Essentials of Investments, 11e (Bodie)
Chapter 22 Investors and the Investment Process
1) To ________ means to mitigate a financial risk.
A) invest
B) speculate
C) hedge
D) renege
2) In a defined benefit pension plan, the ________ bears all of the fund’s investment performance
risk.
A) employer
B) employee
C) fund manager
D) government
3) In a defined contribution pension plan, the ________ bears all of the fund’s investment
performance risk.
A) employer
B) employee
C) fund manager
D) government
4) My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual
salary for each year of service. I must have ________.
A) a defined benefit plan
B) a defined contribution plan
C) an endowment fund
D) a variable annuity
5) A ________ insurance policy provides death benefits, with no buildup of cash value.
A) whole-life
B) universal life
C) variable life
D) term life
6) If the maturity of a bank’s assets is much longer than the maturity of its liabilities and it wants
to limit its interest rate risk, the bank may ________.
A) prefer to invest in long-term bonds in its asset portfolio
B) prefer to invest in equities in its asset portfolio
C) prefer to invest in variable-rate assets
D) decide to increase its fixed-rate mortgage holdings
7) You are thinking of investing in one of two assets. Asset A has higher systematic risk than
asset B. You can be sure that asset A’s ________ return will be higher than asset B’s, but you
can’t be sure if asset A’s ________ return will be higher than asset B’s.
A) realized; expected
B) real; nominal
C) expected; realized
D) nominal; expected
8) SoHo International Investment Management has an asset allocation strategy of 57% U.S.
investments and 43% global investments. Within the United States, Go Global has allocated 55%
of its portfolio to equities and 45% to bonds. SoHo International now holds 4.4% of its U.S.
equity portfolio in the stock of Bright Force. Internationally, SoHo International has allocated
72% to equities and 28% to bonds. About what percentage of SoHo International’s total portfolio
is invested in Bright Force?
A) 1%
B) 1.26%
C) 1.5%
D) 1.81%
9) Which one of the following would be considered a “cash equivalent” investment?
A) Treasury bills
B) common stock
C) corporate bonds
D) real estate
10) For a bank, the difference between the interest rate charged to borrowers and the interest rate
paid on liabilities is called the ________.
A) insurance premium
B) interest rate spread
C) risk premium
D) term premium
11) Price volatility is greatest on which one of the following investments?
A) commercial paper
B) 20-year zero-coupon bonds
C) Treasury notes
D) Treasury bills
12) A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio.
This is called a ________ strategy.
A) passive-aggressive
B) passive core
C) passively active
D) balanced fund
13) The major asset most people have during their early working years is their ________.
A) home
B) stock portfolio
C) earning power derived from their skills
D) bond portfolio
14) At the early stage of an individual’s working career, his or her retirement portfolio should
probably consist mostly of ________.
A) annuities
B) stocks
C) bonds
D) commodities
15) If an investor wants to invest 100% of her portfolio in safe assets but does not want to
manage her portfolio, she should invest in ________.
A) a money market fund
B) a growth stock fund
C) several different money market instruments
D) several different stocks
16) Just 2 months after you put money into an investment, its price falls 25%. Assuming that
none of the investment fundamentals have changed, which of the following actions would
evidence the greatest risk tolerance?
A) You sell to avoid further worry and buy something else.
B) You do nothing and wait for the investment to come back.
C) You buy more, thinking that if it was a good investment before, now it’s not only good but
cheap too.
D) You sue your financial adviser.
17) To become a CFA, you must do all of the following except which one?
A) Pass three exams designed to ensure that you have sufficient knowledge of investments.
B) Obtain 3 years of work experience in money management.
C) Become a member of a local Society of the Financial Analysts Federation.
D) Divest all your own stock holdings to eliminate any potential conflicts of interest with client
recommendations.
18) Which of the following is not one of the main areas covered in the examinations that must be
taken in order to achieve the designation of Chartered Financial Analyst?
A) investment management ethics
B) securities analysis
C) securities marketing techniques
D) portfolio management
19) As the typical investor ages, the composition of his wealth usually switches from primarily
________ to primarily ________.
A) human capital; financial capital
B) financial capital; human capital
C) intellectual capital; physical capital
D) investable capital; noninvestable capital
20) The two most important factors in describing an individual’s or organization’s investment
objectives are ________.
A) income level and age
B) income level and risk tolerance
C) age and risk tolerance
D) return requirement and risk tolerance
21) The term hedge refers to an investment that is used ________.
A) primarily for tax-loss selling purposes
B) to mitigate specific financial risks
C) to conceal one’s true investment strategy from other market participants
D) primarily to defer capital losses
22) The price of your investment increases 20% one month after you buy it. You do not believe
that the stock’s prospects have changed. Which one of the following actions would indicate the
lowest amount of risk aversion?
A) You hang on to the stock, anticipating that it will go higher.
B) You buy more stock, anticipating that it will go higher.
C) You sell all of your stock holdings immediately.
