Q&A Hero

Q: the "efficient frontier" relates all the combinations of risk and return that represent the same level of satisfaction.

Q: portfolios that offer the highest return for a given level of risk are "efficient."

Q: the numerical value of beta for the market equals 1.

Q: during a rising market, stocks with greater beta coefficients may be preferred.

Q: a portfolio's beta coefficient tends to be stable over time.

Q: if a beta coefficient is 1.7, that implies the return on the stock tends to be less volatile than the return on the market.

Q: low beta stocks tend to generate higher returns in rising markets.

Q: if a stock has a beta of 1.0, it is riskfree stock.

Q: if the return on two stocks is highly and positively correlated (i.e., correlation coefficient = +1.0), combining these stocks will reduce the risk associated with the portfolio.

Q: if a stock's return has a large standard deviation, that suggests the stock has little risk.

Q: the dispersion around a stock's return is one measure of risk.

Q: the informed investor can expect consistently to outperform the market.

Q: investors seek to minimize risk for a given return.

Q: by accepting more risk, the investor will increase the realized return.

Q: reinvestment rate risk results from higher stock prices in the future.

Q: investors may reduce risk by constructing diversified portfolios but not eliminate risk.

Q: exchange rate risk refers to fluctuations in the prices of foreign currencies (i.e., foreign exchange).

Q: inflation, which is a general decline in prices, is the source of financial risk.

Q: the negative relationship between interest rates and securities prices is the source of interest rate risk.

Q: unsystematic risk considers how firms finance their assets and the nature of their operations.

Q: unsystematic risk refers to factors that are unique to the specific asset.

Q: investors must bear the systematic risk associated with fluctuating securities prices.

Q: diversification reduces reinvestment rate risk.

Q: portfolio risk is the summation of business and financial risk.

Q: in a world of certainty, there would be no risk.

Q: a diversified portfolio requires the securities of at least fifty firms.

Q: while diversification decreases risk, it also increases the chance of a large gain.

Q: a portfolio consisting of securities whose returns are highly correlated is not truly diversified.

Q: systematic risk is reduced through diversification.

Q: the tendency of individual stock prices to move together is one source of systematic risk.

Q: what is the federal income tax owed by an investor in the 35 percent income tax bracket? the tax rate on long-term capital gains is 15 percent. a. tristan sold stock a for a short-term capital loss of $5,250; sold stock b for a long-term capital gain of $4,250. b. isolda sold stock a for a $2,000 short-term gain; sold stock b for a $6,000 long-term loss. c. elsa is 65 years old and withdraws $1,000 from her traditional ira account, she deposits $1,000 in her roth ira. d. gertrude bought 100 shares of ibm in march 2006 for $100 a share and sold 40 shares six months later for $120. e. siegmunds traditional ira is currently worth $25,000. he sold a stock in the account for $2,000. he had purchased the stock for $1,000 in 2004. f. sieglinde purchased 100 shares of baby at $15 on september 10. she sold the shares for $12 on september 15. she repurchased the shares on september 20 for $10.

Q: what is the federal income tax owed by an investor in the 35 percent income tax bracket? the tax rate on long-term capital gains is 15 percent. a. megan sold stock a for a short-term capital gain of $5,500; sold stock b for a short-term capital loss of $2,100. b. margaret sold stock a for a short-term capital loss of $2,000; sold stock b for a short-term capital gain of $4,000. c. melissa is 70 years old and withdraws $1,000 from her roth ira account. would the answer be different if she were 65 years old? d. morgan bought 100 shares of ibm in march for $100 a share and sold the shares in april for $110. e. murphy contributed $4,000 to an ira and used the proceeds to purchase stock a for $4,000. the stock was subsequently sold for $4,500 after a year had passed.

Q: what is the federal income tax owed by an investor in the 35 percent income tax bracket? the tax rate on long-term capital gains is 15 percent. a. bob owns a savings account that paid $350 in interest and sold stock b for a long-term capital gain of $1,200. b. bill sold stock a for a short-term capital gain of $3,500; sold stock b for a short-term capital loss of $3,100. c. brian sold stock a for a long-term capital gain of $3,700; sold stock b for a long-term capital loss of $5,100. d. barbara sold stock a for a $6,000 short-term loss and sold stock b for a $2,000 long-term gain. e. robertas ira account collected interest of $1,000 and a bond paid her interest of $1,000.

