Personal Finance Ch 12

Which of the following "portfolios" is the best example of spreading risk by investing in different asset classes and markets? art and collectibles. commodities and futures. real estate and mortgages. stocks and derivatives. municipal bonds.

Stocks and derivatives

Perhaps the most critical information to have about an investment is its potential return. susceptibility to types of risk. asset value. a. and b. a., b., and c.

a. and b.

When you invest in a mutual fund you invest in a diversified portfolio. pay only one transaction cost. select your securities individually. a. and b. a., b., and c.

a. and b.

When you invest in bonds you loan money and receive interest. receive repayment of principal at maturity. borrow money and pay interest. a. and b. a., b., and c.

a. and b.

A portfolio strategy involves capital allocation decisions. asset allocation decisions. security selection decisions. a. and b. a., b., and c.

a., b., c.

An investment policy statement outlines an investor's return objectives, risk preferences, and constraints. an investment advisor's approach to applying portfolio theory. an institution's goals and investment decisions. an investment firm's disclosures to clients. a company's disclosures to investors.

an investor's return objectives, risk preferences, and constraints.

When you invest in stocks you pay dividends. sell equity for liquidity. buy a share of a corporation. a. and b. a., b., and c.

buy a share of a corporation

Perfect Lawn Inc.'s stock price has fallen because it was not able to meet its production deadlines. This is an example of economic risk. industry risk. company risk. asset class risk. market risk.

company risk

Investment risks include all the following EXCEPT default risks. economic risks. industry and company risks. asset class risks market risks.

default risks

Recession and inflation have decreased the value of your investments. This is an example of economic risk. industry risk. company risk. asset class risk. market risk.

economic risk

Issuers of stock promise returns. must trade in a public stock exchange. expect investors to share in profits and losses. pay dividends whether or not there is a profit. also issue bonds.

expect investors to share in profits and losses

Businesses in landscaping services suffered losses when new home construction starts fell. This is an example of economic risk. industry risk. company risk. asset class risk. market risk

industry risk.

Investor constraints include all the following EXCEPT liquidity needs. time horizon. level of debt. tax obligations. legal requirements.

level of debt

When you allocate capital, you choose investments that are more and less. diversified. risky. costly. a. and b. a., b., and c.

risky

As an investor you are constrained by your unique preferences, beliefs, and values. legal and tax considerations. your age, life stage, and goals. a. and b. a., b., and c.

a., b., c.

Benefits of having an investment policy statement include providing a flexible and portable framework for planning. thinking through goals and expectations. taking an active role in investment planning. a. and b. a., b., and c.

a., b., c.

If you are risk averse, then you do not have enough wealth or surplus to invest. knowledge to invest with confidence. time before you need your money for expenses. a. and b. a., b., and c.

a., b., c.

If you prefer active management of your portfolio, then you like to choose the specific securities you invest in. are willing to pay higher transaction costs. believe you can gain through market timing. a. and b. a., b., and c.

a., b., c.

The difference between actual returns and expected returns is defined as risk, measured as the amount of volatility. standard deviation. whether the investment performed as expected. a. and b. a., b., and c.

a., b., c.

The idea of using the predictability of returns to manage portfolios of investments is based on an infinite time horizon. is more suitable for institutional versus individual investors. has led to an explosion in financial engineering. a. and b. a., b., and c.

a., b., c.

To calculate the annual rate of return for an investment, you need to know the income created. the gain or loss in value. the original value at the beginning of the year. a. and b. a., b., and c.

a., b., c.

When you invest in an index fund you invest in a mutual fund. a fund reflecting the performance of similar securities. a fund managed by a company, brokerage, or bank. a. and b. a., b., and c.

a., b., c.

When you invest in commodities you invest in derivatives. reduce volatility by locking in prices over a long term. buy things that do not yet exist. a. and b. a., b., and c.

a., b., c.

The risk that actual returns will not match or exceed expected returns is called opportunity cost. investment risk. default risk. asset class risk. market risk.

investment risk

Real estate prices fell across the board because the market was glutted with surplus pre-owned homes for sale. This is an example of economic risk. industry risk. company risk. asset class risk. market risk.

market risk

The Joneses believe it is important to try to reduce poverty and hunger globally by aiding local communities. They invest internationally in local businesses and nonprofit organizations that are effectively addressing the problem. Their strategy is an example of divestment. social investment. unique circumstances. risk tolerance. legal constraints.

social investment

Commodities include all the following EXCEPT stocks and bonds. currencies. precious metals. energy resources. agricultural products

stocks and bonds.

Your return objective represents your investment risk. the annual return needed to meet your goals. your time horizon. the amount you have to invest to start with. your risk tolerance.

the annual return needed to meet your goals.

All the following are examples of asset classes EXCEPT stocks and bonds. wills and trusts. commodities and derivatives. art and collectibles. real estate and mortgages.

wills and trusts.

Your risk tolerance represents your wealth or net worth. the amount of money you stand to lose. your ability or willingness to take chances. the amount of time separating you from your money. your return objective.

your ability or willingness to take chances.