Deck 4: Financial Planning, Taxation, and the Efficiency of Financial Markets

Question 1

A tax shelter is not synonymous with tax evasion.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

Pension plans permit investors to defer income tax.

Question 7

A small firm may offer a Roth IRA instead of a 401(k) or Keogh account.

Question 8

Only the earnings, and not the amount invested, aretaxed when distributed from a 401(k).

Question 9

A Keogh account (HR-10) is a tax deferred pension plan for the self employed.

Question 10

Short-term capital gains are subject to higher tax rates than long-term capital gains.

Question 11

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

Question 12

Securities must be sold before capital gains taxation applies.

Question 13

Realized short-term capital losses are used to offset long-term losses for the purpose of taxation.

Question 14

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

Question 15

The potential savings from a 401(k) plan increases as the individual's tax rate decreases.

Question 16

A Keogh plan is a pension plan for an individual notcovered by a pension plan at place of employment.

Question 17

The anticipation of a lower tax rate in the future is an argument for a Roth IRA instead of a traditional IRA.

Question 18

Capital losses may be used to offset capital gains.

Question 19

Contributions to a Roth IRA are not tax-deductible.

Question 20

An income statement enumerates of an individual's receipts and disbursements.

Question 21

The efficient market hypothesis says that no one canoutperform the market.

Question 22

Which of the following is included in an individual's cash budget

A) common stock
B) social security payments
C) home mortgage owed
D) credit card balances

Question 23

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

Question 24

Examples of tax shelters for individuals include1. interest on municipal bonds2. realized short-term capital gains3. IRAs

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 25

The process of financial planning requires theindividual to1. establish financial goals and objectives2. quantify the value of his or her assets3. hire professional financial advisors

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 26

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

Question 27

The efficient market hypothesis suggests that thecurrent price of a stock reflects what the investment community believes the stock is worth.

Question 28

U.S. securities markets are efficient in part because these markets are very competitive.

Question 29

Examples of capital gains include sales of1. IRA accounts2. stocks sold for a profit3. real estate sold for a profit

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 30

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.

Question 31

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

Question 32

Investing in stocks purchased by insiders may generate superior investment results and that is inconsistent with the strong form of the efficient market hypothesis.

Question 33

Which of the following is excluded from an individual's cash budget

A) wages and salary
B) retirement account
C) social security tax payments
D) alimony

Question 34

The efficient market suggests that, over a period oftime, the investor should earn a return that is consistent with the amount of risk the investor bears.

Question 35

One anomaly to the efficient market hypothesis isthat investments in the debt of large firms will earnhigher returns than investments in their stock.

Question 36

According to the efficient market hypothesis, purchasing high P/E stocks should produce higher returns.

Question 37

An active portfolio strategy is premised on

A) the stock market being efficient
B) the stock market being inefficient
C) the investor's being able to obtain public information
D) the portfolio manager's access to corporate management

Question 38

Possible investment objectives may include1. capacity to meet financial emergencies2. preservation of capital3. desire to finance retirement

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 39

Securities prices tend to adjust slowly as new information is disseminated in an inefficient market.

Question 40

The tendency for securities prices to overreact maycreate an anomaly that can lead to superior returns.

Question 41

What is the federal income tax owed by an investor in the 35 percent income tax bracket The tax rate on long-term capital gains is 15 percent.
a. Tristan
sold Stock A for a short-term capital loss of
$5,250;
sold Stock B for a long-term capital gain of $4,250.
b. Isolda
sold Stock A for a $2,000 short-term gain;
sold Stock B for a $6,000 long-term loss.
c. Elsa is 65 years old and withdraws $1,000 from her
traditional IRA account, She deposits $1,000 in her
Roth IRA.
d. Gertrude
bought 100 shares of IBM in March 2006 for $100 a
share and sold 40 shares six months later for $120.
e. Siegmund's traditional IRA is currently worth
$25,000. He sold a stock in the account for $2,000.
He had purchased the stock for $1,000 in 2012.

