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Investors and the Investment Process

1. To _____ means to mitigate a financial risk.

a.
invest

b.
speculate

c.
hedge

d.
none of the above

2. In a defined benefit pension plan, the _____ bears all of the fund's investment
performance risk.

a.
employer

b.
employee

c.
fund manager

d.
government

3. In a defined contribution pension plan, the _____ bears all of the fund's
investment performance risk.

a.
employer

b.
employee

c.
fund manager

d.
government

4. My pension plan will pay me a yearly retirement amount equal to 2% of my


highest annual salary for each year of service. I have a ______ plan.

a.
defined benefit

b.
defined contribution

c.
endowment

d.
none of the above

5. A ______ insurance policy provides death benefits, with no buildup of cash


value.

a.
whole life

b.
nonlife

c.
variable life

d.
term life

6. If the maturity of a bank's assets is much longer than the maturity of its
liabilities, the bank will be likely to have a problem when ______.

a.
interest rates decline

b.
interest rates rise

c.
property values increase

d.
none of the above

7. An endowment fund could be operated for the benefit of ______.

a.
General Motors

b.
Bill Gates

c.
the Cleveland Orchestra

d.
all of the above

8. A mutual fund may not hold more than ______ of the shares of any publicly
traded company.

a.
5%

b.
10%

c.
25%

d.
50%

9. _______ would be considered to be a "cash equivalent".

a.
Commercial paper

b.
Common stock

c.
Corporate bonds

d.
Real estate

10. For a bank, the difference between interest charged to borrowers and the
interest rate paid on liabilities is called the __________.

a.
insurance premium

b.
interest rate spread

c.
risk premium

d.
term premium

11. Interest rate risk is highest on __________.

a.
commercial paper

b.
long-term bonds

c.
short-term bonds

d.

treasury bills

12. A portfolio manager indexes part of a portfolio and actively manages the rest of
the portfolio. This is called a __________ strategy.

a.
passive aggressive

b.
passive core

c.
passively active

d.
none of the above

13. __________ refer to strategies aimed at attaining the established rate of return
requirements while meeting expressed risk tolerance and applicable constraints.

a.
investment constraints

b.
investment objectives

c.

investment policies

d.
none of the above

14. __________ center on the trade-off between the return the investor wants and
how much risk the investor is willing to assume.

a.
Investment constraints

b.
Investment objectives

c.
Investment policies

d.
None of the above

15. If an investor wishes to invest 100% of her portfolio in safe assets but does not
wish to manage her portfolio, she should invest in __________.

a.
a money market fund

b.

a growth stock fund

c.
several different money market instruments

d.
several different stocks

16. Just two months after you put money into an investment, its price falls 25
percent. Assume none of the fundamentals have changed. Which of the following
strategies would show the greatest risk tolerance?

a.
Sell to avoid further worry and buy something else.

b.
Do nothing and wait for the investment to come back.

c.
Buy more. If it was a good investment before; now it's a cheap
investment too.

d.
Sue your financial advisor.

17. Which of the following is not one of the basic goals of the Institute of Chartered
Financial Analysts?

a.
To develop a current body of knowledge applicable to the investment
decision-making process.

b.
To administer a study and examination program for eligible candidates.

c.
To enforce a code of ethical standards in the investments profession.

d.
All of the above are basic goals of the Institute of Chartered Financial
Analysts.

18. Which of the following is not one of the main areas covered in the examinations
that must be taken in order to achieve the designation of Chartered Financial
Analyst?

a.
Financial accounting

b.
Securities analysis

c.
Securities marketing techniques

d.

Portfolio management

19. Which of the following is not one of the requirements for obtaining the
Chartered Financial Analyst (CFA) designation?

a.
A college degree.

b.
At least five years of work experience as a financial analyst.

c.
Application for membership in the Society of Financial Analysts Federation.

d.
All of the above are requirements for the CFA designation.

