Question 1

At which one of the following institutions is liquidity usually the most important?

Accepted Answer

Banks typically deal with short-term deposits and withdrawals from customers, which requires them to maintain high levels of liquidity to meet these demands. Mutual funds, pension funds, and life insurers manage longer-term investments and typically have a more predictable cash flow, so liquidity is not as critical for their operations.

Question 2

Your sister,an avid outdoors person,works in the airline industry and she has come to you (the financial guru)for investment advice.She is looking at purchasing stocks she knows something about.She is considering purchasing stock in Boeing,Lockheed Martin,United Technologies (maker of aircraft engines)and Cabela's Sporting Goods.Based only on the information given which stock should your recommend for her?

Accepted Answer

The answer of Your sister,an avid outdoors person,works in the...

Question 3

Major functions of the investment committee include all but which one of the following?

Accepted Answer

The investment committee is responsible for determining the overall asset allocation and the asset class weights for each portfolio, as well as establishing the asset universe from which the investments will be chosen. However, the committee does not engage in security selection for each portfolio managed – this task is typically delegated to portfolio managers or analysts.

Question 4

One of the major functions of the investment committee is to ________________.

Accepted Answer

The investment committee's main function is to translate the investment company's objectives and constraints into an asset universe so that the portfolio managers can select the appropriate securities for each portfolio. While the committee may provide guidance on security selection and portfolio percentages, these are typically the responsibilities of the portfolio managers. The investment committee may also review and report on the overall rate of return, but this is not their primary function.

Question 5

Go Global Investment Management has an asset allocation strategy of 60% U.S.investments and 40% global investments.Within the U.S.Go Global has allocated 70% of its portfolio to equities and 30% to bonds.Go Global now holds 3% of its U.S.equity portfolio in the stock of Wally World.Internationally,Go Global has allocated 55% to equities and 45% to bonds.About what percentage of Go Global's total portfolio is invested in Wally World?

Accepted Answer

To calculate the percentage of Go Global's total portfolio invested in Wally World, we need to first find the total percentage of the portfolio allocated to U.S. equities, then multiply that by the percentage allocated to Wally World. 
Total percentage of portfolio allocated to U.S. equities = 60% * 70% = 42%
Percentage of U.S. equities allocated to Wally World = 3%
Therefore, the percentage of Go Global's total portfolio invested in Wally World = 42% * 3% = 1.26%.
So the answer is B.

Question 6

Under the provisions of a typical defined benefit pension plan,the employer is responsible for _____________.

Accepted Answer

Under the provisions of a typical defined benefit pension plan, the employer is responsible for paying benefits to retired employees. The employer is also responsible for investing the plan assets to ensure that there are sufficient funds available to pay the promised benefits. The employer is not responsible for counseling employees in the selection of asset classes or paying employees the market rate of return on employee contributions, which are more common in defined contribution plans.

Question 7

For an investor concerned with maximizing liquidity,which of the following investments should be avoided?

Accepted Answer

Real estate is generally considered to be the least liquid investment because it can take a long time to sell and convert into cash.

Question 8

An investor with low risk aversion will likely require which of the following risk return combinations?

Accepted Answer

An investor with low risk aversion is willing to take on more risk for potentially higher returns. Option D offers the highest expected return with the highest standard deviation, indicating a higher risk-return combination.

Question 9

An institutional investor will have to pay off a maturing bond issue in 3 years.The institution has 10,000 bonds outstanding each with a $1,000 par value.The institutional money manager is reevaluating the fund's $100 million portfolio at this time.She is bullish on stocks and wants to put the most she can into the stock market but she cannot risk not being able to pay off the bonds.Three year zero coupon bonds are available paying 6% interest.What percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the bond payments?

Accepted Answer

The answer of An institutional investor will have to pay...

Question 10

Both a wife and her husband work in the airline industry.They are in their 40s and they have a high tax bracket and are concerned about their after tax rate of return.A meeting with their financial planner reveals they are primarily focused on long term capital gains and they will need at least a 9% to 11% average rate of return to meet their retirement goals.They desire a diversified portfolio and liquidity is not currently a major concern.If you had to choose from the list below which of the following asset allocations seems to best fit their situation?

Accepted Answer

Given that the couple is focused on long-term capital gains and desires a diversified portfolio, option A can be eliminated since it has a relatively high exposure to bonds and commodities while only having 40% in stocks. Option B has a low equity allocation of only 40% and no money market allocation, which could be risky in case of market downturns. Option C has a relatively high allocation to high dividend paying stocks, which may not be the best choice for long-term capital appreciation. 
Option D seems to be the best fit for the couple since it has a 60% allocation to stocks, which are typically associated with long-term growth and capital appreciation. While most of the stocks have low dividends, they have high growth prospects, which aligns well with the couple's preference for long-term capital gains. The allocation to long-term bonds and commodities is relatively low, indicating a higher level of risk tolerance, which is needed for achieving higher returns. The 5% money market allocation provides some level of liquidity, but liquidity is not a major concern for the couple, so the allocation is relatively low.

