Chapter 20 Financial Planning and Investing in an
Efficient Market Context
TRUE/FALSE
establish the objectives of the portfolio.
with fluctuations in securities prices (i.e., the market)
is reduced.
risk, other sources of risk remain.
not 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.
individual should develop a diversified portfolio.
inefficient, that argues for the individual to pursue a
more active portfolio strategy.
mentality helps explain financial bubbles.
inefficiency, the individual may still be unable to
outperform the market.
importance of financial planning.
MULTIPLE CHOICE
individual to
1. establish financial goals and objectives
2. identify and 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
a. systematic risk
b. unsystematic risk
c. market risk
d. purchasing power risk
1. fluctuating exchange rates
2. a firm’s financing decisions
3. higher interest rates
4. loss of purchasing power
a. 1 and 2
b. 2 and 3
c. 2 and 4
d. all four
1. a firm’s financing decisions
2. interest rate risk
3. loss of purchasing power
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. the returns on the individual securities should
be highly correlated
b. the prices of the stocks should be stable
c. the returns on the individual securities should
be negatively correlated
d. one firm should offer dividends and the other
should offer capital gains
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. financial markets are inefficient
2. financial markets are rational
3. the investors have a herd instinct
4. investors do not have a herd instinct
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
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
a. all investors would profit
b. prices indicate the proper valuation of securities
c. prices would adjust rapidly
d. an investor may consistently outperform the market
a. securities prices are random 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
1. buy–and hold
2. index mutual funds
3. specialized ETFs
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three