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Fundamentals of Investing, 13e (Smart)
Chapter 13 Managing Your Own Portfolio
13.1 Learning Goal 1
1) Before analyzing needs and objectives, investors should first construct a portfolio.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2) A conservative asset allocation would rely heavily on bonds and short-term securities.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3) Utility stocks are often suitable for low-risk, current-income-oriented portfolios.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4) When developing an asset allocation scheme, it is best to weight each type of asset equally.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5) The investor’s overall economic security should an important consideration when allocating
assets within a portfolio.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
2
6) Asset allocation focuses on selecting specific securities within an asset class.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) The allocation of investments between types of assets (stocks, bonds, short-term securities,
etc.) has less effect on a portfolio’s return than the choice of securities within asset classes.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
8) Jordan invests 10% of his money in each of the 10 mutual funds available in his 401-K plan.
This tendency is known as the 1/N heuristic.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
9) Marti is 31 years old and is saving for retirement. Which one of the following portfolio
allocations might best suit her situation if she is willing to accept a fair amount of risk in
exchange for long-term capital appreciation?
A) 60% bonds, 15% money funds and 25% real estate
B) 5% money funds, 10% bonds and 85% growth stocks
C) 25% bank CDs, 40% corporate bonds, 15% money market, 20% value stocks
D) 50% mortgage bonds, 5% money market, 45% municipal bonds
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3
10) Asset allocation should focus on
A) the investor’s financial and family situation.
B) selection of individual securities within an asset class.
C) maximization of current income.
D) maximization of short-term profits.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
11) Jessica’s portfolio consists of 30% common stock, 40% bonds, 15% foreign securities and
15% short-term securities. This asset allocation would be considered
A) aggressive.
B) moderate.
C) conservative.
D) passive.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
12) Which one of the following provides the greatest reduction in total risk?
A) diversification
B) asset allocation
C) security selection
D) beta reduction
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4
13) The fixed-weightings approach to asset allocation
A) is based on an allocation of an equal percentage of the portfolio to each separate asset
category.
B) requires periodic rebalancing of the portfolio to maintain the desired weights.
C) is based on periodic adjustments to category weights in response to market changes.
D) uses stock-index futures and bond futures in a market timing strategy.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
14) Tactical asset allocation is most suitable for
A) young, single individuals with good incomes.
B) retirees.
C) large institutional investors.
D) investors who have already accumulated a fair amount of wealth.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
15) An asset allocation plan should consider which of the following factors?
I. economic outlook
II. capital preservation
III. changing investment goals
IV. investor risk tolerance
A) II only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5
16) An asset allocation plan should consider which of the following investor characteristics?
I. income and employment security
II. marital status
III. age and proximity to retirement
IV. social relationships and peer groups
A) II only
B) I, II and III only
C) I, III and IV only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
17) Mathew’s 401-K plan offers a choice between and S&P 500 Index Fund, a large-cap stock
fund, a blue chip stock fund that seeks high dividend income and modest growth, a fund that
invests only in investment grade corporate bonds and a fund that that invests only in
government bonds. Mathew allocates 20% of his money to each fund. Which of the following
statements offers the best critique of Mathew’s “1/N” allocation?
A) Mathew may not be as well diversified as he thinks because the three stock funds probably
own many of the same stocks.
B) He should have allocated on 1/3 to stocks and 1/3 to each of the remaining funds.
C) His plan does not provide sufficient liquidity.
D) There is nothing wrong with Mathew’s plan.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
6
18) Tatiana is following a fixed weighting approach to managing her portfolio, which on
January 1 consisted of 45% common stock, 40% bonds, and 15% short-term securities.
Because stocks had a good year, at the end of the year, it consisted of 55% common stock, 35%
bonds and 10% short-term securities. As a result,
A) Tatiana should leave her portfolio as it is to take advantage of momentum in stocks.
B) she should sell stock and buy bonds and short-term securities to restore the original
weightings.
C) she should sell stock index futures to protect herself from falling prices.
D) she should sell stock and increase the proportions of bonds and short-term securities because
she is now one year older.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
19) Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to
asset allocation. Compare and contrast these three different approaches.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
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13.2 Learning Goal 2
1) The Dow Jones Industrial Average (DJIA) includes 500 of the largest companies traded on
U. S. exchanges.
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) The key areas to monitor when evaluating your portfolio holdings are the overall
performance of both the economy and the financial markets, and the returns on your
investments.
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) Changes in securities prices are not important when measuring portfolio performance unless
gains or losses are realized.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
4) Investors need to monitor economic and market activity to assess the potential impact these
factors can have on their investment portfolios.
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) Several indexes are available to monitor the performance of stocks, but nothing similar is
available for bonds or mutual funds.
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
6) Most investment professionals consider the Dow Jones Industrial Average (DJIA) to be the
most appropriate comparative gauge for evaluating the investment performance of a broadly
based common stock portfolio.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7) Which of the following are required to measure the performance of a diversified stock
portfolio?
I. Price changes
II. Dividend payments
III. An appropriate index to use as a benchmark
IV. The risk-free interest rate
A) I, III and IV only
B) I, II and IV only
C) I, II and III only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
8) If an investor’s portfolio is comprised of a broad range of common stocks, the best measure
to use as a basis of comparison of performance is the
A) Dow Jones Industrial Average (DJIA).
B) S&P 500 index.
C) Dow Jones Corporate Bond Index.
D) American Stock Exchange utilities index.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
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9) The S & P 500 Index is an appropriate benchmark for
A) diversified portfolios of large company stocks.
B) portfolios diversified among several asset classes such as stocks, bonds, and real estate.
C) diversified portfolios with a mix of large, small, and mid-cap stocks.
D) diversified portfolios of mid-cap and small company stocks.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10) The best index to assess the performance of a portfolio diversified among several asset
classes such as stocks, bonds and real estate is
A) the Lipper Index.
B) the NYSE Composite Index.
C) the Value Line Index.
D) No suitable index exists.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
11) Indexes specifically for the performance of various types of mutual funds are published by
A) Value Line.
B) Standard and Poors.
C) the Wall Street Journal.
D) Lipper.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
10
12) The holding period return (HPR) of one’s portfolio should be compared to investment goals
I. to determine whether the rate of return is commensurate with the risk involved.
II. to be sure one’s portfolio is outperforming the S&P 500 Index.
III. to isolate any problem investments.
IV. to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite
Index.
A) I and III only
B) II and IV only
C) I, II and III only
D) II, III and IV only
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
13.3 Learning Goal 3
1) The holding period return measures only the capital appreciation of an investment.
AACSB: 3 Analytical thinking
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Learning Goal: Learning Goal 3
2) Returns for periods greater than one year should be measured using the internal rate of
return.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
3) Holding period return (HPR) captures total return performance by considering current
income and capital gains and is most appropriate for holding periods of one year or less.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3