Personal Finance Final Exam Quiz

Mortgage-backed securities are... A) index funds. B) stocks. C) bonds. D) direct investments in real estate. E) exchange-traded funds.

C) bonds. Mortgage-backed securities (MBS) are bonds secured by pools of mortgages owned by large financial institutions or agencies of the federal government.

An asset bubble is usually accompanied by increased... A) transaction costs. B) transaction and market information costs. C) market participation. D) tax rates on capital gains. E) market information costs.

C) market participation. Increased market participation by speculators can lead to a bubble. Costs discourage market participation.

15. You buy 100 shares of stock for $100 per share. During the next year it pays a dividend of $2.50 per share, and at the end of the year is trading at $93 per share. Your actual return on that investment is closest to... A) -4.5%. B) 4.5%. C) -2.5%. D) -7%%. E) 2.5%.

A) -4.5%. Returns are created in two ways: the investment creates income and the investment gains (or loses) value. To calculate the annual rate of return for an investment, you need to know the income created, the gain (loss) in value, and the original value at the beginning of the year. The percentage return can be calculated as in Figure 12.8. In this example, [2.50 + (-7.00)] / 100 = -4.5%.

Which of the following does not describe the investment policy statement? A) Never needs updating B) Portable C) Investor specific D) Useful E) Flexible

A) Never needs updating The advantages of drawing up an investment policy to use as a planning framework include the following: - The process of creating the policy requires thinking through your goals and expectations and adjusting those to what is possible. - The policy statement gives you an active role in your investment planning, even if the more specific details and implementation are left to a professional investment adviser. - Your policy statement is portable, so even if you change advisers, your plan can go with you. - Your policy statement is flexible; it can and should be updated at least once a year.

Information on foreign investment least likely differs in how it is... A) analyzed. B) prepared. C) accessed. D) publicized. E) presented.

A) analyzed. In other countries, however, accountants do not use GAAP but prepare financial statements by somewhat different rules. Some of those differences relate significantly to asset valuations, a key factor in your decision to invest. When you read financial reports written for foreign companies, therefore, you need to remain mindful that they are written under different rules and may not mean the same as financial reports following the U.S. GAAP. At the very least, you should determine whether the statements you are reading were independently audited.Other countries also have different standards and procedures for making information available to investors. However, similar financial analysis techniques would be applied to the information that is accessed.

As a commodity, gold may be held... A) as bars, coins, or wafers. B) as coins only. C) as wafers only. D) as bars only. E) only by sovereign governments.

A) as bars, coins, or wafers. How exactly do you buy gold? Gold bullion is sold as bars or wafers in units of one kilogram or 32.15 troy ounces. Metal dealers and some banks will sell bars or wafers ranging from 5 grams (or 0.16075 troy ounces) to 500 ounces or more. Transaction costs are relatively high, between 5% and 8%, and there is the cost of storing and securing the gold bars or wafers.A more popular way to buy gold is as coins, which are more easily stored and secured. Gold coins are minted by several countries, including the United States, and may be bought from banks, brokers, and dealers for a fee of about 2%.

An increase in fraud during an asset bubble may be due to an increase in... A) asset values. B) market efficiency. C) regulatory oversight. D) rational behavior. E) perceived risk.

A) asset values. Fraud is certainly not an investment strategy, but bubbles attract fraudulent schemers as well as investors and speculators. A loss of market efficiency and signs of greater investor irrationality attract con men to the markets. It is easier to convince a "mark" of the credibility and viability of a fraudulent scheme when there is general prosperity, rising asset values, and lower perceived risks.

The rise in asset values in a bubble can create... A) both anchoring and overconfidence. B) ambiguity aversion only. C) both overconfidence and ambiguity aversion. D) anchoring only. E) overconfidence only.

A) both anchoring and overconfidence. Stereotyping can develop as a result of repeated "news," resulting in representation bias, which encourages overconfidence or too little questioning or analysis of the situation. The rise in asset values becomes self-reinforcing as it encourages anchoring, the expectation that asset values will continue to rise.

Framing can affect decision making by excluding potential... A) choices, gains, and losses. B) losses only. C) gains only. D) gains and losses. E) choices only.

A) choices, gains, and losses. By framing choices as separate and unrelated, however, you may miss making the best decisions, which may involve comparing or combining choices.

Investment agents are regulated by all of the following EXCEPT... A) client organizations. B) market forces. C) professional associations. D) self-regulating organizations. E) federal government regulatory agencies.

A) client organizations. The U.S. securities industry is formally regulated by federal and state governments. The SEC delegates authority to self-regulatory organizations (SROs). Registered brokers and advisers, and their firms, typically are members of professional organizations with regulatory powers. Market forces may be effective in correcting or preventing unprofessional conduct.

SRI is an approach that most directly affects an investor's... A) constraints. B) risk tolerance. C) return objective. D) time horizon. E) liquidity needs.

A) constraints. Constraints include the following: - Liquidity needs - Time horizon - Tax obligations - Legal requirements Unique circumstances refer to your individual preferences, beliefs, and values as an investor. For example, some investors believe in socially responsible investing (SRI), so they want their funds to be invested in companies that practice good corporate governance, responsible citizenship, fair trade practices, or environmental stewardship.

Bond ratings are based on... A) default risk. V) volatility. C) currency risk. D) liquidity. E) interest rate risk.

A) default risk. To provide guidance, rating agencies provide bond ratings; that is, they "grade" individual bond issues based on the likelihood of default and thus the risk to the investor.

When an asset bubble bursts, there is usually an increase in... A) demands for regulation. B) credit defaults. C) market participation. D) consumption. E) access to credit.

A) demands for regulation. When a bubble bursts, asset values quickly deflate and credit defaults rise, damaging the banking system. Having lost wealth and access to credit, people rein in their demand for consumption and investment, further slowing the economy. Losses usually create a drop in market participation, and demands for an increase in regulatory oversight to rein in future market bubbles.

Steps in creating a portfolio strategy include... A) diversifying among asset classes. B) identifying the time horizon. C) determining risk tolerance. D) identifying constraints. E) determining return objectives.

A) diversifying among asset classes. In traditional portfolio theory, there are three levels or steps to diversifying: capital allocation, asset allocation or diversifying among asset classes, and security selection.

Individual agents have a responsibility to all of the following EXCEPT their... A) economy. B) clients. C) market. D) employer. E) profession.

A) economy. Investment intermediaries or agents such as advisers, brokers, and dealers have responsibilities to their clients, their employers, and to the markets.

If you have greater risk tolerance, you are most likely... A) further from retirement with a greater asset base. B) closer to retirement with a greater asset base. C) a retired entrepreneur. D) young and independently wealthy through inheritance. E) retired with a greater asset base.

A) further from retirement with a greater asset base. Generally, the further you are from retirement and the loss of your wage income, the more risk you will take with your investments, having another source of income (your paycheck).As you get closer to retirement, you become more concerned with preserving your investment's value so that it can generate income when it becomes your sole source of income in retirement, thus causing you to become less risk tolerant.

The market for computer programmers is most likely affected by... A) global competition. B) obsolescence. C) inflation expectations. D) productivity forecasts. E) economic cycles.

A) global competition. Computing is here to stay, and thus is impervious to economic factors and is not cyclical. But the nature of programming work lends itself to globalization of the labor supply, as skills can be learned and practiced remotely.

