stock market. If an investor earns a higher return than the S&P 500, they have outperformed the market. However, it's important to consider the level of risk taken on to achieve that return, as a higher return may come with higher risk. Therefore, outperforming on a risk-adjusted basis means achieving higher returns while taking on an appropriate level of risk.

Question 18

The amount of an outstanding mortgage appears on the individual's balance sheet.

Accepted Answer

An outstanding mortgage represents a liability for the individual and thus appears on their balance sheet.

Question 19

Contributions to an IRA appear on the individual's estimate of cash receipts and disbursements.

Accepted Answer

Contributions to an IRA are considered cash inflows and therefore appear on an individual's estimate of cash receipts and disbursements.

Question 20

One passive investment strategy suggests that the individual construct a portfolio consisting of index funds.

Accepted Answer

This is a common passive investment strategy known as index fund investing. The idea is to invest in a variety of index funds that track various sectors of the market, rather than trying to pick individual stocks or actively manage a portfolio. This approach is designed to achieve market returns over the long term with lower costs and less risk than actively managed funds.

Quiz 24: Portfolio Planning and Management in an Efficient Market Context