Question 1

Which of the following companies would be the most attractive investment to a very conservative investor?

Accepted Answer

Company C, with a P/E ratio of 15, would be the most attractive investment to a very conservative investor because it indicates a potentially more stable and established company compared to those with negative or higher P/E ratios. Negative P/E ratios suggest the company is not currently profitable, which is riskier, and a very high P/E ratio can indicate overvaluation, also adding risk.

Question 2

Which of the following should you inquire about to find the right advisor?

Accepted Answer

All of these factors are important when choosing the right advisor. Credentials can indicate the advisor's level of education and expertise. Organizational memberships can reflect their commitment to professional standards. Minimum asset requirements are crucial to know if the advisor's services are a good fit for your financial situation.

Question 3

According to traditional macroeconomic theory, which of the following goods would have the highest price?

Accepted Answer

Goods with low supply but high demand typically have the highest prices due to the basic economic principle of supply and demand. When demand exceeds supply, prices tend to rise.

Question 4

An investor is trying to calculate how much she made while trading collectibles. Based on the following information, how much did she make per hour? Total purchase cost: $1,000; gross sales: $1,500; dealer commission: 20%; hours worked: 10.

Accepted Answer

The answer of An investor is trying to calculate how...

Question 5

Municipal bonds are issued by

Accepted Answer

Municipal bonds are issued by local and state governments to finance public projects, such as schools, highways, and water systems. Corporations issue corporate bonds, the federal government issues Treasury bonds, and individuals do not issue bonds.

Question 6

Purchasing power risk is particularly an issue for which of the following investments?

Accepted Answer

Purchasing power risk, also known as inflation risk, is a concern for fixed-income investments like AAA corporate bonds because the fixed interest payments might lose value over time due to inflation. In contrast, stocks can potentially offer returns that outpace inflation, and inflation-protected U.S. government bonds are specifically designed to adjust for inflation, mitigating this risk.

Question 7

Which of the following is most likely to be a considered a growth stock?

Accepted Answer

Growth stocks are typically characterized by high P/E (Price to Earnings) ratios, indicating that investors are willing to pay a premium for them due to expectations of future growth.

Question 8

Not all prices inflate at the same rate. Notably, the average price of which of the following has far exceeded general inflation?

Accepted Answer

The average price of education has far exceeded general inflation, with costs for college tuition and associated fees rising significantly over the past few decades.

Question 9

A financial advisor who charges clients directly for services and receives no commissions based on what or how much a client buys is said to be

Accepted Answer

The answer of A financial advisor who charges clients directly...

Question 10

The longer an investor holds a mutual fund, the lower its ________ tend(s) to be.

Accepted Answer

Volatility tends to decrease the longer an investor holds a mutual fund, as short-term market fluctuations have less impact over a longer investment horizon.

Question 11

A mutual fund's average annual return is 8% and its standard deviation is 8%. An investor would expect 95% of the fund's returns to fall within what range?

Accepted Answer

The range of returns that an investor can expect 95% of the time is given by the mean plus or minus 1.96 times the standard deviation. In this case, the mean is 8% and the standard deviation is 8%, so the range is 8% +/- 1.96 * 8% = 8% +/- 15.68%. Therefore, the investor can expect 95% of the fund's returns to fall between -7.68% and 23.68%.

Question 12

A financial advisor who is required to act in their clients' best interests is said to be

Accepted Answer

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients' interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the client's best interests.

Question 13

Unlike investors with a lower risk tolerance, investors with a very high risk tolerance may be interested in

Accepted Answer

Investors with a very high risk tolerance may be interested in collectibles, as they can be highly volatile and speculative compared to more traditional investments like stocks, bonds, or real estate.

Question 14

A brokerage account statement includes which of the following?

Accepted Answer

A brokerage account statement typically includes all of these details: fees associated with the account, the ending account balance, and the allocations of investments within the account. These elements are crucial for investors to understand their account performance and costs.

Question 15

If prevailing interest rates increase, the market price of previously issued bonds will

Accepted Answer

When prevailing interest rates increase, the market price of previously issued bonds decreases because the fixed payments from the older bonds become less attractive compared to new bonds issued at the higher current rates. Investors will demand a discount on the older bonds, leading to a decrease in their market price.

Question 16

Over the long run, investors should seek returns that are

Accepted Answer

Investors should seek returns that are higher than inflation to ensure that their investment grows in real terms, preserving and increasing purchasing power over time.

Question 17

Which of the following bonds, if all are purchased today, would have the longest date to maturity?

Accepted Answer

Treasury bonds have the longest maturity dates, typically ranging from 20 to 30 years. Treasury bills mature in one year or less, and Treasury notes have maturities ranging from 2 to 10 years.

Question 18

Zero coupon bonds are unlike other bonds in that they

Accepted Answer

Zero coupon bonds do not pay periodic interest (coupon) payments. Instead, they are issued at a discount to their face value and mature at that face value, with the difference between the purchase price and the face value representing the investor's return.

Question 19

An investor with a 50% marginal tax rate is trying to decide on a bond. Which of the following bonds offers the best tax-equivalent yield?

Accepted Answer

The answer of An investor with a 50% marginal tax...

Question 20

Which of the following should you check on while searching for a financial advisor?

Accepted Answer

All of these factors are important when choosing a financial advisor. References can provide insight into the advisor's reliability and effectiveness. Specializations ensure the advisor is well-suited to meet specific financial goals. Fee structures are crucial for understanding how the advisor is compensated and can affect the advice given.

Quiz 8: Investments