Bondholders' risks are somewhat offset if the bond... A) has covenants. B) is redeemable. C) had an issue price less than its face value. D) is callable. E) had an issue price more than its face value.

A) has covenants. Covenants are conditions that the borrower must meet to protect the bondholders, the lenders, so if a bond is issued with covenants, they offset some of the bondholders' risk. Bonds that are callable or redeemable before maturity present more risk to bondholders. The issue price is not an offset to risk, but is indicative of a difference between the coupon and comparable current interest rates.

The measure of return that depends on how long you are invested in a bond is the... A) holding period yield. B) yield to maturity. C) current yield. D) step-up yield. E) floating rate yield.

A) holding period yield. Your holding period yield is the annualized rate of return that you receive over the period you have held the bond, including its gain or loss in market value, and the coupons you received in that period.

If you intend to hold a bond until maturity, you face less... A) interest rate risk. B) inflation risk. C) reinvestment risk. D) repayment risk. E) default risk.

A) interest rate risk. The risk that the company will be unable to make its payments is default risk-the risk that it will default on the bond. There is a risk, however, that when you go to reinvest the coupon, you will not find another investment opportunity that will pay as high a return because interest rates and yields have fallen. This is called reinvestment risk. Another threat to the value of your coupons and principal repayment is inflation. Inflation risk is the risk that your coupons and principal repayment will not be worth as much as you thought, because inflation has decreased the purchasing power or the value of the dollars you receive. Interest rate risk is the risk that a change in prevailing interest rates will change bond value-that interest rates will rise and the market value of the bond will fall. (If interest rates fell, the bond value would increase, which the investor would not see as a risk.).So, if you intend to hold the bond until maturity, you will receive the face value of the bond, and you need not worry about the effect of interest rate risk on its market value during your holding period.

Mutual fund returns may be distributions of... A) interest, dividends, and capital gains. B) interest and dividends only. C) dividends only. D) capital gains only. E) interest only.

A) interest, dividends, and capital gains. Owning shares of a mutual fund means owning shares in a pool of assets. The returns of the fund are the returns of those assets: interest, dividends, or gains (losses).

A blue chip stock is most likely a... A) large cap stock. B) small cap stock. C) macro cap stock. D) mid cap stock. E) micro cap stock.

A) large cap stock. Blue chip: Stock of a stable, well-established, large cap company

An asset bubble is least likely accompanied by... A) less market participation. B) lower tax rates. C) lower interest rates. D) less use of leverage. E) less regulation.

A) less market participation. Bubbles are accompanied by lower interest rates, increased use of debt financing, new technology, and a decrease in government regulation or oversight. Increased market participation, especially by speculators, usually accompanies an asset bubble.

If you want to invest more than you have in your account, you would use a... A) margin account. B) discretionary account. C) cash account. D) custodial account. E) execution-only account.

A) margin account. With a margin account, you may trade in amounts exceeding the cash available in the account, in effect borrowing from your broker to complete the financing of the trade.

Financial engineering is the innovation of new financial instruments using... A) mathematical pricing models. B) rational behavior. C) hedging and speculation. D) efficient markets. E) arbitrage.

A) mathematical pricing models. The last 30 years has seen an explosion in financial engineering, the innovation of new financial instruments through mathematical pricing models. This explosion has coincided with the ever-expanding powers of the computer, allowing professional investors to run the millions of calculations involved in sophisticated pricing models.

Unless you have a large asset base and a well-diversified portfolio, it is most appropriate for you to invest in... A) residential property. B) shopping malls. C) commercial property. D) undeveloped land. E) mortgage-backed securities.

A) residential property. Other direct real estate investments include commercial property, or property exclusively for rent, and undeveloped land. Developers buy property or land and seek to profit from quickly improving and reselling it. Both are more speculative investments, especially if purchased with debt financing. They may also prove to be illiquid and to concentrate assets, making them inappropriate investments for investors without a large and diversified portfolio. Mortgage-backed securities are generally too high risk for an individual investor without a large and diversified asset base.

An example of dollar-cost averaging is when you invest in a(n)... A) retirement plan through regular payroll deductions. B) variable annuity. C) exchange-traded fund. D) retirement plan with sporadic contributions. E) index fund.

A) retirement plan through regular payroll deductions. An investor uses dollar cost averaging when regular payroll deductions are made to fund defined contribution retirement plans, such as a 401k or a 403b. The same amount is contributed to the plan in regular intervals and is typically used to purchase the same set of specified assets.

Risk tolerance is not defined by an investor's... A) return objective. B) personality. C) experience. D) knowledge. E) asset base.

A) return objective. Your risk tolerance is your ability and willingness to assume risk. Your ability to assume risk is based on your asset base, your time horizon, and your liquidity needs. In other words, your ability to take investment risks is limited by how much you have to invest, how long you have to invest it, and your need for your portfolio to provide cash-for use rather than reinvestment-in the meantime.Your willingness to take risk is shaped by your "personality," your experiences, and your knowledge and education. Attitudes are shaped by life experiences, and attitudes toward risk are no different.

All else equal, a bond has less risk for the investor if it is... A) senior debt. B) convertible. C) a debenture. D) subordinated debt. E) callable.

A) senior debt. When a bond is callable, convertible, a debenture (unsecured), or subordinate it is more risky for the bondholder. When the bond is senior debt, it is less risky.

Over your career, you can expect to change careers... A) several times, on average. B) never. C) as often as possible. D) once, on average. E) twice on average.

A) several times, on average. A person starting out in the world of work today can expect to change careers—not just jobs—an average of several times before retiring.

At the time of the initial public offering, shares are... A) traded in a primary market. B) a form of direct investment. C) unauthorized. D) unregulated. E) traded in a secondary market.

A) traded in a primary market. Those authorized shares are then issued through an initial public offering, or IPO. At that point the company goes public. The IPO is a primary market transaction that occurs when the stock is initially sold and the proceeds go to the company issuing the stock.

A REIT is a way to correct for real estate's relatively high... A) transaction costs. B) price volatility. C) diversification. D) yield to maturity. E) liquidity.

A) transaction costs. An equity REIT invests in property, while a mortgage REIT provides real estate financing. A hybrid REIT does both. REITs do for real estate what mutual funds do for other assets. They provide investors with a way to invest with more liquidity and diversity and with comparatively lower transaction costs. Direct investment in real estate has low liquidity and diversification. Real estate price volatility can be found in direct investment or in REITs.

Investment risk is measured by the investment's... A) volatility. B) actual return. C) liquidity. D) returns. E) expected return.

A) volatility. Risk is measured by the amount of volatility, that is, the difference between actual returns and average (expected) returns. This difference is calculated as the standard deviation. Returns with a large standard deviation (showing the greatest variance from the average) have higher volatility and are the riskier investments.

If you buy a bond and keep it until maturity, your return is measured by the bond's... A) yield to maturity. B) rating. C) current yield. D) face value. E) coupons.

A) yield to maturity. The yield to maturity (YTM) is a measure of your return if you bought the bond and held it until maturity, waiting to claim the face value.

To change careers in mid-life, you would most likely research... A) your school's career development office. B) "headhunters." C) career fairs. D) employment websites. E) government websites.

