Personal Finance Chapter 1

a) Specific

"I want to retire w/ $1,000,000 in the bank" is an example of a(n) _________ goal: a) Specific b) Timely c) Attainable d) Realistic

a) Formal network

A network that connects you with people that you would not usually associate with is called a(n): a) Formal network b) Informal network c) Social capital d) Extended capital structure

a) Your health ??

All of the following influence your human capital except: a) Your health b) Your income c) Your education level d) Your skill(s)

c) Present Hedonistic

Arnold rarely thinks about his future. He loves to work out and spend time with friends living in the moment. Given his orientation, which of the following best describes Arnold's time orientation? a) Past Positive. b) Present Fatalistic c) Present Hedonistic d) Future Transcendental

b Pre-commiting to decisions

Creating deadlines for yourself is an example of what type of decision making strategy? a Setting clear goals. b Pre-committing to decisions. c Automating good decisions. d Confirmation heuristic.

c Status quo bias

Mary likes things the way things have traditionally been. She sees no reason to change doing something if what she is doing has worked in the past. Given her perspective, Mary may be exhibiting a(n): a Loss aversion bias. b Optimism bias. c Status quo bias. d Discounting bias.

c) Having a child

Now that Graham has graduated college he is facing several changes in his life. He was recently married and started a new job in a large city. Which of the following events is going to have the highest cost over Graham's life? a) Purchasing a new car b) Paying his student loans c) Having a child d) Paying for vacations on a yearly basis

d) It is impossible to know what Terry's financial risk tolerance is given the information provided

Terry loves to ski, play competitive dodge ball, and go mountain climbing. If asked, Terry would consider sky diving as a hobby. Now that you know this, which of the following statements is true? a) Terry's financial risk tolerance is likely high to very high. b) Given the inverse relationship between financial risk tolerance and general behavior, Terry's financial risk tolerance is moderately low. c) Terry's perception of financial risks mirrors that of her non-financial behavior. d) It is impossible to know what Terry's financial risk tolerance is given the information provided.

d Attainable

The "A" in SMART stands for: a Actionable b Always c Available d Attainable

b) Risk preference

The fact that nearly everyone would like to be wealthier rather than poorer refers to their: a) Risk perception b) Risk preference c) Risk tolerance d) Risk capacity

Michelle: earned her high school degree five years ago and took a job right out of school

--Mike earned his bachelor's degree in history three years ago and started working shortly thereafter. --Michelle earned her high school degree five years ago and took a job right out of school. --Maria earned her associate's degree last year and started work right after graduation. During the next economic recession, who is most likely to be unemployed?

d) Minimizing insurance expenditures

All of the following are pathways to wealth, except: a) Saving money on a regular basis b) Keeping good records c) Spending less than income earned d) Minimizing insurance expenditures

c) Generate the lowest returns

Low risk investments most often: a) Lead to the best long-term gains b) Are generally favored by those with high levels of experience and knowledge c) Generate the lowest returns d) Provide the greatest potential to generate wealth of the lifespan

b) Human capital

Your ability to earn money over the working lifetime is called: a) Social capital b) Human capital c) Human wealth d) Social capital

1 and 2 --A person's time orientation can never be changed --People who hold a past negative time orientation have trouble saving for the future

All of the following statements are true, except: 1. A person's time orientation can never be changed 2. Most Americans tend to hold a future time orientation 3. People who hold a past negative time orientation have trouble saving for the future

d) Long term

Bud is 43 years old. He would like to retire at age 67 and move to the Caribbean. What is Bud's goal time horizon? a) Short term b) Short-intermediate term c) Long-intermediate term d) Long term

d) Both b and c are correct --Unhealthy people tend to work less, which reduces annual earnings and savings --Someone who gets seriously ill may become disabled and be forced out of the labor market, which will reduce income and wealth accumulation

How does a person's health impact their wealth accumulation over time? a) Healthy people spend more money on food and exercise which reduces their lifetime wealth accumulation. b) Unhealthy people tend to work less, which reduces annual earnings and savings. c) Someone who gets seriously ill may become disabled and be forced out of the labor market, which will reduce income and wealth accumulation. d) Both b and c are correct

a) Converting human capital to financial wealth depends on wise planning and management

Which of the following statements is true: a) Converting human capital to financial wealth depends on wise planning and management b) As your financial wealth increases, so does your human capital. c) As your financial wealth increases, your human capital remains unchanged over your lifespan. d) As you age, your financial wealth remains constant but your human capital declines.

