Test Bank Questions, Chapter 10
1. Which of the following is not a step in the planning system for asset allocation?
a. Consider personal factors
b. Identify and review investment alternatives
c. Employ portfolio management principle
d. All of the above are steps in the planning system
e. None of the above is a step in the planning system
2. Why can investments be viewed as a delivery mechanism?
a. Because they increase the household’s risk level
b. Because they help create sufficient assets to fund our goals
c. Because they transform current savings into future spending
d. Because they transform future income into current spending
e. Investments are not viewed as delivery mechanism
3. Which of the following factors is not a personal consideration that enters into the
asset allocation process?
a. Current available resources
b. Projected future cash flows
c. Taxes
d. Risk neutrality
e. All of the above are personal considerations that enter into the asset allocation
process
4. Which of the following time frames is associated with a long-term horizon?
a. 2-7
b. 10-20
c. 2-4
d. 4-10
e. 15-35
5. Which of the following is not part of the investment policy associated with a short-
term horizon?
a. Short-term bond funds
b. Money market
c. U.S. government bonds
d. Certificates of deposit
e. All of the above are part of the investment policy associated with a short-term
horizon
6. Normal long-term asset allocation is the investment policy associated with which of the
following horizons?
a. Intermediate-term
b. Long-term
c. Very long-term
d. Both a and b
e. Both b and c
7. Which of the following influences one’s risk tolerance?
a. Personality
b. Upbringing
c. Type of future cash flows for the household
d. All of the above
e. None of the above
8. Which of the following is the holding period return?
a. (Sum of dividends or interest paid – Gains in principal invested)/Original cost
b. (Sum of dividends or interest paid + Gains in principal invested)/Original cost
c. (Gains in principal invested – Sum of dividends or interest paid)/Original cost
d. (Gains in principal invested + Sum of dividends – interest paid)/Original cost
e. None of the above
9. If the sum of dividends is $45,000, gains in principal invested are $2,500, and the
original cost is $365,500, what is the holding period return?
a. Approximately 13%
b. Approximately 11.5%
c. Approximately 11%
d. Approximately 10.5%
e. None of the above
10. What is liquidity risk?
a. The risk of a decline in the overall stock or bond market
b. The risk of unfavorable business conditions caused by weakness in the overall
economy
c. The risk of receiving a lower than market price upon sale of your holding
d. The risk of an unexpected rise in prices that reduces purchasing power
e. None of the above
11. The risk of unfavorable business conditions caused by weakness in the overall
economy is:
a. Market risk
b. Inflation risk
c. Regulatory risk
d. Company risk
e. None of the above
12. Which of the following is the most common measurement of price fluctuations?
a. Variance
b. Mean
c. Standard deviation
d. Correlation
e. None of the above
13. How does standard deviation differ from semi-variance?
a. Standard deviation includes fluctuations that result in both gains and losses while
semi-variance only measures fluctuations resulting in losses
b. Standard deviation includes fluctuations that result in both gains and losses while
semi-variance only measures fluctuations resulting in gains
c. Semi-variance includes fluctuations that result in both gains and losses while
standard deviation only measures fluctuations resulting in losses
d. Semi-variance includes fluctuations that result in both gains and losses while
standard deviation only measures fluctuations resulting in gains
e. None of the above
14. Unsystematic risk is:
a. The risk of overall market factors
b. The risk related to an individual company
c. Given a benchmark value of 1
d. Correlated with market returns
e. None of the above
15. What is the risk premium?
a. The extra risk that compensates you for the additional amount of return you are
taking with a particular security over a completely safe one.
b. The extra return that compensates you for the additional amount of risk you are
taking with a particular security over a completely safe one.
c. The extra risk that compensates you for the additional amount of return you are
taking with a particular security over the market return.
d. The extra return that compensates you for the additional amount of risk you are
taking with a particular security over the market risk.
e. None of the above.