B) "headhunters." In mid-career, you are likely to have an industry-specific set of skills and knowledge, and are more likely to work with a "headhunter" who has expertise in employment in that particular industry. The other venues listed are more general.

A primary source of information on company performance is the company's... A) 10-K only. B) 10-K and annual report. C) tax return only. D) annual report only. E) 10-K and tax return.

B) 10-K and annual report. The 10-K and the 10-Q can give you a good sense of what and how the company has been doing or planning for the future. Similar corporate information may be found in the company's annual report, sent to shareholders and also available on the company's Web site.An annual report is a narrative of how the company is doing. It includes financial statements, dated at least two years back so that you can see the company's progress. It also includes a discussion, presented by the company's management, of the company's strategic plans, competitive environment, industry outlook, particular risk exposures, and so on. You can get a good sense of how well positioned the company is going forward from an annual report or 10-K.

If you buy an investment for $10,000 and 20 years later it is worth $20,000, your expected return for the next year is closest to... A) 20.0%. B) 3.5%. C) 2.5%. D) 5.0%. E) 100.0%.

B) 3.5%. If the information you have shows more than one year's results, you can calculate the annual return using what you learned in Chapter 4 about the relationships of time and value. For example, if an investment was worth $10,000 five years ago and is worth $14,026 today, then 10,000 ◊ (1+ r)^5 = 14,026. Solving for r-the annual rate of return, assuming you have not taken the returns out in the meantime-and using a calculator, a computer application, or doing the math, you get 7%. So the $10,000 investment must have earned at a rate of 7% per year to be worth $14,026 five years later, other factors being equal. In this example, 10,000 ◊ (1 + r)^20 = 20,000, so r = 3.5%.

Defining return objectives is the process of quantifying the annual return needed to... A) increase your wealth. B) achieve your goals. C) change your constraints. D) increase your asset base. E) increase your risk tolerance.

B) achieve your goals. Defining return objectives is the process of quantifying the required annual return (e.g., 5%, 10%) necessary to meet your investment goals.

You would use a stop-buy order when you are... A) selling a long position hoping to buy at a lower price. B) borrowing and selling, hoping to buy back at a lower price. C) buying and returning borrowed stock at a higher price. D) selling stock with a limit order. E) buying a long position hoping to sell at a higher price.

B) borrowing and selling, hoping to buy back at a lower price. You can use a stop-buy order to buy a stock at a certain price (above the current price) if you have "shorted" a security and want to limit your loss if its value rises.

Interest rates are an economic indicator because debt finances much of the following EXCEPT... A) consumer living expenses. B) business operating expenses. C) consumer investment. D) foreign direct investment. E) business investment.

B) business operating expenses. In addition, interest rates are another financial market indicator. Interest rates are tracked intently because so much capital investment, consumer investment (for houses, cars, education), and even daily consumption relies on debt financing.

Over the last few centuries, financial crises seem to occur, on average, every... A) five years. B) decade. C) year. D) generation. E) century.

B) decade. Between 1618 and 1998, there were thirty-eight financial crises globally, or one about every ten years.

The relationship between risk and return is best described as... A) inverse. B) direct. C) elliptical. D) indirect. E) undefined.

B) direct. The link between risk and return is reciprocal, that is, direct.

The internal growth rate indicates the fastest the company can grow given expectations of... A) leverage only. B) earnings, leverage, and dividends. C) dividends only. D) earnings and leverage only. E) earnings only.

B) earnings, leverage, and dividends. Given how good the company is at taking capital and turning it into assets and using those assets to create earnings, the internal growth rate looks at how fast the company can grow without any new borrowing or new shares issued.

If you expect the real estate financing sector to expand, you would most likely invest in... A) a hybrid REIT only. B) either a hybrid or a mortgage REIT. C) a mortgage REIT only. D) an equity REIT only. E) either an equity or a mortgage REIT.

B) either a hybrid or a mortgage REIT. An equity REIT invests in property, while a mortgage REIT provides real estate financing. A hybrid REIT does both.

A stock's value is based on the corporation's abilities to create all of the following EXCEPT... A) competitive advantage. B) employment. C) products. D) growth. E) profit.

B) employment. Corporations exist to make profit for the owners. The better a corporation is at doing that, the more valuable it is, and the more valuable are its shares. A company also needs to increase earnings, or grow, because the global economy is competitive. A corporation's future value depends on its ability to create and grow earnings.

An individual who wants to hedge a commodities risk in the least risky way is likely to do so by investing in... A) collectibles. B) exchange-traded funds. C) bonds of a company that produces the commodity. D) derivatives. E) stock of a company that produces the commodity.

B) exchange-traded funds. As with stocks, bonds, and real estate, the most popular way for individual investors to invest in any commodity—including precious metals—is through open-end mutual funds or exchange traded funds (ETF). The fund may invest in a variety of contracts, diversifying its holdings of the commodity. It has professional managers who understand the pricing of such contracts and can research the market volatility and the global economy. Using a fund as a way of investing in commodities thus provides both diversification and expertise. It can also give you more liquidity as fund shares can be quickly traded into the market. Investing in any one company does not diversify investment.

Expected return is best described as an investment's... A) change in value for the last period. B) future return based on an average of actual returns. C) future return based on the last period's actual returns. D) income earned for the last period. E) both income and change in value for the last period.

B) future return based on an average of actual returns. If the time period you are looking at is long enough, you can reasonably assume that an investment's average return over time is the return you can expect in the next year. Answers a., b., and d. describe actual return factors; answer e. describes only the last period's actual return.

Compared to investing in the underlying asset, investing in futures involves... A) greater transaction costs. B) greater time sensitivity. C) less risk. D) greater investment. E) less liquidity.

B) greater time sensitivity. Future contracts are time-sensitive contracts created with an expiration date.

An upward sloping yield curve indicates that bond yields are expected to... A) stay the same. B) increase. C) be the same as Treasury bond rates. D) decrease. E) be unpredictable.

B) increase. Usually, the yield curve is upward-sloping—that is, long-term rates are higher than short-term rates. Long-term rates indicate expected future rates. If the economy is expanding, future interest rates are expected to be higher than current interest rates, because capital is expected to be more productive in the future.

Gold may be used as a hedge against... A) reinvestment risk. B) inflation risk. C) sector risk. D) default risk. E) political risk.

B) inflation risk. In times of inflation or deflation, investors worry that the value or purchasing power of currency will change. They may invest in gold or silver as a more stable store of wealth than the currency that is supposed to represent the metal. In other words, if investors lose faith in the currency that represents the gold, they may trade their money for the gold.

For the amateur investor, the existence of inside information makes market timing... A) less effective when combined with technical analysis. B) less effective. C) more effective when combined with technical analysis. D) doesn't have any effect. E) more effective.

B) less effective. To time events precisely, you would constantly have to watch for new information, and even then, the information from different sources may be contradictory or there may be information available to others that you do not have. Taken together, your chances of profitably timing a bubble or crash are fairly slim.

Earnings expectations are least dependent on factors that are... A) sector-specific. B) macroeconomic. C) investor-specific. D) industry-specific. E) company-specific.

C) investor-specific. A corporation's future value depends on its ability to create and grow earnings.That ability depends on many factors. Some factors are company-specific, some are specific to the industry or sector, and some are macroeconomic forces.