D) You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.
23) An individual is on the game show Squeal or No Squeal, and she has a choice between
receiving a certain gain of $100,000 and receiving a 50% chance of winning $200,000 or zero. If
she takes the gamble instead of the certain $100,000, she is acting ________.
A) like a person who is risk-neutral
B) like a person who is risk averse
C) like a person who is a risk lover
D) irrationally
24) Which of the following typically strives to earn a return on their investments that exceeds the
actuarially determined rate of return?
A) banks
B) thrifts
C) mutual funds
D) pension funds
25) If an individual confers legal title to property to another person or institution to manage the
property on their behalf, the individual has created ________.
A) a personal trust
B) a charitable trust
C) an endowment fund
D) a mutual fund
26) Personal trusts are typically allowed to engage in which of the following investment
activities?
I. Buying and selling futures contracts.
II. Short-selling securities.
III. Purchasing and writing options.
IV. Buying stock on margin.
A) I only
B) II and III only
C) II and IV only
D) None of the given activities are allowed.
27) If a defined benefit pension fund’s actual rate of return is ________ than the actuarial
assumed rate, then the ________.
A) greater; employees will benefit
B) greater; firm’s shareholders will benefit
C) lower; employees will benefit
D) lower; firm’s shareholders will benefit
28) An employee has an average wage of $60,000 and has worked for the firm for 28 years. The
defined benefit pension plan pays retirees 2.3% of the average wage times the years of service.
The employee can expect to receive ________ per year upon retirement.
A) $18,000
B) $38,640
C) $45,325
D) $55,250
29) Life insurance companies try to hedge the risks inherent in whole-life insurance policies by
investing in ________.
A) long-term bonds
B) money market mutual funds
C) savings accounts
D) short-term commercial paper
30) A pension fund will owe $15 million to retirees in 8 years. An actuary assumes an 7% rate of
return on the funds invested in the pension plan. If the pension plan receives annual contributions
from the company sponsor, how much must the company pay each year to fully fund the pension
liability?
A) $1,212,587
B) $1,462,016
C) $1,533,333
D) $1,666,667
31) The risk that a downturn in the market may substantially reduce your investment principal is
called ________.
A) purchasing power risk
B) interest rate risk
C) market risk
D) liquidity risk
32) The possibility that you are too conservative and your money doesn’t grow fast enough to
keep pace with inflation is called ________.
A) purchasing power risk
B) liquidity risk
C) timing risk
D) market risk
33) A pension fund will owe $ 20 million to retirees in 25 years. An actuary assumes a 5.6% rate
of return on the funds invested in the pension plan, but the fund actually earns 7.1%. The pension
plan receives annual contributions from the company sponsor. If the 7.1% rate of return is
expected to continue, by how much can the company reduce its pension payments per year?
A) $65,437
B) $73,871
C) $89,462
D) $95,320
34) Many defined benefit pension plans have a target rate of return on investment that is equal to
the ________.
A) firm’s return on equity
B) plan’s assumed actuarial rate of return
C) economic inflation rate because wages often increase with inflation
D) estimated stock market return
35) _______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred
savings plan.
A) Term life
B) Whole life
C) Variable life
D) Universal life
36) Empirical evidence confirms that investors become ________ as they approach retirement.
A) greedier
B) less interested in investments
C) more risk averse
D) more risk tolerant
37) _______ is a life insurance policy that will provide a death benefit only and has no savings
plan.
A) Term life
B) Whole life
C) Variable life
D) Universal life
38) Of the following, the investment time horizon is typically the shortest for ________.
A) banks
B) endowment funds
C) life insurance companies
D) pension funds
39) A passive asset allocation strategy involves ________.
A) investing in the stock of companies that are price takers
B) maintaining approximately the same proportions of a portfolio in each asset class over time
C) varying the proportions of a portfolio in each asset class in response to changing market
conditions
D) selecting individual securities in different sectors that are believed to be undervalued
40) An active asset allocation strategy involves ________.
A) investing in the stock of companies that are price takers
B) maintaining approximately the same proportions of a portfolio in each asset class over time
C) varying the proportions of a portfolio in each asset class in response to changing market
conditions
D) selecting individual securities in different sectors that are believed to be undervalued
41) Endowment funds are held by ________.
A) financial intermediaries
B) individuals
C) profit-oriented firms
D) nonprofit institutions
42) Which one of the following is a life insurance policy that will provide a fixed death benefit
and allows the policyholder to choose where to invest the policy’s cash value?
A) term life
B) whole life
C) variable life
D) industrial life
43) Under a “passive core” portfolio management strategy, a manager would ________.
A) index the entire portfolio
B) index part of the portfolio and actively manage the rest
C) delegate the management of core segments of the portfolio to other managers
D) actively manage the entire portfolio
44) Of the following, the most flexible type of life insurance policy from the policyholder’s
perspective is probably a ________ policy.
A) term life
B) whole life
C) variable life
D) universal life