Q&A Hero

Q: Major functions of the investment committee include all but which one of the following? A. Engage in security selection for each portfolio managed B. Broadly determine the overall asset allocation of the investment company C. Determine the asset-class weights for each portfolio D. Determine the asset universe

Q: 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? A. 1% B. 1.26% C. 1.5% D. 1.77%

Q: The asset universe is the _____________________. A. set of investments in which an investment company can legally invest B. existing set of assets the investment company currently owns in one or more of its portfolios C. list of assets approved by the investment committee that may be placed into the investment company's portfolio D. market portfolio of all available risky assets

Q: For an investor concerned with maximizing liquidity, which of the following investments should be avoided? A. Real estate B. Bonds C. Domestic stocks D. International stocks

Q: One of the major functions of the investment committee is to ________________. A. determine security selection of each portfolio operated by the investment company B. translate the objectives and constraints of the investment company into an asset universe C. determine the percentages of each security in the total investment company portfolio D. calculate and report the overall rate of return to investment company constituents

Q: For which one of the following institutions is liquidity usually the most important? A. Mutual funds B. Pension funds C. Life insurers D. Banks

Q: Which one of the following institutions typically has the longest investment horizon? A. Mutual funds B. Pension funds C. Property and casualty insurers D. Banks

Q: 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 _________________. A. annuities B. endowments C. mutual funds D. personal trusts

Q: 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? A. Boeing B. Lockheed Martin C. United Technologies D. Cabela's

Q: 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? A. 10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields B. 0% money market; 60% intermediate-term bonds; 40% stocks C. 10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks D. 5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

Q: 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? A. 10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks B. 0% money market; 60% long-term bonds; 40% stocks C. 10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks D. 5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

Q: 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? A. Fixed annuity B. Defined benefit plan C. Defined contribution plan D. Bonds invested in a retirement plan

Q: 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. Which of the following is (are) true? I. The fund should have a target rate of return of at least 10%. II. The limitations on spending require that the fund limit its considerations to growth stocks. III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return. A. I only B. II only C. I and III only D. I, II, and III

Q: An investor with low risk aversion will likely prefer which of the following risk and return combinations? A. Expected return = 11%, historical standard deviation = 12% B. Expected return = 12%, historical standard deviation = 14% C. Expected return = 14%, historical standard deviation = 18% D. Expected return = 17%, historical standard deviation = 21%

Q: An investor with high risk aversion will likely prefer which of the following risk and return combinations? A. Expected return = 12%, historical standard deviation = 17% B. Expected return = 14%, historical standard deviation = 19% C. Expected return = 16%, historical standard deviation = 21% D. Expected return = 18%, historical standard deviation = 23%

Q: 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? A. 87.4% B. 88.5% C. 90% D. 91.6%

Q: 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? A. High-yield utility stocks B. 5-year zero-coupon bonds C. 10-year coupon bonds D. Money market investments rolled over as needed

Q: Under the provisions of a typical defined benefit pension plan, the employer is responsible for _____________. A. investing in conservative fixed-income assets B. paying benefits to retired employees C. counseling employees in the selection of asset classes D. paying employees the market rate of return on employee contributions

Q: An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ___________ constraint. A. return requirement B. risk-tolerance C. liquidity D. social

Q: 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 A. II only B. III only C. I only D. None of these options (A policy statement is necessary for all three.)

Q: Which of the following is the least likely to be included in the portfolio management process? A. Monitoring market conditions and relative values B. Monitoring investor circumstances C. Identifying investor constraints and preferences D. Organizing the investment management process itself

Q: The first step any investor should take before beginning to invest is to __________. A. establish investment objectives B. develop a list of investment managers with superior records to interview C. establish asset allocation guidelines D. decide between active management and passive management

Q: Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________. A. income; high growth B. income; moderate growth C. moderate-growth; high growth D. high-growth; moderate growth

Q: The choice of an active portfolio management strategy rather than a passive strategy assumes ___________. A. the ability to continuously adjust the portfolio to provide superior returns B. asset allocation involving only domestic securities C. stable economic conditions over the short term D. the ability to minimize trading costs

Q: The term investment horizon refers to __________. A. the proportion of short-term to long-term investments held in an investor's portfolio B. the planned liquidation date of an investment C. the average maturity date of investments held in a portfolio D. the maturity date of the longest investment in the portfolio

Q: When used in the context of investment decision making, the term liquidity refers to _____________. A. the ease and speed with which an asset can be sold at any value possible B. the ease and speed with which an asset can be sold without having to discount the value C. an aspect of monetary policy D. the proportion of short-term to long-term investments held in an investor's portfolio

Q: 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. A. tax B. risk-tolerance C. liquidity D. social

Q: The prudent investor rule is an example of a regulation designed to ensure appropriate _____________ by money managers. A. fiduciary responsibility B. fiscal responsibility C. monetary responsibility D. marketing procedures

Q: The prudent investor rule requires __________. A. executives of companies to avoid investing in options of companies they work for B. executives of companies to disclose their transactions in stocks of companies they work for C. professional investors who manage money for others to avoid all risky investments D. professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

Q: The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors. A. broader; more risk averse B. broader; less risk averse C. more limited; more risk averse D. more limited; less risk averse

Q: 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, __________. A. stock A will have a higher after-tax holding-period return than stock B B. the after-tax holding period returns on stocks A and B will be the same C. stock B will have a higher after-tax holding-period return than stock A D. The answer cannot be determined from the information given.