Tammy: 40 years old, well educated, drinks a glass of wine daily, and exercises regularly

--Lance is 25 years old and well educated but a smoker. --Robb is a 35 years old and well educated but smokes marijuana on a regular basis. --Tammy is 40 years old, well educated, drinks a glass of wine daily, and exercises regularly. Who has the ability to maintain their human capital over the longest period of time

Jorge: foreign exchange student who studies finance and is active in his fraternity

--Takashi is a foreign exchange student studying engineering in the United States. His English skills are limited but given his major in college this has not been a big problem. --Jorge is also a foreign exchange student. He is studying finance and is active in his fraternity. --Kim is not enrolled in college. She works 40 to 50 hours a week as a warehouse foreman and when she is not working tends to keep to herself reading books. Who is most likely to have the highest social capital today and in the future?

c Future Goal

A person's time orientation can shape life outcomes. Which of the following is most closely associated with lifetime wealth accumulation? a Present Hedonistic. b Past Positive. c Future Goal. d Present Fatalistic.

d) Both a and b are correct --Enroll in a continuing education program --Go back to school and learn a new skill

As people age, their human capital can decline due to changes in the marketplace that demand different skills and abilities. One way to boost human capital is to: a) Enroll in a continuing education program b) Go back to school and learn a new skill c) Begin working out in order to look younger d) Both a and b are correct

a) Enroll immediately b/c the investment payback period is relatively short

Barbara knows that the best way to build human capital is to invest in her education. She has a love for foreign languages and has decided to pursue a degree in medieval Nordic languages. One Ivy League school offers a degree in this language. Barbara will need to borrow approximately $86,000 to cover the cost of tuition, room, board, books, travel, and fees. If she can earn $21,000 per year after graduation, she should: a) Enroll immediately b/c the investment payback period is relatively short b) Reconsider her decision b/c the cost is high compared to her potential earnings. c) Enroll immediately with the intent of continuing on to obtain a graduate degree in medieval Nordic languages; while this will mean more debt, it will also mean slightly more income after graduation. d) Not worry about the cost because any human capital investment is a good investment.

c) 60 to 70 percent

Based on findings from the Marshmallow experiment, what percent of Americans fall prey to temptation? a) 10 to 20 percent. b) 30 to 50 percent. c) 60 to 70 percent. d) 80 to 90 percent.

b) How well you understand and use personal finance information

Financial literacy refers to: a) How well you manage the financial stressors in your life. b) How well you understand and use personal finance information. c) How well you score on standardized measures of personal finance. d) Your maximum score on a comprehensive consumer finance test.

c) Your willingness to engage in a risk in which an outcome is potentially negative

Financial risk tolerance refers to: a) Your perception of the riskiness of a situation or investment b) Your preference when choosing between two or more investments c) Your willingness to engage in a risk in which an outcome is potentially negative d) Your capacity to sustain an expected loss

a) Risk preference

Given a choice, John would like to invest in a really safe and secure investment compared to investing in the stock market. This is an example of John's: a) Risk preference b) Risk perception c) Risk tolerance d) Risk need

b Automating good decisions

Having bills automatically paid so you are never late when making a payment is an example of: a Setting clear goals. b Automating good decisions. c Pre-committing to decisions. d Both b and c.

a) Knowledge leads to confidence, which leads to experience, which leads to understanding, which leads to an increase in risk tolerance

It is possible to increase your financial risk tolerance over time. What is the process of risk tolerance change? a) Knowledge leads to confidence, which leads to experience, which leads to understanding, which leads to an increase in risk tolerance. b) Experience leads to understanding, which leads to confidence, which leads to knowledge, which leads to an increase in risk tolerance. c) Risk tolerance leads to confidence, which leads to understanding, which leads to experience, which leads to increased knowledge. d) Understanding leads to risk tolerance, which leads to experience, which leads to confidence, which leads to increased knowledge.

b Loss aversion

Jerry recently won $200 in a lottery. He felt great about the win. Because he was feeling lucky he took the $200, plus an additional $200, and bought more lottery tickets. Unfortunately, these tickets did not pay off and he lost the entire $400. Afterwards, Jerry felt miserable. He hated losing the money much more than he enjoyed winning the lottery. Jerry's feeling is an example of: a Discounting. b Loss aversion. c Behavioral economics. d Heuristic meditation.