If you expect an "up" market and your goal is to increase returns above the market benchmarks, you would most likely use a(n)... A) index fund. B) leveraged fund. C) inverse fund. D) lifestyle fund. E) fund of funds.

B) leveraged fund. Funds that invest both investors' money and money that the fund borrows to augment the investable assets and thus potential returns are called leveraged funds. Because they use borrowing, leveraged funds are riskier (more risk, more return) than funds that do not use leverage.

An indirect investor may be a... A) general partner. B) limited partner. C) investor in mortgage-backed securities. D) investor in a REIT. E) property manager.

B) limited partner. Investors who want to add a real estate investment to their portfolio more often make an indirect investment. That is, they buy shares in an entity or group that owns and manages property. For example, they may become limited partners in a real estate syndicate.

Day-trading tries to maximize return through... A) dollar cost averaging. B) market timing. C) direct investment. D) dividend reinvestment. E) indexing.

B) market timing. Short-term stock strategies like day-trading rely on taking advantage of market timing to earn above-average returns. Day trading is a very short-term strategy of taking and closing a position in a day or two.

To minimize your transaction costs of investing in mutual funds, you would most likely use a fund that has... A) management fees. B) no load. C) front-end load. D) a 12-b. E) back-end load.

B) no load. A no-load fund, does not charge a sales commission, because shares may be purchased directly from the fund or through a discount broker. Thus, a no-load fund minimizes the transaction costs of investing in mutual funds.

Which of the following strategies would not diversify your portfolio?Investing in stocks... A) of cyclical and counter-cyclical industries. B) of tire companies and automakers. C) of large cap and micro cap companies. D) and derivatives of agricultural producers. E) of food packagers and defense contractors.

B) of tire companies and automakers. To truly diversify, you need to invest in assets that are vulnerable to different kinds of risk. For example, you may want to diversify - between cyclical and countercyclical investments, reducing economic risk; - among different sectors of the economy, reducing industry risks; - among different kinds of investments, reducing asset class risk; - among different kinds of firms, reducing company risks. Tire companies and automakers would both be exposed to risks in the auto market and exposed to the same kinds of economic factors.

If share value is not determined by the market equilibrium price, a mutual fund is most likely a(n)... A) closed-end fund. B) open-end fund. C) index fund. D) primary market fund. E) exchange-traded fund.

B) open-end fund. Most mutual funds are open-end funds in which investors buy shares directly from the fund and redeem or sell shares back to the fund. The price of a share is its net asset value (NAV) or the market value of each share as determined by the fund's assets, liabilities and the number of shares that exist. Closed-end funds are funds for which a limited number of shares are issued. Once all shares have been issued, the fund is "closed" so a new investor can only buy shares from an existing investor. Since the shares are traded on an exchange, the limited supply of shares and the demand for them in that market directly determines the value of the shares for a closed-end fund. Exchange-traded funds (ETFs) are structured like closed-end funds. Index funds may be open- or closed-end funds.

Investment professionals may behave unethically because... A) the stakes are too small to attract attention. B) overconfidence stimulates repeated behavior. C) professional organizations provide no ethical guidelines. D) complexity increases the probability of getting caught. E) employers encourage giving the client priority.

B) overconfidence stimulates repeated behavior. Financial markets, perhaps more than most, seem to seduce otherwise good citizens into unethical or even illegal behavior. There are several reasons: 1. Investing is a complex, volatile, and unpredictable process, such that the complexity of the process lowers the probability of getting caught. 2. The stakes are high enough and the probability of getting caught is low enough so that the benefits can easily seem to outweigh the costs. The benefits can even blind participants to the costs of getting caught. 3. The complexity of the situation may allow some initial success, and the unethical investor or broker becomes overconfident, encouraging more unethical behavior. 4. Employers may put their employees under pressure to act in the company's interests rather than clients' interests.

When there is a financial crisis, investors typically demand more... A) regulation only. B) oversight, regulation, and enforcement. C) regulation and enforcement only. D) enforcement only. E) oversight only.

B) oversight, regulation, and enforcement. Government regulation of capital markets has long been a contentious issue in the United States. During periods of expansion and rising asset prices, there is less call for regulation and enforcement. Clients and investment agents may have fewer complaints because of investment gains and increasing earnings. When a bubble bursts or there is a true financial crisis, however, then investors demand protections and enforcement.

A company goes public in order to... A) provide transparency. B) raise capital. C) require more regulation. D) limit operations. E) change corporate culture.

B) raise capital. Companies go public to raise large amounts of capital to expand products, operations, markets, or to improve or create competitive advantages.

When a state needs capital to finance the construction of a football stadium on its state college campus, it most likely issues a... A) subordinated bond. B) revenue bond. C) general obligation bond. D) mortgage bond. E) debenture.

B) revenue bond. State and municipal governments issue revenue bonds or general obligation bonds. A revenue bond is repaid out of the revenue generated by the project that the debt is financing. For example, toll revenue may secure a debt that finances a highway. A general obligation bond is backed by the state or municipal government, just as a corporate debenture is backed by the corporation. A mortgage bond is secured by a specific asset, which wouldn't make sense for a government issue, and a subordinated bond is less senior than other bonds from the same corporate issuer.

Using a passive portfolio strategy, you omit the step(s) of... A) asset allocation and capital allocation. B) security selection only. C) capital allocation only. D) capital allocation and security selection. E) asset allocation only.

B) security selection only. This strategy of bypassing the security selection decision is called passive management.

Passively managed index funds most likely provide investors with maximum... A) capital allocation. B) security selection. C) transaction costs. D) asset allocation. E) diversification.

B) security selection. Passively managed index funds are designed to mirror the performance of a specific index constructed to be representative of an asset class. Because they mimic an established set of securities, they provide security selection. The index fund does not necessarily provide maximum diversification; for example, if it is limited to a sector index. Likewise, if limited to an asset class, it will not provide asset allocation. It cannot provide capital allocation, which is specific to an investor. Index funds are designed to minimize transaction costs.

If you are fired, your job loss is most likely related to... A) industry competition. B) your performance. C) economic cycles. D) company financing. E) product performance.

B) your performance. When you are fired, the employer permanently terminates your employment based on your performance.

A job offer least likely includes details about... A) benefits. B) your supervisor's personal life. C) details about opportunities for advancement. D) a job description. E) salary.

B) your supervisor's personal life. A job offer should include details about the work you will be performing, the compensation, and the opportunity to advance from there.

A defensive stock is a stock that is... A) overvalued. B) undervalued. C) less volatile than the market. D) overlooked. E) more volatile than the market.

C) less volatile than the market. Less volatility than the overall market and less sensitive to market changes

If you are worried about inflation, you are most likely to invest in... A) Treasury stock. B) Treasury bills. C) TIPS. D) Treasury bonds. E) Treasury notes.

C) TIPS. The U.S. government issues Treasury bills for short-term borrowing, Treasury notes for intermediate-term borrowing (longer than one year but less than ten years), and Treasury bonds for long-term borrowing for more than ten years. The federal government also issues Treasury Inflation-Protected Securities (TIPS). TIPS pay a fixed coupon, but the principal adjusts with inflation. At maturity, you are repaid either the original principal or the inflation-adjusted principal, whichever is greater.