Q: 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. A. employee; employee B. employee; employer C. employer; employee D. employer; employer

Q: An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible against state taxes and vice versa).A. 3.9%B. 4.75%C. 6.5%D. 9.9%

Q: An investor in the 34% tax bracket would be indifferent between a corporate bond with a before-tax yield of 8% and a municipal bond with a yield of _________. A. 3.91% B. 6.15% C. 5.28% D. 10.72%

Q: The fact that the U.S. government provides deposit insurance to banks creates a form of ___________, which is at least partially offset by requiring banks to hold more capital if they are riskier. A. moral hazard B. adverse selection C. risk aversion D. interest rate risk

Q: A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is John's total cost of his 5% contribution? A. $2,100 cost B. $2,800 cost C. $700 benefit D. $3.500 benefit

Q: A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is John's effective salary reduction if he is in the 25% tax bracket? A. $2,100 B. $2,800 C. $5,600 D. $8,400

Q: A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is the amount of the total contribution to his 403b if John contributes 5% of his own money? A. $5,600 B. $8,400 C. $11,200 D. $12,500

Q: Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return. How much money will Sharon have in her retirement plan when she is ready to retire at age 62? A. $554,856 B. $623,245 C. $740,480 D. $1,311,805

Q: Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return. How much money will Sharon have in her retirement plan after 6 years? A. $30,000 B. $35,575 C. $38,578 D. $41,451

Q: You want to minimize your current tax bill by maximizing your contributions to your _____________. A. taxable bond portfolio B. Roth retirement plan C. 401k or 403b plan D. taxable savings account

Q: If you plan for a bequest for your children, your grandchildren, their children, and so on, your planning horizon becomes _____. A. equal to the life span of your children B. 100 years, or your lifetime, whichever ends first C. infinite D. double what it would have been without the bequest

Q: An individual wants to have $95,000 per year to live on when she retires in 30 years. The individual is planning on living for 20 years after retirement. If the investor can earn 6% during her retirement years and 10% during her working years, how much should she be saving during her working life? (Hint: Treat all calculations as annuities.) A. $9,872 B. $8,234 C. $7,908 D. $6,624

Q: An investor can earn a 6% nominal rate of return, but inflation is expected to be 3%. If the individual invests $2,000 per year for 20 years, the real future value of this investment is ________. (All investments occur at year-end). A. $73,571 B. $66,334 C. $53,251 D. $48,732

Q: Currently, the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______. A. $15,000 B. $32,000 C. $45,000 D. $75,000

Q: Statistics show that life expectancy at age 66 for males is about _____ additional years and for females is about _____ additional years. A. 15; 20 B. 16; 19 C. 18; 22 D. 19; 24

Q: A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the ________. A. after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio B. after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio C. after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio D. after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor

Q: Suppose you have maxed out your allowable contributions to your tax-sheltered retirement plans and you still want to shelter income. The best choice of investment for you to minimize the tax bill is to invest in _________. A. a bond portfolio B. stocks with high dividend yields C. a blended stock and bond portfolio containing zero-coupon bonds D. stocks with low or zero dividend yields

Q: Which one of the following statements about 401k plans is not correct? A. The employer will typically match some portion of an employee's contributions to a 401k. B. A 401k plan is a defined contribution plan. C. Allowable contributions to 401k plans are limited. D. Withdrawals from 401k plans are not taxed upon retirement.

Q: If you start saving for retirement only in your later years and your income growth from that point is rapid, then ________________________. A. a traditional retirement plan is probably a better choice than a Roth retirement plan B. a Roth retirement plan is probably a better choice than a traditional retirement plan C. a SEP is probably a better choice than Medicare D. a 401k is probably a better choice than a 403b

Q: Withdrawals after retirement from a traditional retirement plan are __________, and withdrawals after retirement from a Roth retirement plan are ____________. A. taxable; not taxable B. not taxable; taxable C. tax deductible; not tax deductible D. not tax deductible; tax deductible

Q: An investor has an effective tax rate on all items of 30%, and he decides to put $8,000 into a 401k. The future value of the investment that results from the deferral of taxes over 30 years at an 8% return equals _____________. A. $2,400 B. $8,000 C. $10,400 D. $24,150

Q: An employee uses her firm's 401k plan. If she decides to contribute $11,000 per year and pays an effective tax rate for all items of 28%, what is the reduction in her take-home pay each year? A. $3,080 B. $4,210 C. $7,920 D. $11,000

Q: The employees of a firm complain that they cannot afford to contribute $8,000 per year to a 401k because of the loss of $8,000 of take-home pay. In fact, how much will the take-home pay be reduced if all taxes combined total 33%? A. $5,360 B. $6,340 C. $7,637 D. $8,000

