Question 1

How do interest rates affect returns on other investments?

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Question 2

A typical young investor should have most of their retirement money allocated in common stocks.

Accepted Answer

As a young investor, there is typically more time to ride out market fluctuations and take on a higher degree of risk in pursuit of a higher return. Common stocks historically have the highest returns over the long-term, making them a suitable investment for young investors planning for retirement. It is important, however, to diversify the investments even within the common stock asset class.

Question 3

Describe the sources of risk in the risk-return trade off.

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Question 4

A young investor who is averse to risk should invest their money in government bonds.

Accepted Answer

Government bonds are considered a safe and low-risk investment as they are backed by the government. Therefore, a young investor who is averse to risk should consider investing their money in government bonds. However, the potential return on investment may be lower compared to other options that carry higher risk.

Question 5

Hostess and Kodak recently filed for bankruptcy protection in an attempt to restructure their debts.One could assume that both of these companies experienced too much ________ risk.

Accepted Answer

The term "bankruptcy protection" implies that the companies were facing financial difficulties and were unable to meet their financial obligations. Therefore, the best choice would be C) financial risk. Business risk refers to the risk of operating in a certain industry or market, whereas interest rate risk relates to the impact of interest rate changes on a company's borrowing costs. Liquidity risk pertains to a company's ability to meet its short-term financial obligations. Of these options, financial risk would be the most relevant to companies filing for bankruptcy protection.

Question 6

Lexi earns a nominal rate of return of 12.2% this year on her investment.If inflation is calculated at 2.1% for the year,what is her approximate real rate of return for the year?

Accepted Answer

The real rate of return can be calculated by subtracting the inflation rate from the nominal rate of return. Therefore, Lexi's approximate real rate of return for the year is 12.2% - 2.1% = 10.1%. Option C is the closest answer at 10.1%.

Question 7

Explain the concept of liquidity relating to personal financial planning.

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Question 8

Provide an explanation of the four points of making a comparison of investing returns on an after-tax basis.

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Question 9

How does the principle of diversification work?

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Question 10

Clarify the difference between systematic and unsystematic risk.

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Question 11

Principle #2: the time value of money tells us that time is our greatest ally.This being so,the most important and most difficult step is making the commitment to get started.Tell how to find the money and get started with Principle #15: just do it.

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Question 12

Interest rate risk says that if market interest rates rise the price of outstanding bonds will fall.This means that interest rates and bond prices have an ________ relationship?

Accepted Answer

Interest rates and bond prices have an inverse relationship, which means that when interest rates rise, bond prices fall and vice versa. This relationship is due to the fact that as interest rates rise, newer bonds issued in the market offer higher yields, making existing bonds with lower yields less attractive to investors, thereby reducing their demand and lowering their prices.

Question 13

Liquidity risk is a very important part of the time dimension of investing.

Accepted Answer

Liquidity risk refers to the risk of not being able to sell or liquidate an investment when needed without incurring significant losses. It is an important factor to consider when making investment decisions, especially for those who may need access to their funds in the near future.

Question 14

What makes up the interest rate risk?

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Question 15

Why do investors sometimes demand risk premiums when investing?

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Question 16

During the economic downturn that occurred between the fall of 2007 and spring of 2009,stocks declined in price.This period is known as a(n)

Accepted Answer

A bear market is characterized by falling prices and a general sense of pessimism in the market. This is exactly what happened during the economic downturn of 2007-2009, when stocks declined in value.

Question 17

As investors,we can try to diversify away ________ risk but we are still left with the ________ risk that can't be eliminated through diversification.

Accepted Answer

Unsystematic risk is specific to a particular company or industry and can be reduced through diversification. Systematic risk affects the entire market and cannot be diversified away.

Question 18

Rank the historical rates of return of the common investments discussed in this chapter from highest to lowest.

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Question 19

As the length of your investment horizon increases,you can assume greater risks with your investing.

Accepted Answer

As you have more time to ride out any fluctuations or downturns in the market, you can afford to take on more risk in pursuit of potentially higher returns. This is because you have more time to allow your investments to recover from any losses and grow in value. However, it is important to find a balance between risk and potential returns that aligns with your individual investment goals and needs.

Question 20

The nominal return on an investment is an illusion.Explain.

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Quiz 11: Investment Basics