Which of the following is most likely be a temporary, involuntary job loss? A) Your position is outsourced. B) Your industry faces obsolescence. C) You get laid off D) You get fired E) Your position is eliminated when your company is acquired.

C) You get laid off Involuntary job loss may be due to your employer's decision, an accident or disability, or unexpected circumstances, such as the acquisition, merger, downsizing, or closing of the company you work for. Your employer also may decide to lay you off or fire you. A layoff implies a temporary job loss due to a circumstance in which your employer needs or can afford less labor.

Life cycle investing is a strategy to address... A) liquidity needs. B) capital allocation. C) asset allocation. D) bond selection. E) time horizon.

C) asset allocation. Bonds most commonly are used to reduce portfolio risk. Typically, as your risk tolerance decreases with age, you will include more bonds in your portfolio, shifting its weight from stocks-with more growth potential-to bonds, with more income and less risk. This is an issue of asset allocation.

Financial crises most likely exhibit investor biases that are... A) random. B) diverse. C) both rational and irrational. D) irrational only. E) rational only.

C) both rational and irrational. When an asset bubble builds, often the asset that is the object of speculation is a resource for or an application of a new technology or an expansion into new territory that may be critical to a new emphasis in the economy. In other words, the assets that became the objects of bubbles tend to be the drivers of a "new economy" at the time and thus are rational investments rather than as speculation. As asset values rise—even if only on the strength of investor beliefs—speculators, financed by an expansion of credit, augment the market and drive up asset prices even further. Many irrational financial behaviors—overconfidence, anchoring, availability bias, representativeness—are in play, until finally the market is shocked into reversal by a specific event or simply sinks under its own weight.

Long-term stock strategies are designed to minimize... A) both transaction costs and liquidity. B) transaction costs only. C) both transaction costs and volatility. D) the volatility of market timing only. E) the liquidity of market timing only.

C) both transaction costs and volatility. Long-term strategies favor choosing a long-term approach to avoid the volatility and risk of market timing. Minimizing transaction costs is always a strategic choice.

You know that in five years, you will get a $5,000,000 distribution from a trust. On your investment policy statement, that helps define your... A) return objective only. B) constraints and risk tolerance only. C) constraints, risk tolerance, and return objective. D) risk tolerance only. E) constraints only.

C) constraints, risk tolerance, and return objective. Your ability to assume risk is based on your asset base, your time horizon, and your liquidity needsÖ Constraints include the following: - Liquidity needs - Time available - Tax obligations - Legal requirements - Unique circumstances This distribution would affect your liquidity needs (constraints). It would also affect your risk tolerance and return objective because both are related to your asset base.

A job inquiry should typically include a... A) photo. B) compensation request. C) cover letter and resume. D) information on marital status. E) social media invitation.

C) cover letter and resume. To get a job you will have to convince someone who does not know you that you are worth paying for. You have an opportunity to prove that in your cover letter and résumé.

An initial public offering does not involve the company's... A) board of directors. B) original shareholders. C) creditors. D) investment bank. E) management.

C) creditors. The private corporation's board of directors, shareholders elected by the shareholders, must authorize the number of shares that can be issued. Since issuing shares means opening up the company to more owners, or sharing it more, only the existing owners have the authority to do so. A company hires an investment bank to manage its initial public offering of stock. For efficiency, the bank usually sells the IPO stock to institutional investors. Usually, the original owners of the corporation keep large amounts of stock as well.

A financial crisis is typically preceded by an economic... A) recession encouraged by political changes. B) expansion encouraged by rising interest rates. C) expansion encouraged by new technology. D) recession encouraged by rising interest rates. E) expansion encouraged by resource shortages.

C) expansion encouraged by new technology. Patterns of events that seem to precipitate and follow the crises are shown in Figure 13.9. First a period of economic expansion is sparked by a new technology, the discovery of a new resource, or a change in political balances. This leads to increased production, markets, wealth, consumption, and investment, as well as increased credit and lower interest rates. People are looking for ways to invest their newfound wealth. This leads to an asset bubble, a rapid increase in the price of some asset: bonds, stocks, real estate, or commodities such as cotton, gold, oil, or tulip bulbs that seems to be positioned to prosper from this particular expansion.

International investments are attractive most likely because of their excessive... A) regulation and market risk in a developed economy. B) market risk in a developed economy. C) growth potential in an emerging economy. D) regulation. E) regulation and growth potential in an emerging economy.

C) growth potential in an emerging economy. Often, foreign investments seem promising in part because economic growth may be higher in an emerging economy, and often, they are.

Companies with similar market capitalization tend to have similar... A) industry profiles. B) competitive advantages. C) growth potential. D) amounts of leverage. E) size profits.

C) growth potential. A company's size is an indicator of its earnings and growth potential.

When bonds are included with stocks in a portfolio, the effect on the overall portfolio is to... A) decrease diversification and decrease growth potential. B) increase diversification and increase growth potential. C) increase diversification and decrease growth potential. D) decrease diversification and increase growth potential. E) not change diversification and growth potential.

C) increase diversification and decrease growth potential. Bonds provide more secure income for an investment portfolio, while stocks provide more growth potential. When you include bonds in your portfolio, you do so to have more income and less risk than you would have with just stocks. Bonds also diversify the portfolio. Because debt is so fundamentally different from equity, debt markets and equity markets respond differently to changing economic conditions.

A financial crisis is least likely a demonstration of market... A) volatility. B) cyclicality. C) inefficiency. D) accessibility. E) efficiency.

C) inefficiency. Economists may argue that this is what you should expect, that markets expand and contract cyclically as a matter of course. In this view, a crash is nothing more than the correction for a bubble—market efficiency at work.

Expected return differs from actual return in that it is calculated based on... A) investment income and change in value. B) investment income. C) investment performance over a long term. D) change in investment value. E) investment performance for one period.

C) investment performance over a long term. Estimating the expected return is complicated because many factors (i.e. current economic conditions, industry conditions, and market conditions) may affect that estimate.For investments with a long history, a strong indicator of future performance may be past performance.

The P/E ratio is an indicator of a stock's... A) diversification value. B) book value. C) market value. D) enterprise value. E) fundamental value.

C) market value. The P/E ratio indicates a stock's relative market value. The larger the P/E ratio, the more expensive the stock is and the more you have to invest to get one dollar's worth of earnings in return.

Assets that become the focus of asset bubbles are often useful for expanding... A) markets and productivity only. B) markets only. C) markets, productivity, and governments. D) productivity only. E) governments only.

C) markets, productivity, and governments. Often the asset that was the object of speculation was a resource for or an application of a new technology or an expansion into new territory that may have been critical to a new emphasis in the economy. In other words, the assets that became the objects of bubbles tended to be the drivers of a "new economy" at the time and thus were rationalized as investments rather than as speculation.

Inflation most likely causes a decrease in bond... A) ratings. B) spreads. C) prices. D) indexes. E) yields.

C) prices. If there is inflation, the yield to maturity goes up to compensate investors. This in turn lowers the price of bonds.

It is important to evaluate a news source for all of the following EXCEPT its... A) verifiable facts. B) reliability. C) reporter's age and experience. D) subjectivity. E) credibility.