Q: What is the value of a $2,500 deposit into a retirement plan if the investment earns 12% per year for 15 years? A. $12,174 B. $13,684 C. $14,652 D. $15,523

Q: A regular retirement plan requires that taxes be paid at the time the money is removed from the plan. What is the after-tax value of a $5,000 deposit into a retirement plan today that generates an 8% return for 20 years if the investor is taxed at the 28% level? A. $16,779 B. $20,135 C. $21,685 D. $23,305

Q: An investor must decide between putting $2,000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor's tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end? A. The investment in the regular retirement plan. B. The investment in the Roth retirement plan. C. Both investments will have the same future value after taxes. D. The answer cannot be determined from the information given.

Q: A worker plans to retire in 30 years. He hopes to receive $65,000 per year in retirement income. If inflation is forecast at 2.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $65,000? A. $65,000 B. $76,159 C. $98,398 D. $136,342

Q: An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 20-year life span, and she wants a $50,000-per-year annuity, payable at the end of each year. If the insurance company uses a 3% assumed investment rate, how much should the annuity cost? A. $696,928 B. $743,874 C. $833,552 D. $953.982

Q: A worker plans to retire in 20 years. He needs $20,000 per year in retirement income in today's dollars. If inflation is forecast at 3.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $20,000? A. $30,353 B. $34,159 C. $37,398 D. $39,796

Q: A safe driver who drives faster as a result of purchasing collision car insurance would be an example of the ___________ problem. A. moral hazard B. adverse selection C. Texas hedge D. actuarial error

Q: An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of each year. If the insurance company uses a 4% assumed investment rate, how much should the annuity cost? A. $296,928B. $312,236C. $333,552D. $353.982

Q: An investor plans to retire at age 60 with total savings of $1,000,000. If she is currently 35 years old, has no savings, and expects to earn 8% per year on her investments, how much money must she set aside every year? A. $15,546 B. $13,679 C. $11,892 D. $10,324

Q: In planning for retirement, an investor decides she will save $11,000 every year for 40 years. At an 11% return on her investment, how much money will she have at the end of 40 years (to the nearest hundred thousand dollars)? A. $1,400,000 B. $2,800,000 C. $4,900,000 D. $6,400,000

Q: In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years? A. $119,015 B. $125,316 C. $126,498 D. $128,420

Q: Withdrawals from a traditional retirement plan prior to age ___ are taxable and must pay a ___ tax penalty. A. 59; 10% B. 62; 5% C. 65; 7 % D. 63; 5%

Q: A tax shelter that allows for tax-exempt saving for higher education is called a _____. A. Roth savings plan B. 403b C. 401k D. 529 plan

Q: If your marginal tax rate is 15%, your capital gains tax rate on a stock you have held for 10 years would be ___. A. 5% B. 15% C. 20% D. 27.5%

Q: In 2012, the income cap on Social Security taxes was set at _____ with an exemption of _____. A. $200,000; $10,000 B. $153,600; $7,600 C. $110,100; $0 D. $96,000; $10,000

Q: Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and _______ toward Medicare. A. 1.45%; 6.2% B. 6.2%; 1.45% C. 7.65%; 1.45%% D. 15.3%; 4.9%

Q: How many years of Social Security contributions count for determination of benefits? A. 25 B. 35 C. 45 D. All yearly contributions count.

Q: Contributions to a traditional retirement plan are __________, and contributions to a Roth retirement plan are ____________. A. not tax deductible; not tax deducible B. tax deductible; tax deductible C. tax deductible; not tax deductible D. not tax deductible; tax deductible

Q: The Social Security Primary Insurance Amount formula favors ______. A. older workers B. high-income workers C. younger workers D. low-income workers

Q: Average Indexed Monthly Earnings are used to compute ___________. A. the consumer price index B. your Social Security retirement benefits C. your maximum 401k contribution D. your maximum retirement plan contribution

Q: Which one of the following is not likely to be subject to adverse selection? A. Health insurance providers B. Lifetime annuity providers C. Life insurance providers D. Social Security

Q: One feasible way to hedge labor income is to ____________________. A. diversify your investment portfolio away from the industry in which you work B. save for retirement only from investment income C. change careers every 7 years D. invest heavily in the stock options provided by your firm

Q: Taxes are applied to the _______________________. A. real value of sheltered investment income B. nominal value of unsheltered investment income C. nominal value of sheltered investment income D. real value of unsheltered investment income

Q: A study by Spivack and Kotlikoff (1981) showed that a marriage contract increases the dollar value of lifetime savings by as much as _____. A. 5% B. 10% C. 25% D. 50%

Q: A retirement plan that offers a tax shelter will defer ______________ taxes on contributions and investment earnings. A. income B. sales C. property D. estate

Q: A saver who expects to have a higher tax rate after retirement would prefer a ______. A. Roth retirement plan B. traditional retirement plan C. 401k plan D. 403b plan