Question 1

A constant-ratio plan requires an investor to periodically rebalance the portfolio.

Accepted Answer

A constant-ratio plan involves periodically adjusting the proportions of different assets in a portfolio to maintain a specific asset allocation ratio, which requires rebalancing.

Question 2

Dollar cost averaging is a formula plan which automatically causes investors to purchase more shares when the price is low and purchase fewer shares when the price is high.

Accepted Answer

Dollar cost averaging involves investing a fixed amount of money at regular intervals, regardless of the share price, which naturally leads to buying more shares when prices are low and fewer shares when prices are high.

Question 3

Dollar cost averaging is a procedure by which an investor

Accepted Answer

Dollar cost averaging involves investing a fixed dollar amount in a particular investment on a regular schedule, regardless of the investment's price. This strategy can potentially reduce the impact of volatility on the overall purchase. The investor buys more shares when prices are low and fewer shares when prices are high, averaging out the cost of the shares over time.

Question 4

The constant-ratio plan

Accepted Answer

The constant-ratio plan involves maintaining a fixed ratio of different asset classes in a portfolio, which requires rebalancing when the actual ratio deviates from the target, thus necessitating trigger points for rebalancing.

Question 5

Successful portfolio management with a variable ratio plan depends on the investor's skill in timing the market.

Accepted Answer

A variable ratio plan in portfolio management involves adjusting the investment mix based on market conditions, which requires the investor to accurately predict market movements to be successful.

Question 6

Which one of the following statements is correct concerning dollar cost averaging plans?

Accepted Answer

Dollar cost averaging involves regularly investing a fixed amount of money over a long period, regardless of the market's condition, aiming for long-term capital appreciation. It is not focused on active or short-term trading, nor primarily on earning current dividend income.

Question 7

If a constant-dollar plan portfolio is profitable over the long run, the in value over time.

Accepted Answer

The conservative portion of a constant-dollar plan portfolio will increase in value over time if the portfolio is profitable, as profits are often reinvested into the conservative portion to maintain the desired asset allocation.

Question 8

Which one of the following statements concerning formula plans is correct?

Accepted Answer

Formula plans involve following a specific, predetermined set of rules for buying and selling securities, rather than relying on subjective judgment or attempting to time the market for maximum profit. These plans aim to reduce the emotional aspect of investing and provide a disciplined approach to buying and selling.

Question 9

Explain the type of risk measured by each of the following measures. Also identify the factor in each formula that determines the type of risk that is being measured.
(a) Jensen's measure
(b) Sharpe's measure
(c) Treynor's measure

Accepted Answer

The answer of Explain the type of risk measured by...

Question 10

Investors who who accept the random walk theory should use

Accepted Answer

The random walk theory suggests that stock prices move in a random manner and are not influenced by past movements. Therefore, investors who accept this theory would likely use a dollar cost averaging plan, as it involves investing a fixed dollar amount at regular intervals, regardless of the stock price, which aligns with the belief that future stock prices are unpredictable.

Question 11

The formula plan that requires maintaining a target dollar investment in the speculative portion of an investor's portfolio is the

Accepted Answer

The constant dollar plan involves maintaining a fixed dollar amount in the speculative portion of an investor's portfolio. When the value of the speculative investments increases, some of the profits are taken and moved to more conservative investments to keep the dollar amount constant. Conversely, if the value decreases, additional funds are moved into speculative investments to maintain the target dollar amount. This approach aims to balance risk and return by keeping a steady amount of investment in higher-risk areas.

Question 12

The theory behind the variable ratio plan is to

Accepted Answer

The variable ratio plan is based on attempting to time the market to buy when prices are low and sell when they are high, aiming to capitalize on the cyclical movements of the stock market.

Question 13

A constant ratio plan allows for speculative gains while limiting potential losses.

Accepted Answer

A constant ratio plan is a type of investment strategy that adjusts the exposure to different asset classes based on a predetermined ratio, aiming to capitalize on market gains while minimizing losses by rebalancing the portfolio to maintain the set ratio.

Question 14

The formula plan which requires the greatest management attention and is also the most aggressive is called the plan.

Accepted Answer

The variable ratio plan requires the most management attention because it involves adjusting the asset mix in a portfolio based on specific criteria or market indicators, making it an aggressive strategy. This approach often necessitates frequent monitoring and adjustments to maintain the desired asset allocation, hence requiring significant management effort.

Question 15

Formula plans are high-risk investment strategies that attempt to benefit from cyclical price movements.

Accepted Answer

The answer of Formula plans are high-risk investment strategies that...

Question 16

The general theory of dollar cost averaging is

Accepted Answer

Dollar cost averaging involves investing a fixed amount of money at regular intervals, regardless of the stock price. This strategy naturally buys more shares when prices are low and fewer shares when prices are high, without attempting to time the market.

Question 17

Dollar cost averaging is a formula plan to purchase the same number of shares of stock at regular intervals of time.

Accepted Answer

Dollar cost averaging involves investing a fixed amount of money at regular intervals, which means the number of shares purchased varies depending on the stock's price at each interval.

Question 18

Which of the following is ideally suited to automatic investing through a payroll deduction plan?

Accepted Answer

A dollar cost averaging plan is ideally suited to automatic investing through a payroll deduction plan because it involves regularly investing a fixed amount of money, which is easily automated with payroll deductions.

Question 19

Dollar cost averaging is likely to work best with a mutual fund

Accepted Answer

Dollar cost averaging works best with investments that fluctuate widely but trend upward over time, allowing investors to buy more shares when prices are low and fewer when prices are high, potentially reducing the average cost per share over time.

Question 20

Investors who use formula plans believe that they have above average ability to time the market and pick successful investments.

Accepted Answer

Formula plans are designed to minimize the emotional aspect of investing by following a predetermined strategy for buying and selling, rather than relying on an investor's belief in their ability to time the market or pick successful investments.

Quiz 13: Managing Your Own Portfolio