Q: an implication of the efficient market hypothesis is a. securities prices are random determined b. stock prices reflect historical information c. few investors can expect to outperform the market over a period of time d. after adjusting for risk, money market securities offer superior returns

Q: use of p/e ratios will not produce superior investment results according to the a. weak form of the efficient market hypothesis b. semistrong form of the efficient market hypothesis c. strong form of the efficient market hypothesis d. all forms of the efficient market hypothesis

Q: the strong form of the efficient market hypothesis suggests 1> inside information will not lead to superior investment results 2> inside information will lead to superior investment results 3> studying financial statements will not lead to superior investment results 4> studying financial statements will lead to superior investment results a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: the weak form of the efficient market hypothesis implies a. securities prices are randomly determined b. studying past price behavior will lead to inferior investment decisions c. past securities prices predict future prices d. studying past price behavior does not lead to superior investment decisions

Q: if the financial markets were not efficient, a. all investors would profit b. prices indicate the proper valuation of securities c. prices would adjust rapidly d. an investor may consistently outperform the market

Q: the efficient market hypothesis requires 1> financial markets to be competitive 2> prices to adjust rapidly 3> prices of undervalued securities to fall a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: if financial markets are efficient, that suggests that a. investors cannot earn superior returns b. investors cannot expect to outperform the market consistently c. security prices are random d. bearing additional risk will not increase return

Q: net short-term capital losses are used to offset a. dividend income b. unrealized long-term capital gains c. 401(k) contributions d. realized short-term capital gains

Q: which of the following is not illustrative of a taxsheltered retirement plan? a. keogh account b. iras c. 401(k) plans d. life insurance

Q: which of the following currently reduces taxes? 1> contributions to an ira 2> contributions to a roth account 3> purchases of life insurance 4> contributions to a 401(k) plan a. 1 and 2 b. 1 and 3 c. 1 and 4 d. 2 and 4

Q: a 401(k) plan is a a. taxdeferred retirement plan b. savings plan for the retired c. plan to increase current tax-exempt income d. dividend or interest enhancement plan

Q: with a roth ira, the individual a. deducts the annual contributions b. earns tax-free income c. defers taxes d. avoids estate taxes

Q: a retirement account for the selfemployed is called a a. 401(k) plan b. keogh account (hr10 account) c. 10k report d. tax-deferred annuity

Q: the traditional ira is a. a taxdeferred retirement account for individuals not covered by a corporate pension plan b. a taxable retirement account for individuals not covered by a corporate pension plan c. a means to generate taxfree income d. a means to increase current income

Q: examples of capital gains include sales of 1> ira accounts 2> stocks sold for a profit 3> real estate sold for a profit a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: examples of tax shelters for individuals include 1> interest on municipal bonds 2> realized short-term capital gains 3> keogh accounts a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: an active portfolio strategy is premised on a. the stock market being efficient b. the stock market being inefficient c. the investor's being able to obtainpublic information d. the portfolio manager's access to corporate management

Q: which of the following is excluded from an individuals cash budget? a. wages and salary b. retirement account c. social security tax payments d. alimony

Q: which of the following is included in an individuals cash budget? a. common stock b. social security payments c. home mortgage owed d. credit card balances

Q: possible investment objectives may include 1> capacity to meet financial emergencies 2> preservation of capital 3> desire to finance retirement a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: the process of financial planning requires the individual to 1> establish financial goals 2> identify and quantify the value of his or her assets 3> hire professional financial advisors a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: the tendency for securities prices to overreact may create an anomaly that can lead to superior returns.

Q: investing in stocks purchased by insiders may generate superior investment results and that is inconsistent with the strong form of the efficient market hypothesis.

Q: one anomaly to the efficient market hypothesis is that investments in debt of large firms will earn higher returns than investments in their stock.

Q: the efficient market suggests that, over a period of time, the investor should earn a return that is consistent with the amount of risk the investor bears.

Q: according to the efficient market hypothesis, purchasing high p/e stock should produce higher returns.

Q: the efficient market hypothesis says that no one can outperform the market.

Q: u.s. securities markets are efficient in part because these markets are very competitive.

Q: securities prices tend to adjust slowly as new information is disseminated in an inefficient market.

Q: the efficient market hypothesis suggests that the current prices of stocks reflect what the investment community believes the stocks are worth.

Q: if financial markets are efficient, that negates the importance of financial planning.

Q: if an investor believes that financial markets are inefficient, that argues for the individual to pursue a more active portfolio strategy.

Q: asset allocation is important to help diversify a portfolio but has little impact on the portfolio's return.

Q: in an efficient securities market, the investor should earn, over a period of years, a return comparable to the amount of risk the individual bears.

Q: short-term capital losses are used to offset long-term losses for the purpose of taxation.

Q: short-term capital gains are subject to higher tax rates than long-term capital gains.

Q: the anticipation of a lower tax rate in the future is an argument for a roth ira instead of a keogh account.

Q: contributions to a roth ira are not tax-deductible.

Q: only the earnings, and not the amount invested, are taxed when distributed from a 401(k).

Q: a small firm may offer a roth ira instead of a 401(k).

Q: the potential savings from a 401(k) plan increases as the individuals tax rate decreases.

Q: a keogh plan is a pension plan for an individual not covered by a pension plan at place of employment.

Q: securities must be sold before capital gains taxation applies.

Q: capital losses may not be used to offset capital gains.

Q: an ira is a taxdeferred pension plan for the selfemployed.

Q: pension plans permit investors to defer income tax.

Q: a tax shelter is not synonymous with tax evasion.