Chapter 02 – Asset Allocation and Security Selection
Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING PROBLEM(S)
If Taxable Income
Then
The Tax is
Is Over
But Not Over
This Amount
Plus This %
Of The Excess Over
$0
$7,150
0
10%
0
$7,150
$29,050
715
15%
$7,150
$29,050
$70,350
$4,000
25%
$29,050
$70,350
$146,750
$14,325
28%
$70,350
$146,750
$319,100
$35,717
33%
$146,750
$319,100
–
$92,592.50
35%
$319,100
$0
$14,300
0
10%
0
$14,300
$58,100
1430
15%
$14,300
$58,100
$117,250
$8,000
25%
$58,100
$117,250
$178,650
$22,787.50
28%
$117,250
$178,650
$319,100
$39,979.50
33%
$178,650
$319,100
–
$86,328
35%
$319,100
45. Refer to Exhibit 2.1. What is the marginal tax rate for a single individual with taxable income of $85,000?
a.
15%
b.
25%
c.
28%
d.
33%
e.
35%
46. Refer to Exhibit 2.1. What is the tax liability for a single individual with taxable income of $85,000?
Chapter 02 – Asset Allocation and Security Selection
a.
$23,800
b.
$18,427
c.
$24,958
d.
$16,867
e.
$19,650
47. Refer to Exhibit 2.1. What is the average tax for a single individual with taxable income of $85,000?
a.
13.57%
b.
15.68%
c.
21.68%
d.
25.74%
e.
29.55%
48. Refer to Exhibit 2.1. What is the tax liability for a married couple filing jointly with taxable income of $125,000?
a.
$23,800
b.
$18,427
c.
$24,958
d.
$16,867
e.
$19,650
49. What would the equivalent taxable yield be on an investment that offers a 6 percent tax exempt yield? Assume a
marginal tax rate of 28 percent.
a.
0.125 percent
b.
7.20 percent
c.
6.48 percent
d.
8.33 percent
e.
32.14 percent
50. What would the after-tax yield be on an investment that offers a 6 percent fully taxable yield? Assume a marginal tax
rate of 31 percent.
a.
2.79 percent
b.
6.48 percent
c.
4.14 percent
d.
7.20 percent
e.
12.50 percent
51. The future value of $50,000 invested today, at the end of 10 years assuming an interest rate of 7.5 percent per year,
with semiannual compounding, is
a.
$104,407.60.
Chapter 02 – Asset Allocation and Security Selection
b.
$103,051.58.
c.
$123,510.52.
d.
$210,673.43.
e.
$105,117.46.
52. Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund. The annual rate of
interest that you expect to earn in this account is 5.25 percent. The amount in the account at the end of 20 years is
a.
$60,000.00.
b.
$105,039.84.
c.
$37,009.35.
d.
$123,510.52.
e.
$115,637.37.
53. Assume that you invest $1250 at the end of each of the next 15 years in a mutual fund. You currently have $10,000 in
the mutual fund. The annual rate of interest that you expect to earn in this account is 4.35 percent. The amount in the
account at the end of 15 years is
a.
$58,940.30.
b.
$28,750.00.
c.
$37,009.35.
d.
$44,630.81.
e.
$25,690.50.
54. Someone in the 15 percent tax bracket can earn 8 percent annually on his investments in a tax-exempt IRA account.
What will be the value of a $10,000 investment after five years (assuming annual compounding)?
a.
$6,805
b.
$14,693
c.
$15,528
d.
$20,114
e.
$50,000
55. Suppose the 8 percent investment of the previous problem is taxable rather than tax-deferred. What will be the after-
tax value of his $10,000 investment after five years (assuming annual compounding)?
a.
$10,680
b.
$11,765
c.
$13,895
d.
$14,693
e.
$15,528
56. An individual in the 36 percent tax bracket invests $5,000 in a tax-exempt IRA. If the investment earns 10% annually,
what will be the value of the IRA after five years?
Chapter 02 – Asset Allocation and Security Selection
a.
$6,600
b.
$6,818
c.
$7,500
d.
$8,053
e.
$10,879
57. An individual in the 15 percent tax bracket has $10,000 invested in a tax-exempt IRA account. If the individual earns
8 percent annually before taxes and inflation is 2.5 percent per year, what is the real value of the investment in 20 years?
a.
$23,211
b.
$28,467
c.
$29,178
d.
$37,276
e.
$46,610
58. An individual in the 36 percent tax bracket has $20,000 invested in a tax-exempt account. If the individual earns 10
percent annually before taxes and inflation is 3.0 percent per year, what is the real value of the investment in 10 years?
a.
$31,000
b.
$33,200
c.
$38,614
d.
$39,343
e.
$47,823
59. You currently have $150,000 in an IRA designated for retirement. If you save an additional $100 at the end of every
month and expect to earn an annual return of 12 percent, how much do you expect to have in the IRA in 10 years?
a.
$467,632
b.
$518,062
c.
$732,546
d.
$949,328
e.
$1,215,234
60. Which of the following is NOT a typical portfolio constraint?
a.
liquidity needs
b.
risk tolerance
c.
time horizon
d.
tax concerns
e.
legal factors
61. For an investor with a time horizon of 6 to 10 years and lower risk tolerance, an appropriate asset allocation strategy
would be
Chapter 02 – Asset Allocation and Security Selection
a.
100 percent stocks.
b.
100 percent cash.
c.
30 percent cash, 50 percent bonds, and 20 percent stocks.
d.