C) reporter's age and experience. As you survey these news sources, be aware of features that might lead you to trust an online source of information. The following are some questions to help you evaluate the credibility of a Web site: 1. Can the content be corroborated? (Check some of the facts.) 2. Is the site recommended by a content expert? (Look for a rating or recommendation.) 3. Is the author reputable? (Search on the author's name.) 4. Do you see the site as accurate? (Check with other sources.) 5. Was the information reviewed by peers or editors? (Read the reviews or logs.) 6. Is the author associated with a reputable organization? (Search on the organization.) 7. Is the publisher reputable? (Search on the publisher's name.) 8. Are the authors and sources identified? (Look for source citations or references.) 9. Do you see the site as current? (Check "last updated" or headline date.) 10. Do other Web sites link to this one? (Look for links.) 11. Is the site recommended by a generalist? (Ask a librarian.) 12. Is the site recommended by an independent subject area guide? (See site referrals.) 13. Does the domain include a trademark name? (Look for a trademark in the URL.) 14. Is the site's bias clear? (Read the "About" section Look for a statement of purpose. Read the author's profile.) 15. Does the site have a professional look? (Look for a clean design and error-free writing.)

Individual investors use mutual funds to accomplish... A) an active investment strategy. B) a passive investment strategy. C) security selection. D) asset allocation. E) capital allocation.

C) security selection. A mutual fund provides an investor with cheaper and simpler security selection, requiring only one transaction to own a portfolio (the mutual fund). A fund serves as a convenient way for an investor to have a portfolio of investments in just about any investable asset. The fund may be either passively or actively managed.

Legislation regulates all of the following aspects of employment EXCEPT... A) firing. B) whistle blowing. C) severance. D) hiring. E) compensation.

C) severance. Severance is compensation and benefits offered by your employer when you are fired. Your employer is not obligated to offer any severance.Major federal legislation that addresses these issues is outlined in Figure 18.11.These laws cover all aspects of employment: hiring, negotiation, working conditions, compensation, benefits, and terminationÖ they have clauses that prohibit retaliation against employees who invoke those laws or enlist government assistance to enforce them. The laws also protect whistleblowers who report employer infractions to government authorities.

When gas pumps became "self-serve," it eliminated the job market for "pump jockeys." This is an example of a job market affected by changes in... A) demographics. B) consumer demand. C) technology. D) wage levels. E) laws and regulations.

C) technology. Macroeconomic factors like a change in technology can open up new fields of employment and make others obsolete.

Ratings agencies help correct the bond markets' lack of... A) regulatory oversight. B) volatility. C) transparency. D) arbitrage opportunities. E) liquidity

C) transparency. The corporate bond markets are less transparent to the individual investor.To provide guidance, rating agencies provide bond ratings; that is, they "grade" individual bond issues based on the likelihood of default and thus the risk to the investor.

To minimize tax obligations, you would most likely invest in a mutual fund with... A) no load. B) low returns. C) a low expense ratio. D) a low turnover ratio. E) low management fees.

D) a low turnover ratio. Unless you have invested in a tax-exempt savings plan such as an Individual Retirement Account (IRA) or a 401k, interest and dividend distributions are taxable as personal income, as are capital gains, including capital gains distributions. A higher turnover ratio may mean a higher tax expense for capital gains distributions.

Brokerage fees for an execution-only account would include: A) advisory fees only. B) management fees only. C) advisory fees and commissions on trades only. D) commissions on trades only. E) advisory fees, management fees, and commissions on trades.

D) commissions on trades only. Execution-only service means that the broker's only role is to execute trades per the investor's decisions, therefore, there are no management or advisory fees.

Accepting a job offer least likely includes examining your... A) compensation. B) contract. C) needs. D) competition. E) conscience.

D) competition. Know what your total compensation will be and whether it is reasonable for the job, industry, and current job market.Realistically compare the job offer to your needs. Once you have been offered a job, you need not consider the competition.

Arbitrage increases market efficiency by... A) correcting arbitrageur mispricings. B) decreasing liquidity. C) decreasing risk. D) correcting market mispricings. E) decreasing returns.

D) correcting market mispricings. Arbitrage is the process of creating investment gains from market mispricings (arbitrage opportunities), that is, buying when an asset seems underpriced and selling when an asset seems overpriced. The knowledgeable investors who carry out market corrections through their investment decisions are called arbitrageurs.

If you rely on your stock investments for regular income, your best strategy is to invest in... A) preferred stock only. B) both common and cumulative preferred stock. C) both common and preferred stock. D) cumulative preferred stock only. E) common stock only.

D) cumulative preferred stock only. Preferred dividends are more of an obligation than common dividends. Most preferred shares are issued with a fixed dividend as cumulative preferred shares. This means that if the company does not create enough profit to pay its preferred dividends, those dividends ultimately must be paid before any common stock dividend.

American depository receipts allow American investors to invest in foreign companies with less... A) industry risk. B) reliable information. C) company risk. D) currency risk. E) regulation.

D) currency risk. ADRs lower transaction costs for U.S. investors investing in foreign corporations. Because they are denominated in U.S. dollars, they lower exchange rate or currency risk for U.S. investors. They also lower your usual risks with investing overseas, such as lack of information and too much or too little regulatory oversight.In return for marketing their shares in the lucrative U.S. market, foreign companies must provide U.S. banks with detailed financial reports. This puts available foreign corporate information on par with that of U.S. companies. Because they are issued and sold in the U.S. on U.S. exchanges, ADRs fall under the regulatory control of the Securities and Exchange Commission (SEC) and other federal and state regulatory agencies, which also lowers your risk.

The risks of foreign investment are decreased by each of the following EXCEPT... A) market liquidity. B) economic diversity. C) efficient pricing. D) currency volatility. E) political stability.

D) currency volatility. In the United States, a substantial volume of trade keeps markets liquid, except in relatively rare times of crisis. This may not be true on some foreign exchanges. Market risk also affects pricing. Market liquidity and the volume of trade helps the market to function more efficiently in the pricing of assets, so you are more likely to get a favorable price when trading. Foreign investments are often used to diversify domestic investments just because foreign economies are different. They may be in different business cycles or in different stages of development. While the United States has a long-established, developed market economy, other countries may have emerging market economies with less capitalization and less experience in market-driven economic patterns. Other economies also have different strengths and weaknesses, sources of growth and vulnerabilities. The U.S. economy is fairly well-diversified, whereas another economy may be more dependent on fewer industries or on commodities or natural resources whose prices are volatile. Prospects for economic growth may differ based on health care and education, tax policies, and trade policies. You want to be sure that your investment is in an economy that can nurture or at least accommodate growth. Perhaps the greatest risk in international investing is currency risk, risk to the value of the foreign currency.

By comparing bonds with similar... A) reinvestment risk, the yield curve predicts default risk. B) interest rate risk, the yield curve predicts default risk. C) inflation risk, the yield curve predicts reinvestment risk. D) default risk, the yield curve predicts interest rate risk. E) inflation risk, the yield curve predicts default risk.

D) default risk, the yield curve predicts interest rate risk. The yield curve is a graph of U.S. Treasury securities compared in terms of the yields for bonds of different maturities. U.S. Treasury securities are used because the U.S. government is considered to have no default risk, so that the yields on its bills and bonds reflect only interest rate, reinvestment, and inflation risks—all of which are reflected in expected, future interest rates.

