Question 1

Which of the following is not a typical portfolio constraint?

Accepted Answer

Risk tolerance is not a constraint but rather a characteristic or preference of the investor that influences how the portfolio is constructed. Constraints typically refer to limitations or requirements that must be adhered to when managing a portfolio.

Question 2

What would the after-tax yield be on an investment that offers a 6 percent fully taxable yield? Assume a marginal tax rate of 31%.

Accepted Answer

After-tax yield = Before-tax yield (1 - Tax Rate)= 6%(1 - .31)= 4.14%

Question 3

Research from the 1970s to the 1990s found that over 90 percent of a fund's returns over time is explained by:

Accepted Answer

Research from the 1970s to the 1990s found that over 90 percent of a fund's returns over time is explained by asset allocation. Market timing, stock selection, and manager selection play a smaller role.

Question 4

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1.What is the average tax for a single individual with taxable income of $85,000?

Accepted Answer

$18,427/$85,000 = 21.68% (average tax rate)

Question 5

The future value of $50,000 invested today,at the end of 10 years assuming an interest rate of 7.5% per year,with semiannual compounding,is

Accepted Answer

FV = 50,000(1 + .0375)²? = $104,407.60

Question 6

John is 55 years old has $55,000 outstanding on a mortgage and no other debt.John typically saves $5,000 in an IRA account and another $10,000 in a company pension.John is most likely in the:

Accepted Answer

John is likely in the consolidation phase, where individuals typically focus on reducing debt and maximizing savings as they approach retirement.

Question 7

Important reasons for constructing a policy statement include:

Accepted Answer

The answer of Important reasons for constructing a policy statement...

Question 8

For an investor with a time horizon of 15 years and moderate risk tolerance,an appropriate asset allocation strategy would be

Accepted Answer

A 15-year time horizon allows for a higher allocation to stocks due to their potential for higher returns over the long term. An 80% allocation to stocks is suitable for moderate risk tolerance, balancing growth potential with some stability from bonds.

Question 9

What would the equivalent taxable yield be on an investment that offers a 6 percent tax exempt yield? Assume a marginal tax rate of 28%.

Accepted Answer

Equivalent taxable yield = .06/(1 - .28)= .06/.72 = 8.33%

Question 10

Which of the following statements is true?

Accepted Answer

D is the only statement that is accurate. It is essential to have a substantial commitment to common stocks in a taxable portfolio to maintain real value over time. A and C are incorrect as taxes reduce investment returns, and long-term stocks outperform bonds. B is incorrect as stocks also maintain purchasing power over time.

Question 11

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1.What is the tax liability for a single individual with taxable income of $85,000?

Accepted Answer

$14,325 + 0.28($85,000 - $70,350)= $18,427 (tax bill)

Question 12

For an investor with a time horizon of 8 years and higher risk tolerance,an appropriate asset allocation strategy would be

Accepted Answer

An investor with a time horizon of 8 years and higher risk tolerance would benefit from some exposure to stocks to achieve long-term growth. Therefore, option A can be considered, but a portfolio with 100% stocks is very risky and volatile, which doesn't suit the investor's risk tolerance level. Option E, which suggests investing totally in bonds, would not provide enough growth to achieve the investor's financial goals. Option B recommends investing entirely in cash, which has low returns and offers no possibility of making a profit. The best choice is option D, which offers a well-diversified portfolio of 10% cash, 30% bonds, and 60% stocks. The investor can reap the benefits of investing in stocks while also cushioning their portfolio with bonds and cash to minimize risks.

Question 13

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1.What is the marginal tax rate for a single individual with taxable income of $85,000?

Accepted Answer

Marginal tax rate = 28%

Question 14

Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?

Accepted Answer

The answer of Which of the following strategies seeks to...

Question 15

For an investor with a time horizon of 12 years and higher risk tolerance,an appropriate asset allocation strategy would be

Accepted Answer

A 100% stock allocation is suitable for an investor with a long time horizon and high risk tolerance, as it offers the potential for higher returns over the long term despite short-term volatility.

Question 16

For an investor with a time horizon of 5 years and moderate risk tolerance,an appropriate asset allocation strategy would be

Accepted Answer

The answer of For an investor with a time horizon...

Question 17

For an investor with a time horizon of 6 to 10 years and lower risk tolerance,an appropriate asset allocation strategy would be

Accepted Answer

A balanced allocation with a mix of cash, bonds, and stocks is suitable for a lower risk tolerance and a medium-term time horizon, providing stability and some growth potential.

Question 18

For an investor with a time horizon of 4 years and higher risk tolerance,an appropriate asset allocation strategy would be

Accepted Answer

An investor with a time horizon of 4 years and higher risk tolerance should allocate their assets in a way that provides the potential for growth while also managing risk. Option C, with 20% cash, 40% bonds, and 40% stocks, provides a balance between these considerations.

Question 19

Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund.The annual rate of interest that you expect to earn in this account is 5.25%.The amount in the account at the end of 20 years is

Accepted Answer

$$F V = 750 \left( \frac { ( 1 + .013125 ) ^ { 80 } - 1 } { .013125 } \right) = \$ 105,039.84$$

Question 20

Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 2.1.What is the tax liability for a married couple filing jointly with taxable income of $125,000?

Accepted Answer

$22,787.50 + 0.28($125,000 - $117,250)= $24,958

Quiz 2: The Asset Allocation Decision

Which of the following is not a typical portfolio constraint?