Question 42

The use of moving averages may produce superior investment results according to

A) the weak form of the efficient market hypothesis
B) the semi-strong form of the efficient market hypothesis
B) the strong form of the efficient market hypothesis
D) all forms of the efficient market hypothesis

Question 43

Which of the following currently reduces taxes 1. contributions to an IRA2. contributions to a Roth account3. purchases of life insurance4. contributions to a 401(k) plan

A) 1 and 2
B) 1 and 3
C) 1 and 4
D) 2 and 4

Question 44

An implication of the efficient market hypothesis is

A) securities prices are randomly determined
B) stock prices reflect historical information
C) few investors can expect to outperform the market over a period of time
D) after adjusting for risk, money market securities offer superior returns

Question 45

If financial markets are efficient, thatsuggests 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 46

Which of the following is a retirement account for the self employed

A) a 401(k) plan
B) Keogh account (HR-10 account)
C) 10?K report
D) tax-deferred annuity

Question 47

What is the federal income tax owed by an investor in the 35 percent income tax bracket The tax rate on long-term capital gains is 15 percent.
a. Megan
sold Stock A for a short-term capital gain of $5,500;
sold Stock B for a short-term capital loss of $2,100.
b. Margaret
sold Stock A for a short-term capital loss of $2,000;
sold Stock B for a short-term capital gain of $4,000.
c. Melissa is 70 years old and withdraws $1,000 from her
Roth IRA account. Would the answer be different if
she were 65 years old?
d. Morgan
bought 100 shares of IBM in March for $100 a share
and sold the shares in April for $110.
e. Murphy
contributed $4,000 to an IRA and used the proceeds to
purchase stock A for $4,000. The stock was
subsequently sold for $4,500 after a year had passed.

Question 48

Net short-term capital losses are used to offset

A) dividend income
B) unrealized long-term capital gains
C) 401(k) contributions
D) realized long-term capital gains

Question 49

Which of the following is not illustrative of atax sheltered retirement plan

A) Keogh account
B) IRAs
C) 401(k) plans
D) life insurance

Question 50

The traditional IRA is

A) a tax?deferred retirement account
B) a non-tax-deferred retirement account
C) a means to generate tax?free income
D) a means to increase current income

Question 51

The weak form of the efficient market hypothesisimplies

A) securities prices are randomly determined
B) studying past price behavior will lead to inferior investment decisions
C) past securities prices predict future prices
D) studying past price behavior does not lead to superior investment decisions

Question 52

A 401(k) plan is a

A) tax?deferred retirement plan
B) savings plan for the retired
C) plan to increase current tax-exempt income
D) dividend or interest enhancement plan

Question 53

The strong form of the efficient market hypothesissuggests1. inside information will not lead to superiorinvestment results2. inside information will lead to superiorinvestment results3. studying financial statements will not leadto superior investment results4. studying financial statements will lead tosuperior investment results

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 54

What is the federal income tax owed by an investor in the 35 percent income tax bracket The tax rate on long-term capital gains is 15 percent.
a. Bob
owns a savings account that paid $350 in interest and
sold Stock B for a long-term capital gain of $1,200.
b. Bill
sold Stock A for a short-term capital gain of $3,500;
sold Stock B for a short-term capital loss of $3,100.
c. Brian
sold Stock A for a long-term capital gain of $3,700;
sold Stock B for a long-term capital loss of $5,100.
d. Barbara
sold Stock A for a $6,000 short-term loss and
sold Stock B for a $2,000 long-term gain.
e. Roberta's IRA account collected interest of $1,000
and a bond paid her interest of $1,000.

Question 55

The efficient market hypothesis requires1. financial markets to be competitive2. prices to adjust rapidly3. prices of undervalued securities to fall

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 56

If financial markets were inefficient,

A) all investors would outperform the stock market
B) prices would indicate the proper valuation of securities
C) prices would adjust rapidly
D) some investors may consistently outperform the market

Question 57

With a Roth IRA, the individual

A) deducts the annual contributions
B) earns tax-free income
C) defers taxes
D) avoids estate taxes