Deck 18: Asset Allocation

Question 1

Which of the following would not be a good method of asset allocation?

A) Restrict your portfolio to stocks
B) Include bonds
C) Include real estate
D) Include mutual funds

Answer 1

Restrict your portfolio to stocks

Question 2

The more similar the returns of individual investments in a portfolio, the more volatile the returns are over time.

Answer 2

True

Question 3

Asset allocation is the process of dividing money across financial assets that include all of the following, except

A) stocks.
B) bonds.
C) mutual funds.
D) All of the above can be used for asset allocation.

Answer 3

All of the above can be used for asset allocation.

Question 4

In constructing a portfolio, you should diversify across several investments.

Question 5

You can best reduce investment risk by investing in

A) a corporate bond.
B) a portfolio of investments.
C) corporate stocks.
D) real estate.

Question 6

The primary benefit of diversification is that it

A) is convenient.
B) is cheap.
C) reduces the exposure of your investments to adverse effects of any individual investment.
D) increases stock volatility.

Question 7

Proper asset allocation can

A) increase your wealth.
B) decrease your assets.
C) increase your dividend income and decrease your interest income.
D) increase your expenses.

Question 8

The more volatile the returns of individual investments in a portfolio, the more volatile the portfolio's returns are over time.

Question 9

A portfolio can reduce risk when its

A) investments do not move in tandem.
B) investments move in tandem.
C) returns of individual investments are similar.
D) investments are from similar industries.

Question 10

Diversifying your investments could protect you to some degree from the problems associated with misleading financial statements from some companies.

Question 11

When you compile a portfolio of stocks, you should avoid including stocks that exhibit

A) a high negative correlation.
B) a high positive correlation.
C) no correlation.
D) an inverse correlation.

Question 12

A portfolio's risk is measured by its degree of volatility because the ________ volatile the returns, the ________ uncertain the future return on the portfolio.

A) more; more
B) more; less
C) less; more
D) None of the above.

Question 13

When you compile a portfolio, you should include investments that exhibit a high positive correlation.

Question 14

A portfolio can be less risky when its investments move in perfect tandem.

Question 15

The objective of asset allocation is to

A) make investment decisions easier.
B) ensure the returns of the individual investments within a portfolio.
C) achieve a desired return on investment and eliminate the adverse risk of investing.
D) achieve a desired return on investment and maintain a tolerable risk level.

Question 16

The main benefit of diversification is that it reduces the exposure of your investments to the adverse effects of any individual stock.

Question 17

To reduce your investment risk, you should select stocks whose returns exhibit a ________ positive correlation rather than a ________ positive correlation.

A) high; high
B) low; high
C) high; low
D) low; low

Question 18

Which of the following is a true statement about diversification?

A) It will increase your overall portfolio risk.
B) It will increase your portfolio volatility.
C) It will decrease the number of investments in your portfolio.
D) It will reduce overall risk and volatility in your portfolio.

Question 19

Asset allocation is the process of allocating money across financial assets, such as stocks, bonds, and mutual funds, with the objective of eliminating risk altogether.

Question 20

The more ________ the returns of individual investments in a portfolio, the more ________ the portfolio's returns are over time.

A) similar; volatile
B) different; volatile
C) steady; unsteady
D) aggressive; predictable

Question 21

If you are trying to adequately diversify your portfolio, you would want to avoid investing in stocks that were

A) highly negatively correlated.
B) not at all correlated.
C) highly positively correlated.
D) in different regions of the world.

Question 22

Common stock diversification strategies include diversifying among stocks across industries and among stocks across countries.

Question 23

To which of the following markets would an investment adviser recommend you allocate approximately 80% of your money if you wanted to maintain a relatively low degree of risk?

A) European stocks
B) Asian stocks
C) U.S. stocks
D) Latin American stocks

Question 24

Asset allocation uses ________ to reduce your risk from investing.

Question 25

Proper risk-return management for a firm means that

A) the firm should take as few risks as possible.
B) the firm must determine an appropriate trade-off between risk and return.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.

Question 26

According to the text, many investment advisors recommend ________% of foreign stocks for a diversified portfolio.

A) 0
B) 10
C) 20
D) 30

Question 27

Investing in Coke and Pepsico would be an example of

A) highly correlated stocks.
B) investing in stocks that were not correlated.
C) diversifying by investing in both rather than one or the other.
D) investing in international growth stocks.

Question 28

During the financial crisis in 2008-2009, investors who were diversified across industries

A) experienced no losses.
B) experienced large gains.
C) experienced significant losses because most industries were suffering from weak economic conditions.
D) experienced losses in financial services companies but not in other industries.

