1
Fundamentals of Investing, 13e (Smart)
Chapter 1 The Investment Environment
1.1 Learning Goal 1
1) A non-interest bearing checking account is still considered an investment.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2) Land and buildings are examples of real property investments.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3) Since 1900, the average return on stocks has exceeded the average return on savings
accounts by more than 6 percentage points.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4) A United States Savings Bond is an example of an investment as defined in the text.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5) Most sources of investment information are in print format, expensive, and difficult to
access.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 1
2
6) Which of the following is NOT an investment as defined in the text?
A) a certificate of deposit issued by a bank
B) a new automobile
C) a United States Saving Bond
D) a mutual fund held in a retirement account
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) Stocks are a(n) ________ investment representing ________ of a business.
A) direct; ownership
B) direct; debt
C) indirect; ownership
D) indirect; debt
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
8) An exchange traded fund that invests in the stocks of large corporations is an example of
A) direct investment.
B) indirect investment.
C) derivative investment.
D) tangible investment.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
9) Which of the following has declined in recent years?
A) direct ownership of stock by individual investors
B) the percentage of foreign stocks held in typical portfolios
C) institutional ownership of common stocks
D) the timeliness of information available to investors
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3
10) Debt represents funds loaned in exchange for
A) dividend income and the repayment of the loan principal.
B) dividend income and an ownership interest in the firm.
C) interest income and a partial ownership interest in the firm.
D) interest income and the repayment of the loan principal.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 1
1.2 Learning Goal 2
1) Institutional investors manage money for businesses and nonprofit organizations, but not for
individuals.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
2) Institutional investors are individuals who invest indirectly through financial institutions.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
3) Banks and insurance companies are examples of institutional investors.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
4
4) In the financial markets, individuals are net demanders of funds.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5) The government is generally
A) not involved in the financial markets.
B) the owner of the financial market.
C) a supplier of funds to the financial market.
D) a demander of funds in the financial market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
6) On a net basis, funds in the financial markets are generally supplied by
A) individuals.
B) both individuals and business firms.
C) business firms.
D) the government.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5
7) A forum in which suppliers and demanders of funds make financial transactions is called a
financial
A) institution.
B) bank.
C) instrument.
D) market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8) Which of the following are true concerning institutional investors?
I. Institutional investors are professionals who manage money for other people.
II. Banks, insurance companies and mutual funds are all institutional investors.
III. Institutional investors are individuals who invest indirectly through financial institutions.
IV. Institutional investors invest large sums of money.
A) I and II only
B) I, II and IV only
C) II, III and IV only
D) I, II, III and IV
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9) Which of the following is NOT traded in the securities markets?
A) stocks
B) bonds
C) derivatives
D) real estate
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
6
10) Describe the major differences between individual and institutional investors.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
1.3 Learning Goal 3
1) Bond investors lend their money for a fixed period of time and receive interest.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
2) A collection of securities designed to meet an investment goal is called a portfolio.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
3) If the value of a common stock increases the value of an option to buy that stock should also
increase.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7
4) An option to purchase common stock is a type of derivative security.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 3
5) Bonds represent a lower level of risk than do stocks in the same company.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
6) Exchange traded funds are similar to mutual funds, but are traded like stocks.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7) Mutual funds invest in diversified portfolios of securities.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8) Bond prices rise as interest rates decline.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8
9) Bond interest and stock dividends are different ways of distributing a corporation’s earnings
to its owners.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
10) Which of the following is an example of a tangible asset?
A) bonds
B) mutual funds
C) real estate
D) stocks
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
11) Which one of the following would be the most liquid investment?
A) stock
B) Series EE bond
C) money market mutual fund
D) real estate
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
9
12) Which of the following investments represents partial ownership of a corporation?
A) bonds
B) mutual funds
C) commercial paper
D) common stock
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13) Investors seeking a diversified, professionally managed portfolio of securities can purchase
shares of
A) preferred stock.
B) convertible securities.
C) insurance policies.
D) mutual funds.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14) One feature that mutual funds and exchange traded funds have in common is
A) they trade continuously throughout the trading day.
B) their portfolios are always based on one of the major market indexes.
C) they invest in broadly diversified portfolios of securities.
D) investors purchase share from the funds managers rather than from other investors.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 3
10
15) Briefly describe three advantages of investing in mutual funds or exchange traded funds.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 3
1.4 Learning Goal 4
1) Earning a high rate of return with little or no risk is a realistic investment goal.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
2) Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on
dividends.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
3) Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on
income from wages.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4