Deck 18: Asset Allocation

Question 1

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.

Answer 1

False

Question 2

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.

Answer 2

more; more

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

Which of the following is a true statement about diversification?

A)It will increase your overall risk
B)It will increase your volatility
C)It will decrease the number of investments in your portfolio
D)It will increase your chances of obtaining your financial goals

Question 8

Trading on information not yet publicly announced can

A)improve diversification.
B)be an acceptable asset allocation strategy.
C)be considered illegal.
D)lessen diversification.

Question 9

Diversifying your investments could even protect you to some degree from the problems associated with insider trading.

Question 10

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 11

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

Question 12

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

Question 13

To reduce your 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 14

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

Question 15

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

A)stocks.
B)bonds.
C)mutual funds.
D)real estate.

Question 16

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 17

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

Question 18

If your portfolio consists of 100 shares of Dell,100 shares of IBM,and 100 shares of Gateway,the following 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 no diversification

Question 19

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

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

Question 20

The primary benefit of diversification is that it

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

Question 21

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

Question 22

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

Question 23

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

Question 24

Diversification among stocks in different industries will usually stabilize fluctuations due to general economic conditions.

Question 25

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

Question 26

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

Question 27

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

Question 28

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 not influenced by similar conditions
C)Negatively correlated investments
D)Investments whose reaction to economic conditions will not be similar

Question 29

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 30

Many investment advisors recommend ________ percent of foreign stocks for a diversified portfolio.

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

Question 31

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

Question 32

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

Question 33

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 34

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 35

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 36

Asset allocation uses what to reduce your risk from investing?

Question 37

Stocks from outside the United States are just about as volatile as those from U.S.markets.

Question 38

Name two ways to diversify common stock.

Question 39

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

Question 40

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

Question 41

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 42

________ REITs invest money directly in properties.

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

Question 43

In a portfolio,stocks and bonds are

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

Question 44

REITs are not

A)an easy way to invest in real estate.
B)a way to diversify your portfolio.
C)a very low risk investment.
D)similar to mutual funds that hold real estate.

Question 45

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

Question 46

After September 11,2001,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 47

________ increase risk while ________ decrease risk in a portfolio.

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

Question 48

Stock prices are influenced the most by

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

Question 49

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 50

________ 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 51

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 52

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 53

REITs are classified according to how they invest their money including

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

Question 54

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 55

Advantages of investing in REITs are 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 56

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

Question 57

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 58

Bond

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

Question 59

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 60

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
C)market; interest rate risk
D)default; liquidity risk

Question 61

Your asset allocation should not be influenced by

A)your risk tolerance.
B)economic conditions.
C)religion.
D)your age.

Question 62

A closed-end mutual fund 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 63

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

A)savings accounts.
B)individual stocks.
C)a stock mutual fund.
D)T-bills.

Question 64

Stock options

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

Question 65

Which of the following will increase the premium on a call option?

A)It is out of money
B)It will expire in 72 hour
C)It is on a very volatile stock
D)It is covered by a put

Question 66

A call option 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 percent
(b)12 percent
(c)50 percent
(d)200 percent

Question 67

The price at which an option allows you to purchase or sell shares of stock is the ________ price.

Question 68

With the price of the stock at $60 per share,a put option is purchased with an exercise price of $58 per share.The option is exercised after the stock is purchased at $52 per share and results in a gain of 50 percent.What was the price of the option? Ignore taxes and brokerage commissions.
(a)$400
(b)$600
(c)$300
(d)$200

Question 69

Investors in the early stages of their career path with the need for safety and liquidity,should consider money market investments.

Question 70

Stock purchased by an investor for $20 per share 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 percent
(b)110 percent
(c)95 percent
(d)70 percent

Question 71

If a call option is purchased at a premium of $200 with the current price of the stock at $25 per share and an exercise price of $28 per share,to what price would the stock need to increase to exercise the option and sell the stock to realize a gain of 250 percent on the option? Ignore taxes and brokerage commissions.
(a)$35
(b)$62.50
(c)$70
(d)$100

Question 72

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 73

A put option is purchased for a premium of $200 with an exercise price of $38 per share and a current market price on the stock of $41 per share.What would be the return if the market price declines to $35 per share and the stock is purchased and the option exercised? Ignore taxes and brokerage commissions.Round to the nearest percentage if necessary.
(a)9 percent
(b)15 percent
(c)50 percent
(d)100 percent

Question 74

Asset allocation is

A)a personal and a financial decision.
B)objective.
C)the same for most people.
D)an easy and inexpensive thing to do.

Question 75

The purchasing of stocks in different industries,bonds,and several mutual funds would be a way to ________ your portfolio.

Question 76

If you own a call option in shares of IBM and the price increases,you could make a profit by

A)selling the shares of IBM.
B)buying the shares of IBM.
C)selling the option.
D)All of the above.

Question 77

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 78

Most investors put a heavy emphasis on stocks at an early stage in life and gradually shift toward bonds or stocks of stable firms that pay high dividends later in life.

Question 79

A(n)________ allows an investor to invest in real estate without owning individual property.

Question 80

A(n)________ gives you the opportunity to purchase or sell stocks at a set price for a set period of time and are very risky investments.