c Long-intermediate term

Kaylee has been dreaming of a grand vacation for several years. Last year, she started to save for this once-in-a-lifetime event. So far, she has saved $2,000 toward a goal of $25,000. Her plan is to travel in six years. What is Kaylee's goal time horizon? a Short term. b Short-intermediate term. c Long-intermediate term. d Long-term.

c) High School Diploma, Bachelor's Degree, Doctoral Degree, Professional Degree

Lifetime earnings and education are positively related. Select the ranking that represents the median lifetime earnings based on education achievement from lowest to highest: a) High School Diploma, Associates Degree, Some College, Master's Degree b) Professional Degree, Bachelor's Degree, Associate's Degree, High School Diploma c) High School Diploma, Bachelor's Degree, Doctoral Degree, Professional Degree d) Bachelor's Degree, Professional Degree, Master's Degree, Doctoral Degree

b) Invest more aggressively knowing that she has time on her side to withstand any temporary setbacks with these riskier investments

Loraine is thinking about her future retirement goals and needs. She has 25 years until retirement. She needs to save quite a bit of money in order to reach her retirement goal. Unfortunately, Loraine's risk tolerance is low. Given these facts, what the best recommendation for Loraine? a) Postpone retirement to offset the fact that her tolerance for risk is so low. b) Invest more aggressively knowing that she has time on her side to withstand any temporary setbacks with these riskier investments. c) Obtain a second job as a way to double her savings into low risk investments. d) Supplement her savings with the use of lottery tickets in the hopes of earning a large windfall.

a She is discounting the future

Melinda is faced with a choice. She can take $500 today guaranteed or she can choose to wait one year and receive $550. The good news is that Melinda does not need the money, so either way the money is a bonus. If she takes the money today she will put it in the bank and receive a 3% rate of return. If Melinda does, in fact, take the $500 today, you could say that: a She is discounting the future. b She has an optimism bias. c She feels that the likelihood of getting the full $550 is less than getting a guaranteed $515. d She has a status quo bias.

d) Not be worried because her risk tolerance will increase as her knowledge and experience increases

Nellie is worried because she just took a risk-tolerance quiz online and learned that she is in the bottom 10% of all those who have taken the questionnaire. She should: a) Be worried because it is unlikely that her risk attitude will ever increase. b) Be satisfied knowing that she should only invest in low-risk investments. c) Not be worried because risk tolerance matter much less than risk preference for those whose goal it is to achieve lifetime wealth. d) Not be worried because her risk tolerance will increase as her knowledge and experience increases.

d) All of the above are correct

Nick has been working in a factory for 12 years. He is a skilled welder. Unfortunately, the factory has closed down. This has caused high unemployment in his town and region. If Nick is concerned about maximizing his human capital and lifetime wealth accumulation, he should: a) Relocate to a place where his welding skills will be valued in the marketplace b) Attend community workshops to learn how to manage household expenses with less income c) Lose weight and improve his grooming to enhance his perceived human capital d) All of the above are correct

b) No, because Nicki's risk tolerance does not match the mutual fund's risk profile

Nicki is meeting with her financial planner. She is new to investing and does not have much experience in the markets. She recently took a risk-tolerance quiz and scored below average in terms of risk tolerance. Her financial planner is now recommending that she purchase shares in an aggressive mutual fund that invests in very risky small companies. The financial planner's argument is that Nicki needs to take risk in order to achieve decent returns. Do you agree with the financial planner? a) Yes, because the only way to make money is to take big risks. b) No, because Nicki's risk tolerance does not match the mutual fund's risk profile. c) Yes, because Nicki's risk tolerance should only be used to indicate the minimum level of risk she should take. d) No, because the only way to make money is to take small incremental risks.

a) More knowledgeable about the financial marketplace over time

Nigel believes that most "rich people" obtained their wealth either through hard work or by investing wisely. Assuming Nigel adopts this same perspective as a guide to his own spending and saving behavior, he is most likely to become: a) More knowledgeable about the financial marketplace over time b) Disillusioned later in life as he nears retirement c) A consistent purchaser of lottery tickets d) Both b and c

b) A general change in perceptions about the chain's quality of food

Recently a major fast food chain saw it store sales drop dramatically after the media reported that hundreds of people got sick eating at one particular restaurant. In fact, sales across the country fell, although competing chains saw no change in sales. This can attributed to: a) A sudden change in preference for different foods among consumers. b) A general change in perceptions about the chain's quality of food. c) A decrease in willingness to eat at fast food chains among consumers. d) An increase in first hand experiences of food quality among consumers.

