45. The amount of risk an individual should take depends on his or her:
I. Return requirements
II. Risk tolerance
III. Time horizon
46. Earnings on variable life and universal life insurance policies are ___________.
47. When a company sets up a defined contribution pension plan, the __________ bears all the
risk and the __________ receives all the return from the plan’s assets.
48. Suppose that the pretax holding-period returns on two stocks are the same. Stock A has a
high dividend payout policy and stock B has a low dividend payout policy. If you are a high-tax rate
individual and do not intend to sell the stocks during the holding period, __________.
49. The objectives of personal trusts normally are __________ in scope than those of individual
investors, and personal trust managers typically are __________ than individual investors.
50. The prudent investor rule requires __________.
51. The prudent investor rule is an example of a regulation designed to ensure appropriate
_____________ by money managers.
52. An investor has a long time horizon and desires to earn the market rate of return.
However, the investor will need to withdraw funds each year from her investment portfolio. The
biggest constraint a planner would face with this client is a ___________ constraint.
53. When used in the context of investment decision making, the term
liquidity
refers to
_____________.
54. The term
investment horizon
refers to __________.
55. The choice of an active portfolio management strategy rather than a passive strategy
assumes ___________.
56. Conservative investors are likely to want to invest in __________ mutual funds, while risk–
tolerant investors are likely to want to invest in __________.
57. The first step any investor should take before beginning to invest is to __________.
58. Which of the following is the least likely to be included in the portfolio management
process?
59. A clearly understood investment policy statement is
not
critical for which one of the
following?
I. Mutual funds
II. Individuals
III. Defined benefit pension funds
60. An investor refuses to invest in any firm that produces alcohol or tobacco. This is an
example of a ___________ constraint.
61. Under the provisions of a typical defined benefit pension plan, the employer is responsible
for _____________.
62. A life insurance firm wants to minimize its interest rate risk, and it is planning on paying
out $250,000 in 5 years. Which one of the following investments best matches its goal?
63. An institutional investor will have to pay off a maturing bond issue in 3 years. The
institution has 10,000 bonds outstanding, each with a $1,000 par value. The institutional money
manager is reevaluating the fund’s total portfolio of $100 million at this time. She is bullish on
stocks and wants to put the most she can into the stock market, but she cannot risk being unable
to pay off the bonds. Three-year zero-coupon bonds are available paying 6% interest. What
percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the
bond payments?
64. An investor with high risk aversion will likely prefer which of the following risk and return
combinations?
65. An investor with low risk aversion will likely prefer which of the following risk and return
combinations?
66. Medfield College’s $10 million endowment fund is not allowed to spend any contributed
capital or any capital gains. The fund may spend only investment earnings. The fund is expected
to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building.
67. An investor is looking at different retirement investment choices, and he is willing to
accept one with upside potential even if that means sacrificing certainty. Which of the following
will he most likely select?
68. Both a wife and her husband work in the airline industry. They are in their 40s, and they
have a high tax bracket and are concerned about their after-tax rate of return. A meeting with
their financial planner reveals that they are primarily focused on long-term capital gains and will
need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a
diversified portfolio, and liquidity is not currently a major concern. Which of the following asset
allocations seems to best fit their situation?
69. A family will retire in a few years. They have a high tax bracket and are concerned about
their after-tax rate of return. A meeting with their financial planner reveals that they are primarily
focused on safety of principal and will need a 6% to 8% average rate of return on their portfolio.
They desire a diversified portfolio, and liquidity is likely to be a concern due to health reasons.
Which of the following asset allocations seems to best fit this family’s situation?
70. Your sister, an avid outdoors person, works in the airline industry, and she has come to
you (the financial guru) for investment advice. She is looking into purchasing stocks she knows
something about. She is considering purchasing stock in Boeing, Lockheed Martin, United
Technologies (maker of aircraft engines), and Cabela’s Sporting Goods. Based only on the
information given, which stock should you recommend for her?
71. In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not–for-profit
charitable organization. Such organizations are typically called _________________.
72. Which one of the following institutions typically has the longest investment horizon?
73. For which one of the following institutions is liquidity usually the most important?
74. One of the major functions of the investment committee is to ________________.
75. For an investor concerned with maximizing liquidity, which of the following investments
should be avoided?
76. The asset universe is the _____________________.
77. Go Global Investment Management has an asset allocation strategy of 60% U.S.
investments and 40% global investments. Within the United States, Go Global has allocated 70%
of its portfolio to equities and 30% to bonds. Go Global now holds 3% of its U.S. equity portfolio in
the stock of Wally World. Internationally, Go Global has allocated 55% to equities and 45% to
bonds. About what percentage of Go Global’s total portfolio is invested in Wally World?
78. Major functions of the investment committee include all but which one of the following?
79. A portfolio consists of three index funds: an equity index, a bond index, and an
international index. The portfolio manager changes the weights periodically according to forecasts
for each sector. This is an example of __________.
80. A portfolio consists of three index funds: an equity index accounting for 40% of the total
portfolio, a bond index accounting for 30% of the total portfolio, and an international index
accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells
some of each sector to preserve the original weights for each sector. This is an example of
____________.
81. One way that life insurance firms can hedge the risk created by offering whole–life
insurance policies is by ________________.