Q&A Hero

Q: An investment requires a total return that comprises: A.a real rate of return and compensation for inflation. B.a real rate of return, compensation for inflation, and a risk premium. C.compensation for inflation and a risk premium. D.a real rate of return, compensation for inflation, a risk premium, and compensation for time and effort devoted to researching alternative investments. E.None of the above

Q: Deposits in an IRA are: A.allowed to grow tax free until withdrawal. B.deducted from current income tax due. C.deducted from current income to reduce income tax due. D.A and C

Q: A stock that pays low or no cash dividends is: A.eBay. B.Duke Power. C.AT&T. D.All of the above

Q: Stocks and bonds are preferred during periods of: A.higher inflation. B.lower inflation. C.rising stock prices. D.higher risk premiums. E.None of the above

Q: Common stock dividends are now taxed at a maximum rate of: A.10%. B.15%. C.20%. D.30%. E.38.8%.

Q: The holding period to qualify for long-term capital gains is: A.at least 6 months. B.at least 9 months. C.at least 18 months. D.at least 2 years. E.more than one year.

Q: One of the reasons a short-term trader has difficulty in beating the market is because of: A.risk. B.lack of information. C.large institutional investors. D.commissions.

Q: Which of the following is not one of the considerations in setting investment objectives? A.Risk versus safety of principal B.Maximize wealth versus minimize expenses C.Current income versus capital appreciation D.Short-term versus long-term orientation E.Taxes

Q: The two components that make up the risk-free rate are: A.real rate of return and capital gains. B.risk-free assets and capital gains. C.real rate of return and the inflation factor. D.real assets and the inflation factor. E.capital gains and the inflation factor.

Q: ____, because of increasing replacement value and scarcity, perform(s) best in periods of high inflation. A.Real assets B.Common stock C.Preferred stock D.Financial assets E.More than one of the above

Q: Which of the following investments would theoretically always carry the highest risk premium? A.U.S. treasury bill B.Common stock C.Preferred stock D.Corporate bond E.Any one of the above

Q: What is the risk-free rate in an environment where the real rate is 3% and inflation is running at 3%? Use either method found in chapter one. A.14.5% or just 14% B.10.21% or just 10% C.6.09% or just 6% D.9.09% or just 9% E.0%

Q: What are the components in determining the real rate of return? A.The risk premium B.The inflation factor C.The required rate of return D.Both a) and b) above E.None of the above

Q: An investment in common stock carries a higher return than a bank certificate of deposit. The difference in returns is called: A.the risk-free rate. B.the real rate of return. C.the risk premium. D.the beta. E.None of the above

Q: What would be the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3 dividend? A.12% B.11% C.10% D.1.5% E.5%

Q: What is the rate of return on a share of common stock that increased in value from $40 to $50? A.5% B.10% C.20% D.25% E.None of the above

Q: Wealthy investors may prefer the favorable tax treatment of investments such as: A.corporate bonds. B.municipal bonds. C.common stock. D.preferred stock.

Q: The ability of the investor to convert an investment into cash in a short period of time is called: A.short-term orientation. B.low investment risk. C.liquidity. D.capital appreciation. E.None of the above

Q: What factors must be considered in choosing between investment alternatives? A.Risk and liquidity B.Interest or dividends versus capital gains C.Time frame for managing funds and evaluating performance and tax effects D.Safety of principal E.All of the above

Q: Investment in a mutual fund results in: A.an indirect equity claim. B.a direct equity claim. C.a creditor claim. D.None of the above

Q: A direct equity claim arises through investment in: A.bonds and other debt instruments. B.common stocks, warrants, and options. C.preferred stock and commodity futures. D.mutual funds. E.None of the above

Q: Which of the following statements is the most accurate concerning security returns over the eight decades since the 1920s? A.Returns on large common stocks were very stable. B.Returns on long-term corporate bonds were very stable. C.Returns on long-term government bonds were very stable. D.Returns on treasury bills were very consistent from period to period. E.All securities exhibited very unstable returns over the eight decades in question.

Q: When ranking the riskiness of securities using the standard deviation, the highest risk security to the lowest risk security is as follows: A.Small stocks, large stocks, long-term government bonds, U.S. treasury bills. B.Long-term government bonds, small stocks, large stocks, U.S. treasury bills. C.Large stocks, small stocks, long-term government bonds, U.S. treasury bills. D.Small stocks, long-term government bonds, large stocks, U.S. treasury bills. E.U.S. treasury bills, long-term government bonds, large stocks, small stocks.

Q: When ranking security returns, the data shows that the annualized returns are as follows (ranked from highest return to lowest return): A.Large stocks, small stocks, long-term corporate bonds, long-term government bonds, treasury bills. B.Small stocks, large stocks, long-term corporate bonds, long-term government bonds, treasury bills. C.Small stocks, large stocks, treasury bills, long-term government bonds, long-term corporate bonds. D.Treasury bills, long-term government bonds, long-term corporate bonds, large stocks, small stocks. E.Large stocks, small stocks, long-term government bonds, long-term corporate bonds, treasury bills.

