Chapter 4 Financial Planning, Taxation, and the Efficiency
of Financial Markets
TRUE/FALSE
establish the goals and objectives of the portfolio.
receipts and disbursements.
subtracting liabilities from assets.
individual’s balance sheet.
individual’s balance sheet.
estimate of cash receipts and disbursements.
investor’s estimate of cash receipts and disbursements.
plan for the self–employed.
taxation applies.
covered by a pension plan at place of employment.
as the individual’s tax rate decreases.
401(k) or Keogh account.
taxed when distributed from a 401(k).
is an argument for a Roth IRA instead of a traditional IRA.
rates than long–term capital gains.
offset long–term losses for the purpose of taxation.
should earn, over a period of years, a return comparable to
the amount of risk the individual bears.
portfolio but has little impact on the portfolio’s return.
inefficient, that argues for the individual to pursue a
more active portfolio strategy.
importance of financial planning.
current price of a stock reflects what the investment
community believes the stock is worth.
information is disseminated in an inefficient market.
because these markets are very competitive.
outperform the market.
purchasing high P/E stocks should produce higher returns.
time, the investor should earn a return that is consistent
with the amount of risk the investor bears.
that investments in the debt of large firms will earn
higher returns than investments in their stock.
generate superior investment results and that is
inconsistent with the strong form of the efficient market
hypothesis.
create an anomaly that can lead to superior returns.
MULTIPLE CHOICE
individual to
1. establish financial goals and objectives
2. quantify the value of his or her assets
3. hire professional financial advisors
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
1. capacity to meet financial emergencies
2. preservation of capital
3. desire to finance retirement
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
individual’s cash budget?
a. common stock
b. social security payments
c. home mortgage owed
d. credit card balances
individual’s cash budget?
a. wages and salary
b. retirement account
c. social security tax payments
d. alimony
a. the stock market being efficient
b. the stock market being inefficient
c. the investor’s being able to obtain public
information
d. the portfolio manager’s access to corporate
management
1. interest on municipal bonds
2. realized short–term capital gains
3. IRAs
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
1. IRA accounts
2. stocks sold for a profit
3. real estate sold for a profit
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. a tax–deferred retirement account
b. a non–tax–deferred retirement account
c. a means to generate tax–free income
d. a means to increase current income
the self–employed?
a. a 401(k) plan
b. Keogh account (HR–10 account)
c. 10–K report
d. tax–deferred annuity
a. deducts the annual contributions
b. earns tax–free income
c. defers taxes
d. avoids estate taxes
a. tax–deferred retirement plan
b. savings plan for the retired
c. plan to increase current tax–exempt income
d. dividend or interest enhancement plan
1. contributions to an IRA
2. contributions to a Roth account
3. purchases of life insurance
4. contributions to a 401(k) plan
a. 1 and 2
b. 1 and 3
c. 1 and 4
d. 2 and 4
tax–sheltered retirement plan?
a. Keogh account
b. IRAs
c. 401(k) plans
d. life insurance
a. dividend income
b. unrealized long–term capital gains
c. 401(k) contributions
d. realized long–term capital gains
suggests that
a. investors cannot earn superior returns
b. investors cannot expect to outperform the market
consistently
c. security prices are random
d. bearing additional risk will not increase return
1. financial markets to be competitive
2. prices to adjust rapidly
3. prices of undervalued securities to fall
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. all investors would outperform the
stock market
b. prices would indicate the proper valuation
of securities
c. prices would adjust rapidly
d. some investors may consistently outperform
the market
implies
a. securities prices are randomly determined
b. studying past price behavior will lead to
inferior investment decisions
c. past securities prices predict future prices
d. studying past price behavior does not lead
to superior investment decisions
suggests
1. inside information will not lead to superior
investment results
2. inside information will lead to superior
investment results
3. studying financial statements will not lead
to superior investment results
4. studying financial statements will lead to
superior investment results
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
investment results according to
a. the weak form of the efficient market hypothesis
b. the semi–strong form of the efficient market
hypothesis
b. the strong form of the efficient market
hypothesis
d. all forms of the efficient market hypothesis
a. securities prices are randomly determined
b. stock prices reflect historical information
c. few investors can expect to outperform the market
over a period of time
d. after adjusting for risk, money market securities
offer superior returns
PROBLEMS
1. What is the federal income tax owed by an investor in
the 35 percent income tax bracket? The tax rate on long–
term capital gains is 15 percent.
a. Bob
owns a savings account that paid $350 in interest and
sold Stock B for a long–term capital gain of $1,200.
b. Bill
sold Stock A for a short–term capital gain of $3,500;
sold Stock B for a short–term capital loss of $3,100.
c. Brian
sold Stock A for a long–term capital gain of $3,700;
sold Stock B for a long–term capital loss of $5,100.
d. Barbara
sold Stock A for a $6,000 short–term loss and
sold Stock B for a $2,000 long–term gain.
e. Roberta’s IRA account collected interest of $1,000
and a bond paid her interest of $1,000.
2. What is the federal income tax owed by an investor in
the 35 percent income tax bracket? The tax rate on long–
term capital gains is 15 percent.
a. Megan
sold Stock A for a short–term capital gain of $5,500;
sold Stock B for a short–term capital loss of $2,100.
b. Margaret
sold Stock A for a short–term capital loss of $2,000;
sold Stock B for a short–term capital gain of $4,000.
c. Melissa is 70 years old and withdraws $1,000 from her
Roth IRA account. Would the answer be different if
she were 65 years old?
d. Morgan
bought 100 shares of IBM in March for $100 a share
and sold the shares in April for $110.
e. Murphy
contributed $4,000 to an IRA and used the proceeds to
purchase stock A for $4,000. The stock was
subsequently sold for $4,500 after a year had passed.
3. What is the federal income tax owed by an investor in
the 35 percent income tax bracket? The tax rate on long–
term capital gains is 15 percent.
a. Tristan
sold Stock A for a short–term capital loss of
$5,250;
sold Stock B for a long–term capital gain of $4,250.
b. Isolda
sold Stock A for a $2,000 short–term gain;
sold Stock B for a $6,000 long–term loss.
c. Elsa is 65 years old and withdraws $1,000 from her
traditional IRA account, She deposits $1,000 in her
Roth IRA.
d. Gertrude
bought 100 shares of IBM in March 2006 for $100 a
share and sold 40 shares six months later for $120.
e. Siegmund’s traditional IRA is currently worth
$25,000. He sold a stock in the account for $2,000.
He had purchased the stock for $1,000 in 2012.
f. Sieglinde purchased 100 shares of BABY at $15 on
September 10. She sold the shares for $12 on
September 15. She repurchased the shares on
September 20 for $10.
SOLUTIONS TO PROBLEMS
