29
19) Which of the following is ideally suited to automatic investing through a payroll deduction
plan?
A) a dollar cost averaging plan
B) a constant dollar plan
C) a constant ratio plan
D) a variable ratio plan
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
20) Under the variable-ratio plan, additional speculative investments are made when the ratio
A) of conservative investments to speculative investments increases by 10%.
B) of the rate of return on the speculative investments exceeds the overall market return by 1%
or more.
C) of the realized rate of return falls below the desired rate of return by 1% or more.
D) of the value of the speculative investments to the total portfolio value drops below a
predetermined level.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
21) An investor adopts a variable ratio policy of investing in both a high beta mutual fund and a
money market fund. Money will be moved from the money market fund to the high beta fund
A) when the high beta fund’s value has declined.
B) when the high beta fund’s value has increased.
C) on the same date each year.
D) whenever accumulated interest in the money market fund exceeds a specified dollar amount.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
30
22) Net asset values at the end of each month for the no-load Currier & Ives fund are shown
below. Holly Tannenbaum invests $500 in the fund each month through an automatic
investment plan. Compute:
a. the number of shares purchased each month
b. the number of shares she owns at the end of December
c. the average price of the shares over the period
d. the average price per share paid by Holly
Month
NAV end of
month
Shares
purchased
July
12.85
August
11.08
September
9.99
October
9.85
November
13.55
December
12.21
Month
NAV end of
month
Shares
purchased
July
12.85
38.91
August
11.08
45.13
September
9.99
50.05
October
9.85
50.76
November
13.55
36.90
December
12.21
40.95
Total shares
262.70
Average price
over the
period
11.59
Average price
paid by Holly
11.42
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
31
23) Dollar-cost averaging plans and constant-dollar plans are both formula approaches to
portfolio management. Briefly explain the two plans.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
13.6 Learning Goal 6
1) A stop-loss order guarantees that an investor’s unrealized profit will be protected.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
2) If an investor has a loss position in an investment and wants to sell it, the best time to sell for
tax purposes is when a capital gain is available against which the loss can be applied.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
3) The maximum capital loss that can be applied to ordinary income for income tax purposes in
any one year is $3000.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
4) An investor who wants to take advantage of a temporary decline in the price of a stock
should use a limit order.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
32
5) Over a period of time if an investment has not met its return objective, it should be sold.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
6) Capital losses up to $5,000 on stock sales can be used to offset the taxes on ordinary income.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
7) Warehousing liquidity protects a portion of the portfolio from market fluctuations.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
8) The primary risk in using a GTC limit sell order rather than a market order is that
A) the market price may exceed the limit price when the order is placed.
B) the limit order may not be executed.
C) the limit order may be executed at a price above the market price.
D) the limit order expires at the end of the day and may not be executed.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
9) A stop loss order may not protect an investor’s profits if
A) the price drops even slightly below the stop price before the order can be executed.
B) the price enters a prolonged period of gradual decline.
C) an unexpected event cause the price to drop steeply when the markets are closed.
D) the stop loss price is never reached.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
33
10) Emily’s marginal tax rate is 28%. She will have $100,000 in taxable income before any
stock transactions. If she sells stock at long-term losses totaling $2,500 , her losses will reduce
her taxes by
A) $2,500.
B) $840.
C) $700.
D) No reduction, the loss is not deductible.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
11) Which of the following are characteristics of stop-loss orders?
I. the risk of whipsawing
II. the ability to limit downside losses
III. the guaranteed execution within the order period
IV. the conversion to a market order
A) I and II only
B) III and IV only
C) I, II and IV only
D) II, III and IV only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
12) Suppose the shares of the Chickadee Corporation traded seven times in the following
sequence one day last week: 46, 45.88, 45.75, 45.50, 45.63, 46, 46.13. In this case, a limit order
to sell at 46 would have been executed
A) between 46 and 46.13, whereas a market order to sell could have been executed anywhere
between 45.50 and 46.13.
B) anywhere between 45.50 and 46.13, whereas a market order to sell would have been
executed only at 46.
C) only at 46, whereas a market order to sell would have been executed at 46.13.
D) only at 46.13, and a market order to sell would have been executed between 46 and 46.13.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
34
13) The two primary media for warehousing liquidity are
A) money market mutual funds and money market deposit accounts.
B) certificates of deposit and short-term bond funds.
C) certificates of deposit and long-term bond funds.
D) short-term bond funds and asset allocation funds.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
14) Which of the following are reasons why a person may want to warehouse liquidity?
I. protect against total loss
II. ability to exploit future opportunities
III. capitalize on the high rates of return available on cash
IV. protect against the need to disturb the existing portfolio
A) I and II only
B) I, II and IV only
C) II, III and IV only
D) I, II, III and IV
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
15) One important tax rule concerning capital losses is that
A) capital losses are always fully deductible.
B) a maximum of $3,000 of losses in excess of capital gains can be written off against ordinary
income in any one year.
C) a maximum of $10,000 of losses in excess of capital gains can be written off against other
income in any one year.
D) capital losses are never deductible.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
35
16) Alex bought 100 shares of CBG corporation at $20 per share. It is now selling at $50 and
Alex has placed a stop loss order at $47.50, good til canceled. Which of the following is true?
A) If the price falls to $40, there is a high probability that Alex will sell at a price close to
$47.50.
B) If the price falls, to $40, Alex can be sure that the stock will sell at $47.50 or higher.
C) If the price falls overnight to $40 and continues to fall from there, Alex will not be able to
sell his stock.
D) If the price falls briefly below $47.50 but bounces back before the order can be executed,
Alex will still own the stock.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
17) Late in the calendar year, Jessica must choose between selling stock that was purchased 2
years ago for $10,000 and has fallen to $7,000 or a different stock that was purchased 1 year
ago for $5,000 and has risen to $7,000. If the investor has no other capital gains, which stock
should she sell?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
18) Explain the use of limit orders and stop-loss orders in rebalancing an investor’s stock
portfolio. What are the principal risks in using these orders?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6