a) Go back to school b/c the net increase in human capital is greater than the cost of the education

Ruby, age 50, is considering going back to school. She would like to retire at age 67. She currently earns $50,000 per year. If she goes back to college and completes a graduate degree, she will earn $55,000 per year. If the total cost of the graduate degree is $75,000, Ruby should: a) Go back to school b/c the net increase in human capital is greater than the cost of the education b) Not go back to school because the cost of the degree exceeds the extra income she will earn over her working life. c) Go back to school because any investment in human capital is a good investment. d) Only go back to school if the time and effort will result in an increase in social capital as well.

c) Help you reach your long-term goals

Short-term goals: a) Help you reach your short-term financial objectives b) Are designed to help you develop SMART goals c) Help you reach your long-term goals d) Are more challenging to meet compared to long-term goals

c Status quo

Some firms entice consumers into long-term contracts using very low introductory rates. Once the initial contract term has ended, the firm increases the cost of the service. Firms know that few consumers leave when the prices increase. These firms are relying on what behavioral economics bias? a Overconfidence. b Optimism. c Status quo. d Loss aversion.

c Confirmatory bias

Someone who erroneously attributes outcomes to skill rather than chance, while ignoring indications that would undermine perceptions of skill, is prone to: a Status quo bias. b Optimism bias. c Confirmatory bias. d Hyperbolic discounting.

a) Has a lower level of financial literacy

Someone who feels that investing is too difficult to understand likely: a) Has a lower level of financial literacy b) Is positioned to maximize lifetime wealth accumulation goals. c) Has a high tolerance for financial risk. d) Feels in control of their financial situation.

a) Willing to take more financial risk

Someone who reports strongly agree with (a) the thought of taking a risk is exciting to me, (b) in terms of investing, high returns are more important than safety, and (c) making money in stocks and bonds is based on knowledge is most likely: a) Willing to take more financial risk b) Willing to take no financial risk c) Someone who believes in luck and fate d) Someone who feels that they cannot control their financial future

a Optimism bias

Swarn is a risk taker. His core life philosophy is that nothing bad can happen to him. When he thinks back over his life, he can't remember any serious negative events. When he looks ahead he simply cannot imagine a painful loss occurring to him. Swarn likely suffers from a(n): a Optimism bias. b Loss aversion bias. c Cognitive evaluation bias. d Future discounting bias.

d) Your financial knowledge, feelings about risk taking, and feelings of control over your situation

The way you view the financial world is shaped most profoundly by: a) Your teachers b) your feelings about the world economy c) the news media and reports of GDP d) Your financial knowledge, feelings about risk taking, and feelings of control over your situation

a) They view playing the lottery as a form of entertainment

What helps to explain why some people play the lottery even when they know the odds of winning are astronomically low? a) They view playing the lottery as a form of entertainment. b) They have a relatively low level of financial literacy. c) They prefer low risk investments. d) Both a and b are correct.

a) Consumer spending

What is the single largest component of the United States GDP? a) Consumer Spending b) Business investment c) Government spending d) The rate of unemployment

b) GDP would fall because consumers would spend less on goods and services

What might happen if all Americans suddenly learned the foundational concepts of personal finance--they borrowed less, saved more, and spent less--and changed their behavior tomorrow? a) More lottery tickets would be purchased because consumers would have more money to spend. b) GDP would fall because consumers would spend less on goods and services. c) GDP would increase because the government would have more investments to tax. d) Confidence about the future would decline because consumers would actually know what it is going to take in order to retire and live a comfortable life.

c) Risk perception

When Todd thinks of investing in the stock market he equates the behavior with terms like loss, risk, and danger. This is an example of Todd's: a) Risk tolerance b) Risk preference c) Risk perception d) Risk capacity

a) Past

When asked, Sancho strongly agrees with the following statement: I often think of what I should have done differently in my life. Given his answer, Sancho most likely holds a _______________ time perspective: a) Past b) Present c) Future d) Transcendental

a) On a scale that can change over time

When financial planners think about someone's financial risk tolerance they think about risk tolerance: a) On a scale that can change over time b) As a fixed category, such as low or high c) As a passing mood that changes daily d) As a trait that declines over time

a) Those who resist temptation today

When viewing general life outcomes, who is more likely to fare better in the future? a) Those who resist temptation today. b) Those who give in to temptation today. c) Those who resist formalizing goals today. d) Those who are impulsive and quick acting.