Question 29

Name two ways to diversify common stock.

Question 30

Because foreign stocks can produce such high returns, many investment advisers recommend that you invest about 45% of your portfolio in these stocks.

Question 31

The stocks, bonds, and mutual funds that an investor owns comprise his/her ________.

Question 32

Diversifying among stocks based in countries outside the United States

A) makes your portfolio less vulnerable to conditions in the United States.
B) is too expensive to use as a means of diversification.
C) makes your portfolio's returns less volatile because foreign stocks are less volatile than U.S. stocks.
D) is too risky for individual investors to consider.

Question 33

Diversification is especially beneficial during periods where the stock market conditions are generally poor.

Question 34

Diversification among stocks in different industries will usually avoid fluctuations in stock values due to general economic conditions.

Question 35

In compiling a portfolio, which of the following should you not consider?

A) Investments that exhibit a high positive correlation
B) Investments whose values are influenced by similar conditions
C) Negatively correlated investments
D) A and B are correct

Question 36

Stocks from outside the United States have about the same volatility as those from U.S. markets.

Question 37

When investing outside the United States, stocks are typically ________ U.S.-based stocks.

A) as volatile as
B) less volatile than
C) more volatile than
D) more stable than

Question 38

Stocks in developing countries are generally ________ stocks in developed countries.

A) as volatile as
B) more volatile than
C) less volatile than
D) more stable than

Question 39

If your portfolio consists of 100 shares of Facebook, 100 shares of Twitter, and 100 shares of Google, which of the following statements would be true of your portfolio?

A) It is well diversified by industry.
B) It is well diversified by type of asset.
C) It has poor diversification.
D) It has more diversification than is necessary.

Question 40

The objective of diversification in an investment portfolio is

A) to make sure you have all your eggs in one basket.
B) to eliminate non-systematic or company specific risk.
C) to eliminate systematic portfolio risk.
D) to hold a lot of strong growth stocks.

Question 41

When two companies' profits tend to move in opposite directions in response to changing economic factors, the companies are likely

A) negatively correlated.
B) not correlated.
C) unrelated in industry sector.
D) in different regions of the world.

Question 42

Which of the following pairs of stocks seem to offer the most diversification benefits?

A) Exxon - Consolidated Coal
B) Exxon - Tesla
C) Netflix - Merck Pharmaceuticals
D) Not enough information to accurately judge since correlation coefficients are not provided.

Question 43

In reality, many stocks are influenced by the same conditions as the stock market overall, so diversification by investing only in stocks is partially limited.

Question 44

________ risk is the risk that a stock is susceptible to poor performance due to weak stock market conditions.

A) Business
B) Market
C) Default
D) Management

Question 45

If stock prices overall decline in a given month, a well-diversified portfolio will likely experience

A) a decline.
B) no change.
C) a gain.
D) an unrelated change.

Question 46

Asset allocation should be restricted to stocks because they have the highest potential returns.

Question 47

One way to reduce your diversification costs is to invest in various mutual funds.

Question 48

Stock prices are influenced the most by

A) general economic conditions.
B) the price of bonds.
C) interest rates.
D) inflation.

Question 49

Mortgage REITs invest in mortgage loans, while equity REITs invest in real estate stocks or other equities.

Question 50

During the financial crisis in 2008-2009, General Electric's share price dropped significantly. This was because of the

A) business risk.
B) market risk.
C) exchange risk.
D) interest rate risk.

Question 51

The greater the proportion of stocks to bonds in your portfolio, the greater the ________ risk.

A) interest rate
B) reinvestment
C) inflation
D) market

Question 52

As you allocate more of your investment portfolio to bonds, you reduce your exposure to interest rate risk, but increase your exposure to market risk.

Question 53

Call options are the right to buy stock and put options are the right to sell stock, but both types of options can be either bought or sold.

Question 54

In general, the larger the proportion of your portfolio that is allocated to bonds, the lower will be your portfolio's overall risk.

Question 55

Which of the following do not belong in a well-diversified portfolio?

A) Global equities
B) Bonds
C) Precious metals like gold or silver
D) All of the above can be present in a well-diversified portfolio.

Question 56

In reality, many stocks are influenced by ________ the stock market overall.

A) different conditions than
B) the same conditions as
C) other conditions than
D) unrelated conditions to

Question 57

The price you pay when purchasing an option is referred to as an advance.

