Question 1

Marti is 31 years old and is saving for retirement. Which one of the following portfolio allocations might best suit her situation if she is willing to accept a fair amount of risk in exchange for long-term capital appreciation?

Accepted Answer

Given Marti's age (31 years old) and her willingness to accept a fair amount of risk for long-term capital appreciation, a portfolio heavily weighted towards growth stocks (85%) with minimal allocations to bonds (10%) and money funds (5%) is most suitable. Growth stocks offer the potential for significant capital appreciation over the long term, aligning with Marti's investment goals and risk tolerance.

Question 2

When developing an asset allocation scheme, it is best to weight each type of asset equally.

Accepted Answer

Asset allocation should be based on individual financial goals, risk tolerance, and investment horizon, not on an equal weighting of asset types. Different assets have different levels of risk and potential return, so their weighting in a portfolio should reflect an investor's specific circumstances and objectives.

Question 3

Jessica's portfolio consists of 30% common stock, 40% bonds, 15% foreign securities and 15% short-term securities. This asset allocation would be considered

Accepted Answer

Jessica's portfolio is diversified across common stock, bonds, foreign securities, and short-term securities. The mix of stocks (45% when combining common and foreign securities) and bonds (40%) with a small portion in short-term securities (15%) suggests a balanced approach, aiming for growth while managing risk, which is typically considered a moderate investment strategy.

Question 4

The allocation of investments between types of assets (stocks, bonds, short-term securities, etc.) has less effect on a portfolio's return than the choice of securities within asset classes.

Accepted Answer

The allocation of investments between different types of assets (asset allocation) is generally considered to have a more significant effect on a portfolio's return and risk level than the selection of individual securities within those asset classes. Asset allocation determines the broad outline of a portfolio's performance characteristics, while security selection fine-tunes it.

Question 5

The Dow Jones Industrial Average (DJIA) includes 500 of the largest companies traded on
U. S. exchanges.

Accepted Answer

The Dow Jones Industrial Average (DJIA) includes 30 of the largest and most influential companies in the United States, not 500. The S&P 500 is the index that includes 500 of the largest companies.

Question 6

The fixed-weightings approach to asset allocation

Accepted Answer

The fixed-weightings approach to asset allocation involves maintaining a specific percentage allocation across different asset categories. This requires periodic rebalancing of the portfolio to restore the original or desired weights, as market movements can cause the actual allocation percentages to drift away from the target allocations. Choices A, C, and D describe different strategies or aspects not inherent to the fixed-weightings approach.

Question 7

Tatiana is following a fixed weighting approach to managing her portfolio, which on January 1 consisted of 45% common stock, 40% bonds, and 15% short-term securities. Because stocks had a good year, at the end of the year, it consisted of 55% common stock, 35% bonds and 10% short-term securities. As a result,

Accepted Answer

Following a fixed weighting approach means adjusting the portfolio back to its original allocation when the actual weightings deviate due to market movements. Since the stock portion grew to 55%, exceeding its original 45% allocation, Tatiana should sell some stock and buy bonds and short-term securities to restore the initial balance.

Question 8

The investor's overall economic security should an important consideration when allocating assets within a portfolio.

Accepted Answer

Considering an investor's overall economic security helps in creating a diversified portfolio that can withstand market volatility and meet long-term financial goals, reducing risk and enhancing potential returns.

Question 9

Tactical asset allocation is most suitable for

Accepted Answer

Tactical asset allocation is most suitable for large institutional investors because it involves actively adjusting a portfolio's strategic asset allocation based on short-term market forecasts, which requires the resources and expertise typically found in large institutional settings.

Question 10

Mathew's 401-K plan offers a choice between and S&P 500 Index Fund, a large-cap stock fund, a blue chip stock fund that seeks high dividend income and modest growth, a fund that invests only in investment grade corporate bonds and a fund that that invests only in government bonds. Mathew allocates 20% of his money to each fund. Which of the following statements offers the best critique of Mathew's "1/N" allocation?

Accepted Answer

Mathew's allocation strategy might lead to an overlap in holdings among the three stock funds (S&P 500 Index Fund, large-cap stock fund, and blue chip stock fund), which can reduce the diversification benefits he might expect from spreading his investments across different funds.

Question 11

Before analyzing needs and objectives, investors should first construct a portfolio.

Accepted Answer

Investors should first analyze their needs and objectives before constructing a portfolio to ensure that their investment strategy aligns with their financial goals and risk tolerance.

Question 12

Asset allocation focuses on selecting specific securities within an asset class.

Accepted Answer

Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, rather than selecting specific securities within those categories.

Question 13

Asset allocation should focus on

Accepted Answer

Asset allocation is primarily concerned with creating a balanced portfolio that reflects the investor's financial situation, goals, and risk tolerance. It involves distributing investments across various asset classes (like stocks, bonds, and cash) rather than focusing on selecting individual securities, maximizing current income, or short-term profits.

Question 14

A conservative asset allocation would rely heavily on bonds and short-term securities.

Accepted Answer

A conservative asset allocation strategy focuses on minimizing risk, which is why it relies heavily on bonds and short-term securities, as these are generally considered safer investments compared to stocks.

Question 15

Utility stocks are often suitable for low-risk, current-income-oriented portfolios.

Accepted Answer

Utility stocks typically offer stable dividends and low volatility, making them suitable for investors seeking low-risk income.

Question 16

Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to asset allocation. Compare and contrast these three different approaches.

Accepted Answer

The answer of Fixed weightings, flexible weightings, and tactical asset...

Question 17

An asset allocation plan should consider which of the following investor characteristics?
I. income and employment security
II. marital status
III. age and proximity to retirement
IV. social relationships and peer groups

Accepted Answer

I, II, and III are relevant because they directly impact an investor's financial situation and risk tolerance. Income and employment security affect the ability to save and withstand market volatility. Marital status can influence financial goals and obligations. Age and proximity to retirement are crucial for determining investment time horizon and risk capacity. Social relationships and peer groups (IV) are less relevant to financial planning principles and are not typically considered in asset allocation.

Question 18

The key areas to monitor when evaluating your portfolio holdings are the overall performance of both the economy and the financial markets, and the returns on your investments.

Accepted Answer

Monitoring the overall performance of the economy and financial markets helps in understanding the macroeconomic factors that could impact your investments, while tracking the returns on your investments allows you to assess their individual performance and make informed decisions about potential adjustments to your portfolio.

Question 19

Jordan invests 10% of his money in each of the 10 mutual funds available in his 401-K plan. This tendency is known as the 1/N heuristic.

Accepted Answer

The 1/N heuristic is a strategy where an individual allocates resources evenly across all available options, in this case, investing an equal percentage (10%) in each of the 10 options.

Question 20

An asset allocation plan should consider which of the following factors?
I. economic outlook
II. capital preservation
III. changing investment goals
IV. investor risk tolerance

Accepted Answer

An asset allocation plan should consider the economic outlook, capital preservation, changing investment goals, and investor risk tolerance. These factors help in creating a balanced and effective investment strategy tailored to an individual's or entity's specific needs and circumstances.

Quiz 13: Managing Your Own Portfolio