Question 11

Which one of the following institutions typically has the longest investment horizon?

Accepted Answer

Pension funds typically have the longest investment horizon as they are managing retirement assets that will not be needed for several decades. Mutual funds, property and casualty insurers, and banks may have shorter investment horizons depending on their specific strategies and goals.

Question 12

An investor with high risk aversion will likely require which of the following risk return combinations?

Accepted Answer

An investor with high risk aversion would require a lower standard deviation for a given expected return. Therefore, option A with the lowest standard deviation and a reasonably high expected return would be the best choice.

Question 13

A life insurance firm wants to minimize its interest rate risk and it is planning on paying out $250,000 in five years.Which one of the following investments best matches its goal?

Accepted Answer

5-year zero coupon bonds would be the best choice as they offer a fixed return at maturity, eliminating interest rate risk. Additionally, the bonds' maturity date coincides with the life insurance firm's payment date, reducing the reinvestment risk. High yield utility stocks and 10-year coupon bonds both have interest rate risk, and money market investments provide little return over time and may be subject to market fluctuations.

Question 14

An investor is looking at different retirement investment choices and he is willing to accept one with upside potential even if that means sacrificing certainty.Which of the following will he most likely select?

Accepted Answer

The defined contribution plan is the most suitable choice for someone who is willing to accept upside potential even if certainty is sacrificed. Unlike fixed annuities and bonds, defined contribution plans are subject to market volatility and hence offer potential for higher returns. Defined benefit plans, on the other hand, offer a fixed, guaranteed benefit and may not be suitable for someone looking for upside potential.

Question 15

In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization.Such organizations are typically called _________________.

Accepted Answer

Endowments are not-for-profit charitable organizations that are funded by donations, typically in the form of stock or other financial instruments. An endowment fund is then established, with the income from this fund being used to support the charitable purposes of the organization. Annuities, mutual funds, and personal trusts are not the best choices because they are not specific types of charitable organizations.

Question 16

A family will retire in a few years.They have a high tax bracket and are concerned about their after tax rate of return.A meeting with their financial planner reveals they are primarily focused on safety of principal and they will need a 6% to 8% average rate of return on their portfolio.They desire a diversified portfolio and liquidity is likely to be a concern due to health reasons.If you had to choose from the list below which of the following asset allocations seems to best fit this family's situation?

Accepted Answer

The allocation in choice A provides a balance between safety and the desired rate of return. The money market offers liquidity, intermediate-term bonds provide stability and income, and blue-chip stocks with high dividends offer potential growth and income, aligning with their need for a 6% to 8% return while maintaining principal safety.

Question 17

Medfield College's $10 million endowment fund is not allowed to spend any contributed capital or any capital gains.The fund may only spend investment earnings.The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building.Which of the following is/are true?
I.The fund should have a target rate of return of at least 10%.
II.The limitations on spending require the fund to limit its considerations to growth stocks.
III.The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return.

Accepted Answer

I is true because the fund needs to earn at least 10% to generate enough investment earnings to cover the cost of the lab equipment. 
II is false because the fund can invest in any type of security that is expected to generate investment earnings. 
III is true because the need for liquidity may force the fund to sell investments at a suboptimal time, which could reduce its rate of return.

Question 18

The asset universe is the _____________________.

Accepted Answer

The asset universe refers to the list of assets approved by the investment committee that may be placed in the investment company's portfolios.

Question 19

A portfolio is comprised of three index funds: an equity index,a bond index and an international index.The portfolio manager changes the weights periodically according to forecasts for each sector.This is an example of __________.

Accepted Answer

The fact that the portfolio manager changes the weights periodically based on forecasts suggests active asset allocation. However, the manager relies on index funds rather than individual securities for the sectors, indicating passive security selection.

Question 20

A portfolio is comprised of three index funds: an equity index comprising 40% of the total portfolio,a bond index comprising 30% of the total portfolio and an international index comprising 30% of the total portfolio.After each quarter the portfolio manager buys and sells some of each sector so as to preserve the original weights for each sector.This is an example of ____________.

Accepted Answer

The portfolio manager is following a passive management strategy by maintaining the original weights for each sector and not deviating from the index funds. Therefore, the portfolio is a totally passively managed fund.

Quiz 22: Investors and the Investment Process