20. The two most important factors in describing an individual or organization's


investment objectives are ________________.

a.
income level and age

b.
income level and risk tolerance

c.

age and risk tolerance

d.
return requirement and risk tolerance

21. The term "hedge" refers to an investment that ________________.

a.
is entered into primarily for tax purposes

b.
is entered into to mitigate specific financial risks

c.
is entered into to conceal one's true investment strategy from other market
participants

d.
none of the above answers are correct

22. The performance of a hedge will be best if the correlation between the returns
on the hedge asset and the returns on the asset being hedged is ______________.

a.
positive and close to 1

b.

positive and close to 0

c.
negative and close to 0

d.
negative and close to 1

23. From the perspective of an individual investor, a defined contribution pension


plan is most like a(n) ___________.

a.
mutual fund

b.
insurance policy

c.
personal trust

d.
none of the above are correct

24. __________ are interested in earning a return on their investments that exceeds
the actuarial assumed rate of return.

a.

Banks

b.
Endowment funds

c.
Mutual funds

d.
Pension funds

25. If an investor wishes to invest 100% of her portfolio in safe assets and 0% in
risky assets, she should invest in __________.

a.
long-term corporate bonds

b.
long-term government bonds

c.
short-term corporate bonds

d.
short-term government bonds

26. An investment manager keeps approximately 50% of her funds invested in the
market portfolio and 50% of her funds invested in the riskless asset at all times.
She has __________.

a.
a passive market timing strategy

b.
a ridiculous investment strategy

c.
an active market timing strategy

d.
none of the above

27. Collateralized real estate loans are better known as __________.

a.
consumer loans

b.
LDC loans

c.
mortgage loans

d.
term loans

28. __________ are boundaries that investors place on their choice of investment
assets.

a.
Investment constraints

b.
Investment objectives

c.
Investment policies

d.
None of the above

29. Life insurance companies try to hedge the risks inherent in whole-life insurance
policies by investing in __________.

a.
long term bonds

b.
money market mutual funds

c.
savings accounts

d.
short term commercial paper

30. Taxes are not an important investment constraint for __________.

a.
banks

b.
life insurance companies

c.
pension funds

d.
none of the above

31. The risk that a downturn in the market may substantially reduce your
investment principal is called ___ .

a.
Purchasing power risk

b.

Interest rate risk

c.
Market risk

d.
Liquidity risk

32. The possibility that you are too conservative and your money doesn't grow fast
enough to keep pace with inflation is called ___ .

a.
Purchasing power risk

b.
Liquidity risk

c.
Timing risk

d.
Market risk

33. The prospect that government decisions will affect the value of your investments
is called ____ .

a.

timing risk

b.
political risk

c.
societal risk

d.
market risk

34. The terrorist attacks on 9/11 would be called ___ .

a.
timing risk

b.
purchasing power risk

c.
societal risk

d.
political risk

35. Your company recently transferred you to another state. You have sold your
home and are renting for 6 months while you search for a new home. You have

invested the proceeds from the sale of your old home in the stock market. Your
choice of investments has exposed you to ___ .

a.
liquidity risk

b.
interest rate risk

c.
timing risk

d.
purchasing power risk

36. Empirical evidence suggests that investors become __________ as they approach
retirement.

a.
greedier

b.
less interested in investments

c.
more risk averse

d.
more risk tolerant

37. Mortgage originators typically ____________.

a.
sell the mortgages that they originate to pass-through agencies

b.
keep the mortgages that they originate

c.
exchange mortgages with a small number of correspondent banks

d.
sell the mortgages that they originate to foreign banks

38. Which of the following is not a nickname of a government sponsored mortgage


pass-through agency?

a.
Fannie Mae

b.
Freddie Mac

c.