16. If the risk free rate is 5% and the risk premium is 4%, what is the expected rate of
return?
a. 9%
b. 1%
c. 14%
d. -1%
e. None of the above
17. The expected rate of return is equal to:
a. The risk free rate divided by the risk premium
b. The risk free rate minus the risk premium
c. The risk premium minus the risk free rate
d. The risk premium divided by the risk free rate
e. None of the above
18. Which of the following is the furthest to the left of the security market line?
a. Government bonds
b. High quality stocks
c. Corporate bonds
d. Risk-free rate
e. None of the above
19. Which of the following statements does not characterize the efficient market
hypothesis?
a. The best valuation for an individual security is its current market price
b. The price reflects all information known about the security
c. The price is the fair price for the asset
d. When new information is issued, it is quickly incorporated in the price of the
shares
e. All of the above characterize the efficient market hypothesis
20. According to the semi-strong form efficient market hypothesis,
a. Looking at current and past information on stock price patterns and the number of
shares traded is not useful
b. All publicly available information is incorporated in a stock’s price
c. All privately available information is incorporated in a stock’s price
d. Both a and b
e. Both a and c
21. According to which of the following is technical analysis a waste of time?
a. Weak form efficient market hypothesis
b. Semi-strong form efficient market hypothesis
c. Strong form efficient market hypothesis
d. Both a and b
e. All of the above
22. Which of the following best defines mean reversion?
a. Returns for securities tend to move toward higher performance when returns are
examined over shorter time frames
b. Returns for securities tend to move toward lower performance when returns are
examined over shorter time frames
c. Returns for securities tend to move toward average performance when returns are
examined over longer time frames
d. All of the above
e. None of the above
23. Which of the following is not a reason why bonds are considered safer than most
other types of securities?
a. The annual income received is flexible
b. The contracted-for loan principal is likely to be repaid in full at the stated date
c. Should bankruptcy occur, bondholders have priority in receiving the proceeds
from liquidation of business assets
d. All of the above are reasons why bonds are considered safer
e. None of the above is a reason why bonds are considered safer
24. Which of the following characterizes a defensive stock?
a. The company grows more rapidly in sales and earnings than the overall economy
b. The company is less affected by cyclical business conditions
c. The company grows at average or below-average rates
d. Both a and b
e. Both b and c
25. Which of the following is a weakness associated with mutual funds?
a. Overhead costs
b. Tax
c. Diversification
d. Both a and b
e. Both b and c
26. Which of the following statements regarding ETFs is false?
a. Traditionally actively managed
b. Pool together investors’ monies for joint management
c. Traded intraday like stocks
d. Typically lower cost structure than mutual funds
e. Usually traded at close to market value of its underlying holdings
27. Greater potential returns and greater risk is a characteristic of which of the following?
a. Smaller capitalization companies
b. Medium capitalization companies
c. Larger capitalization companies
d. All of the above
e. None of the above
28. A fund that attempts to duplicate market performance and keeps costs low by using
computerized programs to purchase holdings is called:
a. An actively managed fund
b. An index fund
c. A high-tech fund
d. A defensive fund
e. A cyclical fund
29. Which of the following is a characteristic of Total Portfolio Management?
a. All household assets interact and their correlations are taken into account
b. Investment decisions that are made incorporate individual asset returns, risks, and
the degree to which they are correlated
c. Households make investment decisions based not only on marketable financial
securities but on all assets that it possesses
d. All of the above
e. None of the above
30. Which of the following is not a question that is asked during the performance
evaluation?
a. How did I do?
b. What were the reasons for the under or overperformance?
c. What can I do to improve future performance?
d. All of the above
e. Only b and c
31. The fact that records are kept by fund management is:
a. A weakness, as it provides a paper trail that can be used in an audit
b. A strength, as it can provide you with information about performance
c. A weakness, as it is used to justify the management expenses
d. None of the above
e. Both a and c
Essay questions:
32. Please list and explain eleven fundamental risks associated with financial assets.
Answer:
33. Please list and explain nine strengths associated with mutual funds.
