chapter 21
A market timing approach that increases the proportion of funds in stocks when the stock market is expected to be rising, and increases cash when the stock market is expected to be falling is a: a. strategic asset allocation. b. tactical asset allocation. c. portfolio optimization. d. liquidity expectation timing.
b
Investors normally assume a Moderate trade-off between risk and return in the ____ phase of the life-cycle. a. accumulation b. consolidation c. spending d. gifting
b
The first step of portfolio management according to Maginn et al. (2007) is : a. to assess market conditions. b. to determine objectives, constraints and preferences. c. to develop strategies and implement them. d. to adjust the portfolio as necessary.
b
Which of the following is NOT part of the portfolio management process, as described by Maginn, Tuttle, McLeavy, and Pinto (2007)? a. portfolio factors are monitored. b. portfolio is rebalanced. c. portfolio is rebalanced as required. d. strategies are developed and implemented.
b
. Which type of portfolio allocation is usually done routinely? a. integrated asset allocation b. strategic asset allocation c. tactical asset allocation d. command asset allocation
c
A financial plan should include decisions on: a. Children. b. Spouse. c. Risk tolerance, purchase of a house, tax planning, life, health, disability, and protection of business and property insurance, and emergency reserve funds. d. Career.
c
An aggressive asset allocation would contain larger proportions of __________ than a conservative allocation. a. cash and bonds b. bonds and large-cap stocks c. small-cap and international stocks d. bonds
c
In order to protect principal against possible loss caused by distressed selling, individuals are typically recommended to have a a. 1-month emergency fund. b. 2-month emergency fund. c. 6-month emergency fund. d. 9-month emergency fund
c
Living expenses are covered from accumulated assets rather than from earned income in the __________ phase of the life cycle. a. accumulation b. consolidation c. spending d. gifting
c
Monitoring and rebalancing a portfolio over time involves all of the following costs EXCEPT a. commissions. b. possible impact on market price. c. holding a portfolio that is no longer adequately diversified. d. time involved in decision making.
c
. The life-cycle theory of asset allocation proposes that as investors progress through life, their a. asset allocation will tend to become more conservative. b. earnings increase in their 20s, reach a peak at about age 45, then decline. c. assets must grow geometrically in order to achieve reasonable goals. d. asset allocation should remain fixed in order to avoid short-sighted adjustments.
a
Investor expectations about expected returns from various asset classes should start with: a. historic rates of return of those asset classes, from sources such as Morningstar/Ibbotson & Associates. b. economic forecasts c. inflation. d. taxes.
a
Strategic asset allocation is usually done: a. once every few years, establishing a long-run or strategic asset mix. b. using Monte Carlo simulation to identify a range of outcomes for various asset mixes. c. the life-cycle concept. d. a market timing strategy.
a
The Markowitz model identifies the efficient set of portfolios, which offers the a. highest return for any given level of risk or the lowest risk for any given level of return. b. least-risk portfolio for a conservative, middle-aged investor. c. long-run approach to wealth accumulation for a young investor. d. risk-free alternative for risk-averse investors.
a
Which of the following is not true regarding life-cycle approach? a. It is most appropriate for institutions. . b. It automatically adjusts to a more conservative position as the investor nears retirement age. c. It is suited to 401(k) plans. d. It can be implemented using life-cycle (also known as target-date) funds.
a
Portfolio objectives are always going to center on _______and_______, because these are the two aspects of most interest to investors. a. accumulation; consolidation. b. return; taxes. c. return; risk. d. spending; gifting.
c
The "lockup" problem involved in rebalancing refers to the: a. problem that investors face in retirement accounts that cannot be liquidated prior to retirement. b. trust accounts that are not managed by the investor and cannot be traded without incurring administrative costs. c. taxable accounts subject to capital gains taxes if investments are traded. d. problem of fixed-income securities that have little liquidity and therefore, must be held till maturity.
c
The annual average compound rate of return for stocks from the period 1926-2007 was: a. 8.50% b. 9.55% c. 10.05% d. 12%
c
The first step to establishing an investment policy is to state the a. minimum investment and maximum fees. b. SEC guidelines for prudent man investing. c. objectives and constraints and preferences. d. asset allocation parameters and time horizons.
c
Which of the following is NOT a major consideration in the asset allocation process? a. Return requirements b. Risk tolerance c. Ease of monitoring progress d. Time horizon
c
Which of the following is not among the usual constraints and preferences considered when formulating an investment policy? a. Avoidance of so-called "sin" stocks (alcohol, tobacco, firearms, etc.) b. Liquidity needs c. Economic assessment d. Time horizon
c
. Conservative retirees likely have ____ than they did early in their careers. a. more small-cap stocks b. more international stocks c. fewer bonds d. more bonds
d
. _____ governs employer-sponsored retirement plans.: a. Investors Advisors Act. b. Investment Company Act. c. Security Investors Protection Act. d. Employment Retirement Income Security Act.
d
One aspect of the tax considerations in asset allocation is that a. capital gains are often taxed at a higher rate than income. b. current income is seldom a significant consideration for an investor in the spending phase of the life cycle. c. investors are exempt from taxes on capital gains once they reach age 65. d. taxes on capital gains are deferred until the gain is realized.
d
The stages of the life cycle for setting individual investment objectives are: a. Accumulation Phase, Consolidation Phase, Retirement Phase, Estate Phase. b. Accumulation Phase, Consolidation Phase, Retirement Phase, Gifting Phase. c. Accumulation Phase, Consolidation Phase, Spending Phase, Retirement Phase, Gifting Phase. d. Accumulation Phase, Consolidation Phase, Spending Phase, Gifting Phase.
d
Which of the following is NOT one of the phases of the life-cycle theory of asset allocation? a. Accumulation phase b. Consolidation phase c. Gifting phase d. Retirement phase
d
__________ is the most important investment decision because it determines the risk-return characteristics of the portfolio and determines as much as 98% of the performance of a portfolio. a. Hedging b. Market timing c. Performance measurement d. Asset allocation
d