1, 2, and 3

Which of the following elements influence your view of the financial world? 1. Your risk tolerance 2. How much you believe you control your financial future 3. Knowledge about personal finance topics

c To fund a $3,500 vacation in San Diego in 9 months

Which of the following goals is the most clearly stated? a To retire in 20 years. b To purchase an $18,000 car in 20 years. c To fund a $3,500 vacation in San Diego in 9 months. d To purchase a home in 7 years with a sizeable down payment.

d Both a and c are correct --Two plus two equals four --Income minus expenses equals savings

Which of the following is an example of a heuristic? a Two plus two equals four. b Women are less risk tolerant than men. c Income minus expenses equals savings. d Both a and c are correct.

b) Achieving a bonus

Which of the following is an example of an external goal motivation factor? a) Feeling good about yourself. b) Achieving a bonus. c) Reaching a dream. d) All of the above.

a) A willingness to save money on a regular basis

Which of the following is most clearly a personal financial strength? a) A willingness to save money on a regular basis b) a willingness to borrow money for day-to-day purchases c) A willingness to postpone future goals in pursuit of current objectives d) All of the above

d) Posting pictures of yourself drinking at a bar

Which of the following is most likely to reduce your social capital among those who may be likely to hire you for a job? a) Posting pictures of yourself with influential politicians in your community. b) Sending notes to business colleagues congratulating them on their accomplishment. c) "Liking" someone's photo posted on a social media site. d) Posting pictures of yourself drinking at a bar.

b) If the value of the assets were to fall there may not be enough time to recoup the loss

Which of the following is the reason those with a short-term time horizon should be cautious when investing their assets? a) The tax rate for short term gains can reduce the value of the assets. b) If the value of the assets were to fall there may not be enough time to recoup the loss. c) It takes too much time to match the risk profile of a portfolio to the risk-tolerance of the investor. d) This rule only applies to older investors who may not live long enough to enjoy the benefits of their investments.

d) Personal Financial Advisor

Which of the following occupations is likely to have the highest median salary? a) Kindergarden teacher b) Massage Therapist c) Construction Worker d) Personal Financial Advisor

c) Michelle who gives regularly to charity, reads about investing, and is self-confident

Which of the following people is most likely to be considered financial literate? a) Jamie who has low self-confidence, plays the lottery, and rarely tracks news stories online. b) Todd who exhibits self-control but is not self-confident or financially experienced c) Michelle who gives regularly to charity, reads about investing, and is self-confident d) John who lives day-to-day, is experienced with investing, but sometimes spends more than he earns

a) The greater the return required, the greater the risk that must be taken

Which of the following relationships accurately describes the role of risk taking and wealth accumulation? a) The greater the return required, the greater the risk that must be taken b) The greater the risk taken, the lower the long-term return. c) The lower the return, the high the risk. d) Both b and c are correct.

1 & 2 only: -Save $ on a regular basis -Pay down debt as quickly as possible

Which of the following strategies is most likely to increase your confidence about your financial future? 1. Save $ on a regular basis 2. Pay down debt as quickly as possible 3. Borrow money to improve GDP

b Past Negative

Which of the following time orientations is most closely associated with a lack of goal orientation, a general feeling of hopelessness, and general pessimism? a Past Positive. b Past Negative. c Present Hedonistic. d Future Goal.

c) Someone who believes strongly in luck and fate

Who is less likely to feel that they are in control of their financial future? a) Someone who is very knowledgeable about money issues. b) Someone who believes that they can control their own destiny. c) Someone who believes strongly in luck and fate. d) Someone who understands the nature of risks and returns.

c) The person who is willing to take risk after adequate research

Who is most likely to accumulate more wealth over their lifetime? a) The person who takes a slow and steady low risk approach b) The person who is willing to take big gambles c) The person who is willing to take risk after adequate research d) The person who likes to gamble and play the lottery

d) both a and b --They have too much debt --They have not saved enough over their lifetime

Why might some people who are nearing retirement feel less confident about their financial future? a) They have too much debt. b) They have not saved enough over their lifetime. c) They live too frugally and cannot enjoy the joys of retirement. d) Both a and b.

1 only --Create deadlines --Encourage hyperbolic discounting

Your friend is a procrastinator. How can you best help her overcome this weakness? 1. Create deadlines 2. Encourage hyperbolic discounting 3. Strengthen their confirmatory bias