Market efficiency assumes that investor biases are... A) harmless. B) random. C) nonexistent. D) diverse. E) predictable.

D) diverse. The efficient market theory relies on the idea that investors behave rationally, and that even when they don't, their numbers are so great and their behavioral biases are so diverse that their irrational behaviors will have little overall effect on the market. In effect, investors' anomalous behaviors will cancel each other out. Thus, diversification (of participants) lowers risk (to the market).

If you rely on your stock investments for regular income, you would be most interested in comparing their... A) P/B ratio. B) P/E ratio. C) earnings per share. D) dividend yields. E) earnings yields.

D) dividend yields. Dividend yield is a measure of the dividend's role as a return on investment: for every dollar invested in the stock, how much is returned as a dividend, or actual cash payback? An investor concerned about cash flow returns can compare companies' dividend yields.

Earnings per share allows you to compare companies with different... A) earnings. B) dividend yields. C) market capitalization. D) earnings and number of shares outstanding. E) growth potential.

D) earnings and number of shares outstanding. EPS allows you to make a direct comparison to other stocks by putting the earnings on a per-share basis, creating a common denominator.

Asset or securities indexes are used to measure all of the following EXCEPT: A) volume. B) momentum. C) direction. D) earnings potential. E) nominal value.

D) earnings potential. The health of financial markets is gauged by the values of various securities indexes that show the growth or decline of prices in various markets. The indexes are used to gauge the movement, direction, and rate of change as well as nominal value.

When a broker-dealer trades for its own account ahead of the clients' accounts, that is known as... A) "pump and dump." B) fraud. C) insider trading. D) front-running. E) market manipulation.

D) front-running. The practice of taking advantage of the client by not putting the client first is called front-running. According to professional ethics, a broker-dealer should be putting her client's interest—and order—ahead of her own.

The purpose of a resume is to convince the reader to... A) support your goals. B) give you a job. C) hire another candidate. D) give you an interview. E) call your references.

D) give you an interview. A good résumé provides enough information to show that you are willing and able to contribute to your employer's success; that it is worth it to at least to talk to you in an interview.

If you rely on your bond returns for regular income, you are least concerned with... A) bond ratings. B) inflation risk. C) reinvestment risk. D) interest rate risk. E) default risk.

D) interest rate risk. Interest rate risk is the risk that a change in prevailing interest rates will change bond value—that interest rates will rise and the market value of the bond will fall. (If interest rates fell, the bond value would increase, which the investor would not see as a risk.) If you rely on bonds for income, you are more concerned with the coupon rate and less with the market value. Also, a bond with a larger coupon provides more liquidity, over the term of the bond, and less exposure to risk.

There is a direct relationship between... A) fixed-rate bond yields to maturity and the prime rate. B) bond yields to maturity and Treasury bill yields. C) corporate bond prices and Treasury bill yields. D) interest rates and bond yields to maturity. E) subordination and Treasury bill yields.

D) interest rates and bond yields to maturity. The yield to maturity is directly related to interest rates in general, so as interest rates increase, bond yields increase, and bond prices fall. As interest rates fall, bond yields fall, and bond prices increase.

Given labor market changes, it is best to choose a career that allows you to satisfy your... A) expected income needs only. B) current income needs only. C) lifestyle choices and current income needs only. D) lifestyle choices and current and future income needs. E) lifestyle choices only.

D) lifestyle choices and current and future income needs. Lifestyle choices affect the amount of income you will need to achieve and maintain your lifestyle and the amount of time you will spend earning income. Lifestyle choices thus affect your career path and job choices in key ways. Sometimes you may choose to sacrifice your lifestyle preferences for your ambitions, and sometimes you may sacrifice your ambitions for your preferences. It's really a matter of figuring out what matters at the time, while keeping in mind the effect of this decision on the next one.

When you decide to quit your banking job in Manhattan to be a ski lift operator (a " ski bum &rdquo), you are making a decision based on... A) income needs. B) skills and abilities. C) economic cycles. D) lifestyle choices. E) risk aversion.

D) lifestyle choices. Lifestyle choices affect the amount of income you will need to achieve and maintain your lifestyle and the amount of time you will spend earning income. Lifestyle choices thus affect your career path and job choices in key ways.

Secondary markets lower risk by increasing... A) earnings potential. B) transaction costs. C) inside information. D) liquidity. E) volatility.

D) liquidity. The existence of secondary markets makes the stock a liquid or tradable asset, which reduces its risk for both the issuing company and the investor buying it.

To improve your search for job opportunities, you would least likely research... A) college alumni journals. B) company websites. C) trade magazines. D) news magazines. E) government websites.

D) news magazines. Jobs may be advertised in: - trade magazines, - professional organizations or their journals, - career fairs, - employment agencies, - employment Web sites, - government Web sites, - company Web sites, - your school's career development office.

A professional broker is expected to... A) not explain the reasoning behind advice. B) wait for clients to ask about investment results. C) suggest superior analytical skills. D) not pressure clients to make certain decisions. E) be secretive about analytical methods.

D) not pressure clients to make certain decisions. An adviser or broker should: - be forthcoming about how the investment analysis was done and the changes or events could affect the outcome; - not present himself or herself as a "guru" with a special or secret method of divining investment opportunities; clearly explain the logic and grounding for all judgments and advice; - not try to pressure you into making an investment decision or use threats or scare tactics to influence you; - communicate regularly and clearly with you about your portfolio performance and any market or economic changes that may affect its performance.

When preparing your resume, it's a good idea to... A) add personal details. B) exaggerate. C) use lots of adjectives and adverbs. D) proofread. E) focus on your personal goals.

D) proofread. Proofread your résumé and have someone else proof it as well. Any error indicates not just that you made an error, but that you are sloppy, lazy, or willing to let your work go public with errors.

Information about a mutual fund's historic returns and costs must be provided in its... A) 10-K. B) audited financials. C) online advertising. D) prospectus. E) annual report.

D) prospectus. All mutual fund companies must offer a prospectus, a published statement detailing the fund's assets, liabilities, management personnel, and performance record.

Loss aversion causes you to make mistakes in determining your... A) time horizon. B) return objective. C) return expectations. D) risk tolerance. E) liquidity needs.

D) risk tolerance. You may be more willing to take risk to avoid a loss if you are loss averse, for example, or you may simply become unwilling to assume risk, depending on how you define the context.

Micro factors that least likely affect career decisions include... A) learned skills. B) productivity expectations. C) consumption preferences. D) undeveloped talents. E) Industry unemployment rates.

D) undeveloped talents. Specific micro factors which weigh on our career decisions include abilities (talents), skills, knowledge (learned skills), and lifestyle choices (consumption preferences). Undeveloped talents are least likely to affect career decisions.

Futures contracts are not traded to speculate on the future value of... A) currencies. B) stock indexes. C) interest rates. D) unemployment rates. E) commodities prices.

D) unemployment rates. Futures and forward contracts or forwards are a form of derivatives, the term for any financial instrument whose value is derived from the value of another security. Ö Derivatives such as forwards, futures, and options are used to hedge or protect against an existing risk or to speculate on a future price. Derivatives are traded on assets such as commodities, as well as stock and bond indexes, interest rates, and currencies. However, an economic indicator, such as unemployment, is not an asset and does not have value.