Question 58

In order to add real estate to your investment portfolio, you may buy houses or other real estate directly or you may purchase real estate investment trusts (REITs).

Question 59

Bond prices are inversely related to interest rates and are not directly influenced by stock market conditions.

Question 60

The returns from investing in stocks and from investing in bonds are not highly correlated.

Question 61

An investor purchases 100 shares of stock for $20 per share. The stock has now risen in price to $44 per share. To cover potential losses, the investor purchases a put option for a premium of $300 with an exercise price of $42 per share. The stock falls to $28 per share, and the investor exercises the option and sells the shares at $42 per share. Ignoring brokerage commissions and taxes, what would be the investor's return from the stock?

A) 120%
B) 110%
C) 95%
D) 70%

Question 62

A call option on 100 shares of stock is purchased for a premium of $400. The current price of the stock is $42 per share, and the exercise price is $44 per share. The option is exercised when the stock is selling for $50 per share. What would be your return on the option if after exercising it, you immediately sold the stock at the market price of $50 per share? Ignore taxes and brokerage commissions.

A) 8%
B) 12%
C) 50%
D) 200%

Question 63

If you are willing to accept only a moderate level of risk, you should invest in

A) savings accounts.
B) small-cap technology stocks.
C) a stock mutual funds.
D) Treasury bills.

Question 64

________ increase risk while ________ decrease risk in a portfolio.

A) Stocks; bonds
B) Bonds; mutual funds
C) Bonds; REITs
D) Mutual funds; stocks

Question 65

Selling options on stock you already own

A) is illegal under federal law.
B) cannot benefit you financially.
C) is called a covered call strategy.
D) is not a very good idea.

Question 66

Bond

A) prices are positively related to interest rates.
B) prices are not directly influenced by stock market conditions.
C) returns are usually higher than stock returns.
D) Both A and B are correct.

Question 67

One advantage of investing in REITs is that

A) shares can be purchased directly from the company.
B) the shareholders decide which properties to buy and sell.
C) the managers take care of maintenance.
D) the income is nontaxable.

Question 68

If your portfolio currently consists of common stock in three companies, you could increase your diversification by all of the following, except

A) selling one of the companies and putting the money in a bond.
B) selling one of the companies and putting the money in a REIT.
C) buying another stock.
D) selling one of the companies and putting the money in the other two.

Question 69

REITs are

A) similar to open-end mutual funds.
B) not traded on stock exchanges.
C) pooled funds that invest in real estate.
D) purchased directly from the company.

Question 70

In general, the ________ the proportion of your portfolio that is allocated to bonds, the ________ will be your portfolio's overall risk.

A) larger; lower
B) smaller; lower
C) larger; higher
D) None of the above.

Question 71

The right to sell 100 shares of a specified stock at a specified price by a specified expiration date is called a

A) call option.
B) put option.
C) divestment option.
D) sell option.

Question 72

As you allocate more of your investment portfolio to bonds, you reduce your exposure to ________ risk, but increase your exposure to ________.

A) interest rate; business risk
B) business; default risk
C) market; interest rate risk
D) default; liquidity risk

Question 73

Stock options

A) are traded on exchanges.
B) are relatively simple.
C) are less risky than stocks.
D) pay dividends.

Question 74

Which of the following is not true of REITs?

A) They are an easy way to invest in real estate.
B) They are a way to diversify your portfolio.
C) They are a very low-risk investment.
D) They commonly invest in commercial real estate.

Question 75

A trust that invests in loans to help finance the development of properties is called a(n)

A) equity REIT.
B) real estate REIT
C) mortgage REIT.
D) option REIT.

Question 76

Ruth paid $300 for a call option on 100 shares of stock. The option gives her the right to buy the stock for $37 per share until April 1. On March 15, the stock rises to $42 per share, and Ruth exercises her option, purchases the stock and then sells it in the market. What is Ruth's return on the option?

A) 167%
B) 67%
C) 100%
D) 150%

Question 77

REITs are classified according to how they invest their money. They include

A) equity REITs.
B) mortgage REITs.
C) mutual fund REITs.
D) Both A and B are correct.

Question 78

In a portfolio, stocks and bonds are

A) different in risk and return.
B) not highly correlated.
C) highly correlated.
D) Both A and B are correct.

Question 79

An alternative to purchasing real estate directly and finding renters is investing in a

A) management rental company.
B) real estate investment trust.
C) condominium.
D) townhouse.

Question 80

________ REITs invest money directly in properties.

A) Asset
B) Equity
C) Mortgage
D) Property