Test Bank For Fundamentals Of Investment Management, 10th Edition

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Chapter 01-The Investment Setting1-1Chapter 01The Investment SettingTrue / False Questions1.In an efficient and informed capital market environment, those investments with thegreatest return tend to have the greatest risk.TrueFalse2.Rare paintings and baseball cards may be considered as forms of investment.TrueFalse3.Mutual funds are a form of direct equity claims.TrueFalse4.Warrants are a form of direct equity claims.TrueFalse5.Pension funds are a form of indirect equity claims.TrueFalse6.An investor can totally eliminate time-consuming investment management activities byparticipating in a mutual fund or limited partnership.TrueFalse7.The riskiness of an investment is measured by the dispersion of possible outcomes.TrueFalse

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Chapter 01-The Investment Setting1-28.Unlike the risk-free rate, the level of the risk premium varies by investment.TrueFalse9.The Ibbotson study showed that high-risk investments generate high returns.TrueFalse10.Diversification is the process of determining the risk premium.TrueFalse11.The Tax Act of 2003 offers greater potential for wealth accumulation.TrueFalse12.The age and economic circumstances of an investor are important variables in determiningan appropriate level of risk.TrueFalse13.It is generally thought that young, upwardly mobile people should take less risk thanelderly people living on a fixed income.TrueFalse14.Commodity futures are a form of financial asset.TrueFalse15.Diamonds represent a form of real assets, but cattle do not.TrueFalse

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Chapter 01-The Investment Setting1-316.To achieve maximum diversification benefits, an investor should invest in projects whichare highly correlated.TrueFalse17.In general, inflation results in a loss of purchasing power to the investor.TrueFalse18.The only compensation anticipated from an investment is for inflation protection.TrueFalse19.Investment is the commitment of current funds in anticipation of receiving a larger flow offunds in the future.TrueFalse20.Common stock represents a direct equity claim.TrueFalse21.Silver is an example of a financial asset.TrueFalse22.A share in a money market fund is an indirect equity claim.TrueFalse23.In the financial world, risk is defined as variability of returns.TrueFalse

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Chapter 01-The Investment Setting1-424.Risk is not correlated with return in the capital markets.TrueFalse25.Investors desiring to assume low risks would probably invest in short-term securities.TrueFalse26.An aggressive portfolio might include real assets.TrueFalse27.Dividends and long-term capital gains are now taxed at the same maximum rate.TrueFalse28.Liquidity refers to how little the sales price of an asset has decreased from its cost.TrueFalse29.Real assets tend to be more liquid than financial assets.TrueFalse30.Those who engage in short-term market tactics are considered traders.TrueFalse31.Most financial assets provide a high degree of liquidity.TrueFalse32.Real estate may be favored by investors in high tax brackets.TrueFalse

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Chapter 01-The Investment Setting1-533.A public utility is likely to appeal to an income-oriented, conservative investor.TrueFalse34.A lack of immediate liquidity cannot be justified even if there is an opportunity for largegains.TrueFalse35.Common stock is a good example of an investment that lacks liquidity.TrueFalse36.Real estate is a good example of an investment that lacks liquidity.TrueFalse37.Common stock investments that do not pay dividends are likely to provide relatively lowtotal returns.TrueFalse38.Finding high income (yield) and growth in the same investment is a relatively standardpractice.TrueFalse39.Retirement questions should be asked 5-10 years before retirement.TrueFalse40.TheStocks, Bonds, Bills and Inflation Yearbookis an annual reference book that publishesreturn data on a variety of securities. The data shows that the large company category had anegative return in only one decade, and that was the 1930s.TrueFalse

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Chapter 01-The Investment Setting1-641.When comparing returns by decade, the Ibbotson study shows that small company stocksoutperformed large company stocks in every decade since the 1920s.TrueFalse42.Those who attempt to engage in short-term market tactics are termed traders.TrueFalse43.Research has shown that it is not that difficult to beat the market on a risk-adjusted basis.TrueFalse44.Liquidity can be measured by the ability of the investor to convert an investment into cashwithin a relatively long period of time, at its fair book value.TrueFalse45.Real assets, because of increasing replacement value and scarcity, tend to perform betterthan financial assets during periods of high inflation.TrueFalse46.One of the problems that investors face in determining required rates of return isforecasting errors involving interest rates and inflation.TrueFalse47.Every investment requires a total return comprised of a real rate of return, compensationfor inflationary expectations, and a risk premium.TrueFalse48.Beta measures a security's return relative to the market.TrueFalse

