Deck 11: Personal Investing - Investing Fundamentals

Question 1

Before you start an investment program, you should ensure liquidity by having money in financial institutions or in money market securities.

Answer 1

True

Question 2

An advantage of investing in corporate bonds is that they hold their value and pay predictable interest (coupon)payments periodically.

Answer 2

False

Question 3

Mutual fund gains can be in the form of dividends or capital gains, which are passed on to the individual investors.

Answer 3

True

Question 4

A company has a choice of whether to distribute dividends to common shareholders or to keep their profits in the company as retained earnings.

Question 5

Growth stocks are likely to pay high dividends.

Question 6

The stocks of well-known companies are referred to as "preferred stock."

Question 7

Many more shares of stock are traded daily on the primary market than on the secondary market.

Question 8

It would be very difficult and expensive for an individual investor to benefit from holding all 60 stocks on the Toronto Stock Exchange (TSX).

Question 9

Because dividends are fixed, the prices of preferred stock are not as volatile as those of common stock.

Question 10

Institutional investors are professionals employed by a financial institution who invest their own money earned from their jobs.

Question 11

Common stockholders have the right to vote on key corporate issues, but also have the last claim to the assets or profits of a company.

Question 12

The primary market is used by firms to raise funds and is a market where newly issued securities are traded.

Question 13

In addition to the interest earned on a bond, it is also possible that the actual bond will increase in value over time.

Question 14

Bonds are certificates representing partial ownership of a firm.

Question 15

The higher the dividend paid by a firm, the lower its potential stock price appreciation.

Question 16

Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds.

Question 17

Since the gain received from the sale of stock is always taxed as ordinary income, you may want to time your sale to shift your profit from one year to another.

Question 18

Most individual investors who buy and sell stock do so on the secondary market through brokers or investment companies.

Question 19

Common stockholders usually have more dividend rights than preferred stockholders.

Question 20

One of the attractive features of mutual funds is that they offer small investors a diversified portfolio and professional management.

Question 21

The risk-free rate of return would be the current rate offered to you by a government investment.

Question 22

Smart investors can find investments that generate high rates of returns with small amounts of risk.

Question 23

It is easier to invest in an exchange-traded fund to diversify your investments than to buy each stock listed in the TSX.

Question 24

A bond issued by a weak corporation will have a low risk premium.

Question 25

An investment with a return of 9.5 percent, while the government rate for a similar investment is 3.5 percent, has a 6 percent risk premium.

Question 26

An investment that has the potential to rise substantially in value also has the potential to decline substantially in value. If you cannot afford the possible loss, you should not make that investment.

Question 27

A stock trading at $20 pays a dividend annually of $0.50. The yield is 2.5 percent.

Question 28

By receiving dividends you apply a dividend tax credit, meaning that you pay less tax than you do on salary.

Question 29

The higher the risk premium, the safer the investment.

Question 30

The length of time you hold an investment reduces the overall risk of the investment.

Question 31

Ellie bought a stock for $18 and sold it for $26. She has a taxable capital gain of $4.

Question 32

The timing on the sale of a stock could make a big difference in the amount of taxes that are due on the profits.

Question 33

If the stocks listed on the TSX all went up 10 percent, your XIU large-cap exchange-traded fund would go up 15 percent.

Question 34

Dividends are grossed up on your tax return, meaning that you pay a higher rate of tax than you do on your earned income.

Question 35

Present and future value concepts are used to determine the wealth provided by an investment.

Question 36

Preferred shares always pay their dividends.

Question 37

XIU is an exchange-traded fund that represents the 60 largest companies on the Toronto Stock Exchange.

Question 38

One of the factors involving risks of investments is the time period you have to keep your money invested.

Question 39

Making an investment in an exchange-traded fund is more risky than buying the common shares of just one company.

Question 40

The standard deviation of a stock's monthly returns measures the degree of volatility of a stock's returns over time and can be a method of evaluating a stock's future risk.

Question 41

Diversifying your investments has no effect on the risk premium on all of your investments.

Question 42

Asset allocation and diversification insulate a portfolio so it cannot lose money in weak stock markets.

Question 43

Asset allocation is another name for diversification.

Question 44

An investor who receives interest will pay less tax than capital gains and dividends.

Question 45

Institutional investors

A)are responsible for more than half of all trading in financial markets.
B)focus their efforts on investment decisions of less than one year.
C)focus their efforts on stock selection by technical analysis.
D)tend to be expert day traders.

Question 46

The security that represents equity or ownership of a corporation is

A)common stock.
B)corporate bonds.
C)long-term loans.
D)stock options.

Question 47

An income trust provides regular income and is as reliable as a bond.

Question 48

A stock with larger standard deviations of returns has higher risk than a stock with lower standard deviations.

Question 49

The market for newly issued securities and initial public offerings (IPOs)is the

A)initial market.
B)original market.
C)primary market.
D)secondary market.