Q: A(n) _____ is a legally documented claim on an asset, while a(n) _____ is an actual, tangible asset which may be seen, felt, held, or collected. A.Real asset; financial asset B.Financial asset; real asset C.Indirect equity claim; direct equity claim D.Direct equity claim; indirect equity claim E.None of the above

Q: The commitment of current funds in anticipation of receiving a larger future flow of funds is called: A.a financial asset. B.a real asset. C.an investment. D.gambling. E.None of the above

Q: In managing a personal portfolio, an investor should consider opportunity costs.

Q: The Tax Relief Act of 2003 has made stocks that pay high dividends more attractive than they previously were.

Q: The Tax Act of 2001 lowered the capital gains tax rate.

Q: Prior to the Taxpayer Relief Act of 1997, long-term capital gains were taxed at ordinary income tax rates.

Q: Beta measures a security's return relative to the market.

Q: Every investment requires a total return comprised of a real rate of return, compensation for inflationary expectations, and a risk premium.

Q: One of the problems that investors face in determining required rates of return is forecasting errors involving interest rates and inflation.

Q: Real assets, because of increasing replacement value and scarcity, tend to perform better than financial assets during periods of high inflation.

Q: Liquidity can be measured by the ability of the investor to convert an investment into cash within a relatively long period of time, at its fair book value.

Q: Research has shown that it is not that difficult to beat the market on a risk-adjusted basis.

Q: Those who attempt to engage in short-term market tactics are termed traders.

Q: When comparing returns by decade, the Ibbotson study shows that small company stocks outperformed large company stocks in every decade since the 1920s.

Q: The Stocks, Bonds, Bills and Inflation Yearbook is an annual reference book that publishes return data on a variety of securities. The data shows that the large company category had a negative return in only one decade, and that was the 1930s.

Q: Retirement questions should be asked 5-10 years before retirement.

Q: Finding high income (yield) and growth in the same investment is a relatively standard practice.

Q: Common stock investments that do not pay dividends are likely to provide relatively low total returns.

Q: Real estate is a good example of an investment that lacks liquidity.

Q: Common stock is a good example of an investment that lacks liquidity.

Q: A lack of immediate liquidity cannot be justified even if there is an opportunity for large gains.

Q: A public utility is likely to appeal to an income-oriented, conservative investor.

Q: Real estate may be favored by investors in high tax brackets.

Q: Most financial assets provide a high degree of liquidity.

Q: Those who engage in short-term market tactics are considered traders.

Q: Real assets tend to be more liquid than financial assets.

Q: Liquidity refers to how little the sales price of an asset has decreased from its cost.

Q: Dividends and long-term capital gains are now taxed at the same maximum rate.

Q: An aggressive portfolio might include real assets.

Q: Investors desiring to assume low risks would probably invest in short-term securities.

Q: Risk is not correlated with return in the capital markets.

Q: In the financial world, risk is defined as variability of returns.

Q: A share in a money market fund is an indirect equity claim.

Q: Silver is an example of a financial asset.

Q: Common stock represents a direct equity claim.

Q: Investment is the commitment of current funds in anticipation of receiving a larger flow of funds in the future.

Q: The only compensation anticipated from an investment is for inflation protection.

Q: In general, inflation results in a loss of purchasing power to the investor.

Q: To achieve maximum diversification benefits, an investor should invest in projects which are highly correlated.

Q: Diamonds represent a form of real assets, but cattle do not.

Q: Commodity futures are a form of financial asset.

Q: It is generally thought that young, upwardly mobile people should take less risk than elderly people living on a fixed income.

Q: The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.

Q: Diversification is the process of determining the risk premium.

Q: The Tax Act of 2003 offers greater potential for wealth accumulation.

Q: The Ibbotson study showed that high-risk investments generate high returns.

Q: Unlike the risk-free rate, the level of the risk premium varies by investment.

Q: The riskiness of an investment is measured by the dispersion of possible outcomes.

Q: An investor can totally eliminate time-consuming investment management activities by participating in a mutual fund or limited partnership.

Q: Pension funds are a form of indirect equity claims.

Q: Warrants are a form of direct equity claims.

Q: Mutual funds are a form of direct equity claims.

Q: Rare paintings and baseball cards may be considered as forms of investment.

Q: In an efficient and informed capital market environment, those investments with the greatest return tend to have the greatest risk.

Q: A firm that evaluates portfolios uses the Sharpe approach to measuring performance. How would it rank these three portfolios? What percent of funds under management should be invested in stocks, bonds, and the like?

Q: The Brinson, Hood, and Beebower (BHB) study indicated that asset managers are more likely to lose their jobs because of poor _____________ rather than poor _________. A.asset allocation; stock selection B.stock selection; asset allocation C.customer relations; performance D.performance; customer relations