10 percent cash, 30 percent bonds, and 60 percent stocks.
e.
100 percent bonds.
62. For an investor with a time horizon of eight years and higher risk tolerance, an appropriate asset allocation strategy
would be
a.
100 percent stocks.
b.
100 percent cash.
c.
30 percent cash, 50 percent bonds, and 20 percent stocks.
d.
10 percent cash, 30 percent bonds, and 60 percent stocks.
e.
100 percent bonds.
63. For an investor with a time horizon of 12 years and higher risk tolerance, an appropriate asset allocation strategy
would be
a.
100 percent stocks.
b.
30 percent cash, 50 percent bonds, and 20 percent stocks.
c.
10 percent cash, 30 percent bonds, and 60 percent stocks.
d.
50 percent bonds and 50 percent stocks.
e.
100 percent bonds.
64. For an investor with a time horizon of 15 years and moderate risk tolerance, an appropriate asset allocation strategy
would be
a.
100 percent stocks.
b.
40 percent cash and 60 percent stocks.
c.
30 percent cash, 50 percent bonds, and 20 percent stocks.
d.
50 percent bonds, and 50 percent stocks.
e.
20 percent bonds and 80 percent stocks.
65. For an investor with a time horizon of four years and higher risk tolerance, an appropriate asset allocation strategy
would be
a.
100 percent cash.
b.
30 percent cash, 50 percent bonds, and 20 percent stocks.
c.
20 percent cash, 40 percent bonds, and 40 percent stocks.
d.
10 percent cash, 40 percent bonds, and 50 percent stocks.
e.
100 percent bonds.
66. For an investor with a time horizon of five years and moderate risk tolerance, an appropriate asset allocation strategy
would be
a.
100 percent cash.
b.
30 percent cash, 50 percent bonds, and 20 percent stocks.
c.
20 percent cash, 40 percent bonds, and 40 percent stocks.
d.
10 percent cash, 30 percent bonds, and 60 percent stocks.
Chapter 02 – Asset Allocation and Security Selection
e.
100 percent bonds.
67. Research from the 1970s to the 1990s found that over 90 percent of a fund’s returns over time is explained by
a.
market timing.
b.
stock selection.
c.
manager selection.
d.
asset allocation.
e.
cash allocation.
68. Asset allocation is
a.
the process of dividing funds into asset classes.
b.
concerned with returns variability.
c.
concerned with the risk associated with different assets.
d.
concerned with the relationship among investments’ returns.
e.
All of these are correct.
69. The asset allocation decision must involve a consideration of
Chapter 02 – Asset Allocation and Security Selection
a.
cultural differences.
b.
the objectives stated in the investor’s policy statement.
c.
the types of assets that are appropriate for the investor.
d.
the risk associated with different investments.
e.
All of these are correct.
70. Research has shown that the asset allocation decision explains ____% of the variation in fund returns across all funds
and ____% of the variation in returns for a particular fund over time.
a.
90; 100
b.
100; 40
c.
90; 40
d.
40; 100
e.
40; 90
71. Adding Japanese, Australian, and Italian stocks to a U.S. stock portfolio _____ the portfolio risk because the global
portfolio reflects only worldwide _____.
a.
reduces; systematic factors
b.
increases; systematic factors
c.
does not change; correlation
d.
reduces; risk
e.
increases; risk
72. Adding foreign stocks and bonds to a U.S. portfolio will almost certainly _____the risk of the portfolio and can
possibly _____ its average return.
a.
reduce; increase
b.
increase; reduce
c.
increase; increase
d.
decrease; decrease
e.
not change; decrease
73. A study examining the performance of numerous assets from the United States and around the world confirms that
a.
riskier assets with higher standard deviations experienced lower returns.
b.
riskier assets with higher standard deviations experienced higher returns.
c.
standard deviation did a better job of explaining the returns than beta.
d.
U.S. equities are highly correlated with world government bonds and with the commodities index.
e.
most assets (including common stocks) have positive correlations with inflation.
74. A study examining the performance of numerous assets from the United States and around the world confirms that
a.
riskier assets with higher standard deviations experienced lower returns.
b.
riskier assets with lower standard deviations experienced higher returns.
c.
beta did a better job of explaining the returns than standard deviation.
Chapter 02 – Asset Allocation and Security Selection
d.
U.S. equities are highly correlated with world government bonds and with the commodities index.
e.
most assets (including common stocks) have positive correlations with inflation.
75. A study examining the performance of numerous assets from the United States and around the world confirms that
a.
riskier assets with higher standard deviations experienced lower returns.
b.
riskier assets with lower standard deviations experienced higher returns.
c.
standard deviation did a better job of explaining the returns than beta.
d.
U.S. equities have zero correlation with world government bonds and with the commodities index.
e.
most assets (including common stocks) have positive correlations with inflation.
76. A study examining the performance of numerous assets from the United States and around the world confirms that
a.
riskier assets with higher standard deviations experienced lower returns.
b.
riskier assets with lower standard deviations experienced higher returns.
c.
standard deviation did a better job of explaining the returns than beta.
d.
U.S. equities are highly correlated with world government bonds and with the commodities index.
e.
most assets (including common stocks) have negative correlations with inflation.
77. Most art and antiques are _____, and the transaction costs are ____ compared to those of financial assets.
a.
illiquid; low
b.
illiquid; high
c.
liquid; low
d.
liquid; high
e.
correlated to bonds; high