Sallie Mae

d.
All of the above are mortgage pass-through agencies

39. The investment time horizon is typically short for __________.

a.
banks

b.
endowment funds

c.
life insurance companies

d.
pension funds

40. A passive asset allocation strategy involves _________.

a.
investing in the stock of companies which are price takers

b.
maintaining approximately the same proportions of a portfolio in each
asset-class over time

c.
varying the proportions of a portfolio in each asset-class in response to
changing market conditions

d.
none of the above

41. An active asset allocation strategy involves _________.

a.
investing in the stock of companies which are price takers

b.
maintaining approximately the same proportions of a portfolio in each assetclass over time

c.
varying the proportions of a portfolio in each asset-class in response to
changing market conditions

d.
none of the above

42. Endowment funds are held by __________.

a.
financial intermediaries

b.
individuals

c.
profit-oriented firms

d.
nonprofit institutions

43. All of the following are characteristics of endowment funds except:

a.
They are held by nonprofit organizations.

b.
Generally income is a key investment objective.

c.
Generally low risk is a key investment objective.

d.
All of the above are characteristics of endowment funds.

44. Under a "passive core" portfolio management strategy, a manager would


___________.

a.
index the entire portfolio

b.
index part of the portfolio and actively manage the rest

c.
delegate the management of core segments of the portfolio to other managers

d.
actively manage the entire portfolio

45. The term "asset allocation" refers to the process of allocating funds between
___________.

a.
individual security issues

b.
investment and current consumption

c.
major asset categories such as stocks, bonds, real estate, etc.

d.
short-term and long-term investments

46. The stage an individual is in his/her life cycle will affect his/her __________.

a.
return requirements

b.
risk tolerance

c.
both a and b.

d.
neither a nor b.

47. An investment manager has 25% of her funds invested in the market portfolio at
the end of year 1 and 75% of her funds invested in the market portfolio at the
end of year 2. She is pursuing __________.

a.
a passive market timing strategy

b.
a ridiculous investment strategy

c.
an active market timing strategy

d.
none of the above

48. 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

49. Suppose that the pre-tax 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.
it is impossible to determine which stock will have a higher after-tax holding
period return given the information available

50. Suppose your wealth is $500,000, half of which is in an IRA and half of which is
outside of an IRA. You wish to have half of your wealth invested in the stock
market and half invested in the bond market. You should invest __________ of
your IRA money in stocks.

a.
0%

b.
25%

c.
50%

d.
100%

51. 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

52. 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 have been approved by a prudent
investor

53. The prudent man law is an example of a regulation designed to enforce


_____________.

a.
fiduciary responsibility

b.
fiscal responsibility

c.
monetary responsibility

d.
All of the above are correct

54. The term "fiduciary" refers to someone who ______________.

a.
is a specialist in investment planning

b.
makes assessments of loss probabilities for insurance companies

c.

manages other people's money

d.
studies the history of market cycles

55. 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

b.
an aspect of fiscal policy

c.
an aspect of monetary policy

d.
the proportion of short-term to long-term investments held in an investor's
portfolio

56. 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.
None of the above answers are correct

57. The choice of an active portfolio management strategy assumes ___________.

a.
an ability to consistently outguess other investors

b.
an asset allocation choice involving only domestic securities

c.
stable economic conditions over the short term

d.
the ability to acquire a seat on a major stock exchange

58. Conservative investors are likely to want to invest in __________ mutual funds
while risk-tolerant investors are likely to want to invest in __________.

a.
high income, high growth

b.
high income, moderate growth

c.
moderate income, high growth

d.
moderate income, moderate growth

59. 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 and passive management

60. An investor in the 39% tax bracket would be indifferent between a corporate
bond with a before tax yield of 10% and a municipal bond with a yield of
_________.

a.
3.9%

b.
6.1%

c.
10.0%

d.
29.0%

61. Which of the following is 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.

62. A clearly written investment policy statement is not critical for ___ .

a.
Mutual funds

b.
Individuals

c.
Pension funds

d.
None of the above

63. The investment policy statement of an institution need not be concerned with
___ .

a.
Its obligations to its clients.

b.
Legal regulations

c.
Taxation

d.
The level of the market

64. 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.
All of the above

65. The asset allocation decision is important to the investment process because the
asset allocation decision ___ .

a.
Determines most of the portfolio's returns and risk over time

b.
Helps the investor decide on realistic investment goals

c.
Identifies the specific securities to be included in the portfolio

d.
Helps establish the appropriate investment time horizon