Question 1

The biggest problem with timing strategies is

Accepted Answer

A)   it is difficult to correctly predict highs and lows in the market.
B)   transaction costs are higher than with other active investing strategies.
C)   small investors are usually not able to get in and get out during market highs and lows as are institutional investors.
D)   taxes will be higher on your investment returns.

Question 2

A program that allows investors to automatically reinvest dividends in additional shares of stock is a

Accepted Answer

A)   DRIP.
B)   DIP.
C)   ESOP.
D)   DROP.

Question 3

Mandy is subject to a marginal tax rate of 24%. She earned $400 in dividends from a taxable brokerage account last year. How much of the dividend income will Mandy pay in taxes?

Accepted Answer

A)   $96
B)   $80
C)   $60
D)   $0, because dividend income is tax exempt

Question 4

A major advantage of a buy-and-hold strategy is

Accepted Answer

A)   greater expected return.
B)   buying securities at their lowest price.
C)   lower transaction costs.
D)   lower default risk.

Question 5

Actively managed portfolios, such as those run by professional money managers, tend to

Accepted Answer

A)   outperform the market as a whole.
B)   underperform the market as a whole.
C)   perform the same as the market as a whole.
D)   remain uncorrelated to the market at all.

Question 6

You are more likely to take on riskier investments during the _________ stage than during the ____________ phase.

Accepted Answer

A)   early life-cycle; wealth accumulation
B)   wealth accumulation; early life-cycle
C)   retirement; wealth accumulation
D)   early life-cycle; retirement

Question 7

Investment goals should be all of the following except

Accepted Answer

A)   realistic.
B)   specific.
C)   measurable.
D)   broad.

Question 8

The sacrifice of today's consumption for consumption at a later date is captured in the

Accepted Answer

A)   real risk-free rate.
B)   inflation rate.
C)   liquidity premium.
D)   maturity risk premium.

Question 9

Which of the following is not one of the steps in the investment planning process?

Accepted Answer

A)   Learning about your employer's flexible spending account (FS
A)  
B)   Monitoring your investment plan
C)   Selecting appropriate investments
D)   Evaluating your investment choices

Question 10

An investor interested in a short-term horizon will avoid purchasing real estate, art, and collectibles due to ________ risk.

Accepted Answer

A)   liquidity
B)   interest rate
C)   maturity
D)   default

Question 11

Which of the following is not one of the factors affecting risk tolerance?

Accepted Answer

A)   Consumer confidence
B)   The state the person lives in
C)   Life-cycle effects
D)   Education

Question 12

_____________ are required to report their financial performance to the owners of the company in an annual report.

Accepted Answer

A)   All U.S. companies
B)   Publicly held companies
C)   Privately held companies
D)   All companies doing business in the United States

Question 13

The principle of diversification is effective when

Accepted Answer

A)   a portfolio is invested in different investments and asset classes.
B)   securities in a portfolio belong to the same asset class.
C)   securities that move up or down together.
D)   there is only one security in the portfolio.

Question 14

Your accountant has just told you that one of your investments had a capital gain over the year. This would mean that

Accepted Answer

A)   the value of the investment appreciated.
B)   the investment paid a large dividend.
C)   the investment made a large interest payment.
D)   you received a tax refund related to the investment.

Question 15

Melvin owns 10 20-year corporate bonds, each with a face value of $1,000. If the bonds pay an interest rate of 7.5%, how much total interest will Melvin earn before taxes in one year on this investment?

Accepted Answer

A)   $75
B)   $100
C)   $375
D)   $750

Question 16

An investment of $1 each in two different securities led to a value of $10 (Security A)  and $20 (Security B) , respectively, after 15 years. When comparing the rate of return earned by the two securities, it can be said that

Accepted Answer

A)   Security B earned a higher average annual rate of return.
B)   Security A earned a higher average annual rate of return.
C)   both securities earned the same average annual rate of return.
D)   it is impossible to calculate the securities rates of return based on this information.

Question 17

Which of the following statements regarding default risk is true?

Accepted Answer

A)   In a bankruptcy proceeding, the value of an equity investment is likely to be zero.
B)   Default risk is greater for short-term securities than for long-term securities.
C)   In a bankruptcy proceeding, the value of a debt investment is likely to be zero.
D)   Default risk is greater for illiquid investments.

Question 18

DRIPs allow investors to

Accepted Answer

A)   receive higher dividends than investors who are not in the program.
B)   avoid brokerage commissions on small trades.
C)   receive returns comparable to the index.
D)   purchase a collection of bonds with different maturities spread out over your investment horizon.

Question 19

The statement "Don't put all your eggs in one basket" is recommending

Accepted Answer

A)   active investing.
B)   market timing.
C)   diversification.
D)   portfolio management.

Question 20

Which of the following are entitled to vote in the election of the board of directors of the company?

Accepted Answer

A)   Common shareholders
B)   Preferred shareholders
C)   Common and preferred shareholders
D)   Bondholders

Exam 11: The Fundamentals of Investing

Which of the following is not one of the steps in the investment planning process?

Correct AnswerverifiedShow Answer

A major advantage of a buy-and-hold strategy is

Correct AnswerverifiedShow Answer

Which of the following statements regarding default risk is true?

Correct AnswerverifiedShow Answer

Which of the following is not one of the factors affecting risk tolerance?

Correct AnswerverifiedShow Answer

Melvin owns 10 20-year corporate bonds, each with a face value of $1,000. If the bonds pay an interest rate of 7.5%, how much total interest will Melvin earn before taxes in one year on this investment?

Correct AnswerverifiedShow Answer

Investment goals should be all of the following except

Correct AnswerverifiedShow Answer

The statement "Don't put all your eggs in one basket" is recommending

Correct AnswerverifiedShow Answer

The sacrifice of today's consumption for consumption at a later date is captured in the

Correct AnswerverifiedShow Answer

_____________ are required to report their financial performance to the owners of the company in an annual report.

Correct AnswerverifiedShow Answer

The biggest problem with timing strategies is

Correct AnswerverifiedShow Answer

Your accountant has just told you that one of your investments had a capital gain over the year. This would mean that

Correct AnswerverifiedShow Answer

DRIPs allow investors to

Correct AnswerverifiedShow Answer

An investor interested in a short-term horizon will avoid purchasing real estate, art, and collectibles due to ________ risk.

Correct AnswerverifiedShow Answer

The principle of diversification is effective when

Correct AnswerverifiedShow Answer

Mandy is subject to a marginal tax rate of 24%. She earned $400 in dividends from a taxable brokerage account last year. How much of the dividend income will Mandy pay in taxes?

Correct AnswerverifiedShow Answer

An investment of $1 each in two different securities led to a value of $10 (Security A) and $20 (Security B) , respectively, after 15 years. When comparing the rate of return earned by the two securities, it can be said that

Correct AnswerverifiedShow Answer

A program that allows investors to automatically reinvest dividends in additional shares of stock is a

Correct AnswerverifiedShow Answer

You are more likely to take on riskier investments during the _________ stage than during the ____________ phase.

Correct AnswerverifiedShow Answer

Which of the following are entitled to vote in the election of the board of directors of the company?

Correct AnswerverifiedShow Answer

Actively managed portfolios, such as those run by professional money managers, tend to

Correct AnswerverifiedShow Answer

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You are more likely to take on riskier investments during the _ stage than during the ____ phase.

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