Question 1

Because there are no income tax consequences arising from trading investments in a 401(k)plan,it is easy to be lured into market timing,which is generally unsuccessful.

Accepted Answer

Since there are no income tax consequences arising from trading investments in a 401(k) plan, some investors may be tempted to engage in market timing, which involves trying to buy and sell assets based on predicting market movements. However, research suggests that market timing is generally an unsuccessful strategy, as it is difficult to consistently predict market movements and investors may end up buying and selling at the wrong times, resulting in lower returns.

Question 2

In constructing portfolios,investors are advised to consider intangible assets but ignore tangible assets.

Accepted Answer

Investors should consider both tangible and intangible assets when constructing portfolios. Tangible assets can include physical assets like real estate, equipment, and inventory, while intangible assets may include things like reputation, brand value, and intellectual property. It is important to evaluate a company's entire asset base in order to make sound investment decisions.

Question 3

Because of income tax considerations,it makes sense to own high current-return investments in a 401(k)plan and high future-return investments outside the plan.

Accepted Answer

This statement is true because high current-return investments will generate immediate income that is sheltered from taxes within a 401(k) plan. On the other hand, high future-return investments may generate capital gains that are taxed at a lower rate when held outside of a tax-advantaged account. Therefore, it can be advantageous to strategically allocate investments based on the tax implications.

Question 4

A variable ratio plan adjusts a portfolio's weights by investing more heavily in the asset that has performed poorly in the recent past.

Accepted Answer

The answer of A variable ratio plan adjusts a portfolio's...

Question 5

Aggressive investors without high-priority future goals are likely to prefer Treasury Strips.

Accepted Answer

Aggressive investors are willing to take on higher risks in order to achieve higher returns. Treasury Strips, although safe, do not offer high returns. Therefore, aggressive investors without high-priority future goals are unlikely to prefer Treasury Strips. They are more likely to invest in stocks, mutual funds or other high-risk/high-return investment vehicles.

Question 6

One of the biggest mistakes investors frequently make in managing their 401(k)retirement investments is being excessively conservative.

Accepted Answer

Being excessively conservative can limit potential gains and may not keep pace with inflation over time, resulting in lower overall returns. It is important to balance risk and reward in retirement investing.

Question 7

In selecting mutual funds for the 401(k)plan,it is prudent to limit your investment to one fund,particularly if the fund had an outstanding return in the previous year.

Accepted Answer

It is not prudent to limit your investment to one fund, even if it had an outstanding return in the previous year. Diversification is important in investing, and it is recommended to invest in a mix of funds to spread out risk and increase potential returns.

Question 8

A mortgage REIT invests only in real estate that is mortgaged.

Accepted Answer

A mortgage REIT (Real Estate Investment Trust) primarily invests in property mortgages and mortgage-backed securities, not directly in physical real estate.

Question 9

One advantage of a limited partnership in comparison to a general partnership is that you cannot lose more than you invest.

Accepted Answer

This statement is true. In a limited partnership, there are general partners who manage the business and are fully liable for the partnership's debts and obligations, while limited partners only invest money and have limited liability. Therefore, limited partners cannot lose more than they invest in the partnership.

Question 10

A constant ratio plan re-balances a portfolio to predetermined target weights.

Accepted Answer

A constant ratio plan is a systematic approach to portfolio rebalancing that involves adjusting the weightings of assets in a portfolio back to predefined target weights on a regular basis. This helps ensure that the portfolio remains aligned with the investor's long-term investment objectives, even in the face of changing market conditions.

Question 11

Investment clubs generally offer the possibility of diversification.

Accepted Answer

Investment clubs allow groups of people to pool their resources and invest in a variety of stocks and other securities. This diversifies the club's investments and reduces the risk of losing money, making it a true statement that investment clubs generally offer the possibility of diversification.

Question 12

A REIT's equity per share is similar to a fund's NAV.

Accepted Answer

Both a REIT's equity per share and a fund's NAV represent the net value of the assets in the respective investment vehicles, divided by the number of outstanding shares or units. Therefore, they can be considered similar measures of value.

Question 13

Generally,unless an employer provides 100% funding for a 401(k)plan,it is a good idea to reject participating in the plan.

Accepted Answer

It is generally recommended to participate in a 401(k) plan even if the employer does not provide 100% funding, as it still allows for tax-deferred savings and potential employer matching contributions.

Question 14

One disadvantage of a limited partnership is that it is usually difficult to sell your partnership interest.

Accepted Answer

In a limited partnership, the limited partners typically do not have the ability to transfer or sell their partnership interest without the consent of the general partner. This lack of transferability can make it difficult to sell or exit the partnership.

Question 15

In a limited partnership,limited partners are inactive in managing the business.

Accepted Answer

Limited partners are investors who contribute capital to the business but do not play an active role in managing the operations. They typically have limited liability for the debts and obligations of the business.

Question 16

Investment clubs are formed by brokerage firms who then manage the club's portfolio.

Accepted Answer

Investment clubs are typically formed by a group of individuals who pool their money together to invest in the stock market. The club members usually manage the portfolio together and make investment decisions through a voting process. While brokerage firms may offer services to investment clubs, they do not typically form or manage them.

Question 17

In comparison to an investment in common stock,a limited partnership investment offers greater liquidity.

Accepted Answer

Limited partnership investments are generally considered illiquid as they involve investing in non-publicly traded entities with limited opportunities to sell or transfer ownership. In contrast, common stock investments are publicly traded and offer greater liquidity due to the ability to easily buy and sell shares on the stock market.

Question 18

A corporation and a limited partnership are similar in that each passes profits or losses to its owners for tax purposes.

Accepted Answer

A corporation typically does not pass profits or losses directly to its owners for tax purposes in the same way a limited partnership does. Corporations are taxed as separate entities, whereas limited partnerships pass profits or losses to their partners who then report it on their personal tax returns.

Question 19

An investment vehicle that adjusts asset weights over time is an asset allocation mutual fund.

Accepted Answer

An asset allocation mutual fund adjusts its asset weights over time based on a specified investment strategy or target allocation. This is designed to help manage risk and maximize returns for investors.

Question 20

Cautious investors who need income are likely to prefer high quality corporate bonds.

Accepted Answer

High quality corporate bonds are considered safer and less risky than lower quality bonds, making them a more attractive option for cautious investors. Additionally, they typically offer higher yields than government bonds, making them a good choice for income-seeking investors.

Quiz 12: Mutual Fundsother Pooling Arrangements: Simplifying, Maybe Improving Investment Performance