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Chapter 01-The Investment Setting1-749.Prior to the Taxpayer Relief Act of 1997, long-term capital gains were taxed at ordinaryincome tax rates.TrueFalse50.The Tax Act of 2001 lowered the capital gains tax rate.TrueFalse51.The Tax Relief Act of 2003 has made stocks that pay high dividends more attractive thanthey previously were.TrueFalse52.In managing a personal portfolio, an investor should consider opportunity costs.TrueFalseMultiple Choice Questions53.The commitment of current funds in anticipation of receiving a larger future flow of fundsis called:A.a financial asset.B.a real asset.C.an investment.D.gambling.E.None of the above54.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 assetB.Financial asset; real assetC.Indirect equity claim; direct equity claimD.Direct equity claim; indirect equity claimE.None of the above

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Chapter 01-The Investment Setting1-855.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 corporatebonds.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.56.When ranking the riskiness of securities using the standard deviation, the highest risksecurity 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.57.Which of the following statements is the most accurate concerning security returns overthe 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.58.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

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Chapter 01-The Investment Setting1-959.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 above60.What factors must be considered in choosing between investment alternatives?A.Risk and liquidityB.Interest or dividends versus capital gainsC.Time frame for managing funds and evaluating performance and tax effectsD.Safety of principalE.All of the above61.The ability of the investor to convert an investment into cash in a short period of time iscalled:A.short-term orientation.B.low investment risk.C.liquidity.D.capital appreciation.E.None of the above62.Wealthy investors may prefer the favorable tax treatment of investments such as:A.corporate bonds.B.municipal bonds.C.common stock.D.preferred stock.63.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

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Chapter 01-The Investment Setting1-1064.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%65.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 above66.What are the components in determining the real rate of return?A.The risk premiumB.The inflation factorC.The required rate of returnD.Both a) and b) aboveE.None of the above67.What is the risk-free rate in an environment where the real rate is 3% and inflation isrunning 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%

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Chapter 01-The Investment Setting1-1168.Which of the following investments would theoretically always carry the highest riskpremium?A.U.S. treasury billB.Common stockC.Preferred stockD.Corporate bondE.Any one of the above69.____, because of increasing replacement value and scarcity, perform(s) best in periods ofhigh inflation.A.Real assetsB.Common stockC.Preferred stockD.Financial assetsE.More than one of the above70.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.71.Which of the following is not one of the considerations in setting investment objectives?A.Risk versus safety of principalB.Maximize wealth versus minimize expensesC.Current income versus capital appreciationD.Short-term versus long-term orientationE.Taxes

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Chapter 01-The Investment Setting1-1272.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.73.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.74.Common stock dividends are now taxed at a maximum rate of:A.10%.B.15%.C.20%.D.30%.E.38.8%.75.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 above76.A stock that pays low or no cash dividends is:A.eBay.B.Duke Power.C.AT&T.D.All of the above

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Chapter 01-The Investment Setting1-1377.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 C78.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 timeand effort devoted to researching alternative investments.E.None of the above79.An investor in Duke Energy can expect:A.low dividends.B.high dividends.C.low inflation.D.fast stock price growth.E.None of the above80.Because most investors are risk averse,A.the riskier the investment, the more the investor will pay for it.B.the riskier the investment, the less compensation the investor requires.C.only financial institutions invest in risky assets.D.they will require a higher rate of return for a riskier investment.81.The two types of investments that provide the highest and lowest yields in the Ibbotsonstudy ofStocks, Bonds, Bills and Inflationare:A.large company stocks and U.S. treasury bills.B.large company stocks and long-term government bonds.C.small company stocks and U.S. treasury bills.D.small company stocks and preferred stock.E.U.S. treasury bills and small company stocks.

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Chapter 01-The Investment Setting1-1482.Which of the following is not a form of a financial asset?A.Commercial paperB.Commodity futuresC.WarrantsD.Personal residenceE.Money market fund83.Historically, the real rate of return in the U.S. economy has been:A.1-2%.B.2-3%.C.3-4%.D.4-5%.E.5-6%.84.Which of the following is not a form of real asset?A.Rare paintingsB.Baseball cardsC.DiamondsD.Real estateE.Commodity futures85.Under the Economic Growth and Tax Reconciliation Act of 2001, when will estate taxesbe eliminated?A.2008B.2009C.2010D.2019E.The estate tax will not be eliminated.

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Chapter 01-The Investment Setting1-15Essay Questions86.a) The stock of Trudeau Corporation went from $27 to $40 last year. The firm also paid$1 in dividends during the year. Compute the rate of return.b) In the following year, the dividend was raised to $1.40. However, a declining markettoward the end of the year caused the stock to fall to $24 per share from $40. Compute therate of return (gain or loss) to the stockholder in the following year.87.(a) The stock of Furniture Unlimited went from $90 to $99 last year. The firm also paid 80cents in dividends. Compute the rate of return.(b) During the next year, the dividend paid was $1.60 per share and the stock closed at $93per share, down from $99 per share at the beginning of the year. Compute the annual gain orloss for the second year holding period.88.Assume the real rate of return in the economy is 4.25%, the expected rate of inflation is3.5%, and the risk premium is 6.75%. Compute the risk-free rate and required rate of return.

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