Question 50

Before you start to invest, you should ensure you have liquidity by owning

A)individual stocks.
B)short -term securities.
C)options and puts.
D)corporate bonds.

Question 51

Low-risk bonds tend to offer higher interest payments.

Question 52

A REIT is an example of an income trust.

Question 53

Borrowing to invest may make sense if you are debt-free.

Question 54

People with a low risk tolerance should invest in individual stocks.

Question 55

Returns from investment in real estate include capital gains and rental income.

Question 56

Day trading

A)is frequently conducted by institutional investors.
B)is a good way to make money safely.
C)is not recommended for most investors.
D)is the first offering of a firm's shares when markets open.

Question 57

Having equal amounts invested in stocks, bonds, and preferred shares is called asset allocation.

Question 58

The risk of an investment comes from the uncertainty surrounding its return.

Question 59

When diversifying a portfolio, you should select investments with high positive correlation.

Question 60

Borrowing to make investments can increase your risk beyond a level that is comfortable.

Question 61

Which of the following is a true statement about dividends?

A)Dividends are not based on earnings.
B)All companies pay dividends.
C)Dividends are based on the number of shares.
D)Dividends are paid by older, established companies.

Question 62

Which one thing do you always have with common stock?

A)Dividends
B)Voting rights
C)Capital appreciation
D)A guarantee of minimum par value

Question 63

Rising stock prices are related to

A)poor economic conditions.
B)corporate objectives.
C)negative earnings.
D)steadily increasing earnings.

Question 64

Compared with common stock, preferred stock values

A)are more variable.
B)are less variable.
C)are lower.
D)are higher.

Question 65

In the secondary market, stock prices are

A)determined by supply and demand.
B)stable.
C)easy to predict.
D)less expensive than on the primary market.

Question 66

Stocks that are undervalued by the market for reasons other than the performance of their business are called

A)growth stocks.
B)value stocks
C)preferred stocks.
D)income stocks.

Question 67

Common stock

A)is less common than preferred stock.
B)is less risky than preferred stock.
C)provides the owner with voting rights.
D)guarantees a dividend.

Question 68

Which of the following is good investment advice?

A)Set high goals and expectations for your investments even if they are unrealistic.
B)If you have two hundred dollars a month to invest, consider diversifying using mutual funds.
C)If you are not getting the returns you need on your savings, select a more risky investment.
D)If you hear about an investment tip, simply borrow to invest, if you do not have the cash.

Question 69

If you believe that a firm will grow rapidly in the future, you should buy its

A)bonds.
B)notes.
C)common stock.
D)preferred stock.

Question 70

Investment professionals responsible for managing pension funds and mutual funds are called

A)institutional investors.
B)professional investors.
C)managing investors.
D)securities investors.

Question 71

Which of the following is true regarding preferred stock?

A)It gets rights to the distribution of profits behind common stockholders.
B)It has an optional dividend rate and frequency.
C)It has the potential for greater capital appreciation than common stock.
D)It is a safer and more conservative investment than common stock.

Question 72

Which of the following is true about mutual funds?

A)There are five kinds of mutual funds with different investing objectives.
B)The professional management mutual funds consistently beats the TSX index returns.
C)Dividends received from their investments are used to pay the fund's expenses.
D)Dividends, interest and capital gains are distributed to mutual fund unit holders.

Question 73

The difference between common and preferred stock is that preferred stock

A)may or may not receive dividends.
B)has predictable income and more safety.
C)has greater potential for capital appreciation.
D)is issued more frequently than common stock.

Question 74

Which of the following is true regarding stock prices?

A)They are influenced by supply and demand.
B)They are regulated by the Bank of Canada.
C)They appreciate in price continually.
D)The higher the dividend payout the higher the potential appreciation.

Question 75

Corporate bonds

A)offer a return to investors in the form of interest payments.
B)maintain their value even in periods of changing interest rates.
C)appreciate in value as the maturity date nears.
D)lose value as the maturity date nears.

Question 76

The best way to ensure that you will receive dividends is to

A)day trade.
B)purchase bonds.
C)purchase common stock.
D)purchase preferred stock.

Question 77

If you wish to have a direct voice in the running of a company, you should purchase

A)directorships.
B)notes.
C)common stock.
D)preferred stock.

Question 78

Which is true about dividends?

A)They are earnings distributed to shareholders.
B)They are return of capital distributed to shareholders.
C)They are retained earnings.
D)They tend to change a lot each quarter.

Question 79

Regarding dividends paid on common stock,

A)older, established firms tend to pay lower dividends.
B)newer firms in growth industries tend to pay higher dividends.
C)some firms don't pay any dividends at all.
D)a firm with high dividends is likely to have high stock price appreciation.

Question 80

Growth stocks tend to

A)be those of more established companies.
B)offer great opportunities for capital appreciation.
C)pay high dividends.
D)be favoured by more conservative investors.