Which of the following would not create investment risk? A) A decrease in industry competition B) A decrease in interest rates C) A freezing of an asset market D) An increase in inflation E) An increase in investors' income

E) An increase in investors' income Starting from the top (the big picture) and working down, there are - economic risks, - industry risks, - company risks, - asset class risks, - market risks.

An advantage to investing in collectibles is most likely... A) liquid markets. B) maintenance costs. C) realizable gains. D) value appreciation. E) efficient pricing.

D) value appreciation. The advantage of unique assets as investments is that you may enjoy collecting and having the items as well as watching their value appreciate. The disadvantages of investing in collectibles are: - high probability of mispricing, as markets are inefficient; - lack of liquidity; - lack of earnings, as there are no dividends or interest; holding costs of the investment.

Which of the following are you entitled to after involuntary job loss? A) Severance pay B) Unemployment insurance C) An explanation for the action D) A good recommendation E) Continuation of health coverage

E) Continuation of health coverage Severance is compensation and benefits offered by your employer when you are fired. Your employer is not obligated to offer any severance. Depending on the reasons for your termination, you may not qualify for unemployment insurance. You must meet eligibility requirements to qualify, and the benefits are limited. However, in most cases, your employer is required under federal law to offer you the opportunity to remain covered under your employee health insurance plan if you assume the cost.

The primary market that functions only as an auction market is the market for... A) both Treasury and corporate bonds. B) corporate stocks only. C) both corporate bonds and stocks. D) corporate bonds only. E) Treasury bonds only.

E) Treasury bonds only. U.S. Treasury bonds are issued to the primary market through auctions. Participants, usually dealers or institutional investors, bid for the bonds, but no one participant is allowed to buy enough shares to monopolize the secondary market. Individuals can also buy Treasuries directly from the U.S. Treasury through its online service, called Treasury Direct.Corporate bonds are traded in over-the-counter transactions through brokers and dealers.

Investment risk is best described as the risk that... A) the investment will not produce income. B) wealth will not increase. C) expected return will not equal actual return. D) the investment will not increase in value. E) actual return will not equal expected return.

E) actual return will not equal expected return. Investment risk is the idea that an investment will not perform as expected, that its actual return will deviate from the expected return.

Market timing can be applied to... A) security selection only. B) capital allocation only. C) capital and asset allocation. D) asset allocation and security selection. E) asset allocation only.

E) asset allocation only. Market timing is an asset allocation strategy.

When a company has worse earnings expectations and better press coverage, its stock will do better than other companies' stocks when there is... A) anchoring. B) framing. C) representativeness. D) overconfidence. E) availability bias.

E) availability bias. Availability bias occurs because investors rely on information to make informed decisions, but not all information is readily available. Investors tend to give more weight to more available information and to discount information that is brought to their attention less often. The stocks of corporations that get good press, for example, may do better than those of less publicized companies, when in reality these "high profile" companies may actually have worse earnings and return potential.

If you anticipate having regular cash flow needs each year for several years, the most appropriate bond investment strategy for you would be to use... A) TIPS. B) immunization. C) cash flow matching. D) bond indexes. E) bond laddering.

E) bond laddering. Cash flow matching can be used when you need different cash flows at different times. When cash flow matching is used to create a steady stream of regular cash flows, it is called bond laddering.

The effectiveness of arbitrage is limited by... A) both transaction costs and market transparency. B) leverage only. C) transaction costs only. D) market transparency only. E) both leverage and transaction costs.

E) both leverage and transaction costs. An investor who sees an arbitrage opportunity would have to act quickly to take advantage of it, because chances are good that someone else will and the advantage will disappear along with the arbitrage opportunity. Acting quickly may involve borrowing if liquid funds are not available to invest. For this reason, transaction costs for arbitrage trades are likely to be higher (because they are likely to include interest), and if the costs are higher than the benefits, the market will not be corrected.

As an individual investor, your agent would be a... A) dealer or broker. B) broker-dealer only. C) dealer only. D) broker only. E) broker or broker-dealer.

E) broker or broker-dealer. As you've read in Chapter 12, a broker is an agent who trades on behalf of clients to fulfill client directives. A dealer is a firm that is trading for its own account. Many firms act as broker-dealers, trading on behalf of both clients and the firm's account.

Networking is not a way to... A) meet potential colleagues. B) get more people involved in your job search. C) learn more about the jobs or careers in a field. D) get a sense of competitive wage levels. E) cash in favors owed by friends and family.

E) cash in favors owed by friends and family. Networking is one of the most successful ways of finding a job. It can take many forms, but the idea is to use whatever professional, academic, or social connections you have to enlist as many volunteers as possible to help in your job search. Another good networking strategy is to call or e-mail people working in the industry, individuals who are currently in or just above the position you'd like to have, and ask to talk with them about their work. If you make it clear that you are not asking for or expecting a job offer from them, many people will be happy to take a half hour to discuss their jobs with you. They may have valuable tips or leads for you or be willing to pass along your name to someone else who does.

Overconfidence is when you credit good results to good... A) luck and markets only. B) luck only. C) luck and decisions only. D) markets only. E) decisions only.

E) decisions only. Overconfidence also comes from the tendency to attribute good results to good investor decisions and bad results to bad luck or bad markets.

Unlike bonds, stocks create return by... A) trading on an exchange. B) paying floating-rate interest. C) paying fixed-rate interest. D) trading through brokers or dealers. E) distributing corporate profits.

E) distributing corporate profits. Stocks or equity securities are shares of ownership. When you buy a share of stock, you buy a share of the corporation. The size of your share of the corporation is proportional to the size of your stock holding. Since corporations exist to create profit for the owners, when you buy a share of the corporation, you buy a share of its future profits. You are literally sharing in the fortunes of the company. Answers a. and e. describe both stocks and bonds; answers b. and c. pertain only to bonds.

A high dividend payout ratio may be seen as a sign of weakness because the company... A) sacrifices profits for dividends. B) creates excess capital. C) rewards investors instead of employees. D) is investing too much in new ventures. E) does not retain enough capital for growth.

E) does not retain enough capital for growth. Other investors see a high dividend as a sign of weakness, indicative of a company that cannot grow because it is not putting enough capital into expansion and growth or into satisfying creditors. This may be because it is a mature company operating in saturated markets, a company stifled by competition, or a company without the creative resources to explore new ventures.

The Index of Economic Freedom is a measure of how receptive a country is to... A) entrepreneurship only. B) political change only. C) foreign investment only. D) political change and entrepreneurship. E) entrepreneurship and foreign investment.

E) entrepreneurship and foreign investment. In 1995 the Heritage Foundation and the Wall Street Journal created the Index of Economic Freedom (IEF) to try to measure a country's welcoming of investment and encouragement of economic growth.

When you quit your job to go to graduate school, your loss of income is... A) a reason to collect unemployment. B) involuntarily. C) unexpected. D) permanent. E) expected.

E) expected. When you leave voluntarily, presumably you have had a chance to make a reasoned decision and your loss of income is expected.

If you rely on bond returns for your regular income, you will most likely invest in... A) floating-rate coupon bonds. B) deferred-coupon bonds. C) zero-coupon bonds. D) split-coupon bonds. E) fixed-rate coupon bonds.

E) fixed-rate coupon bonds. The coupon rate of interest on the bond may be fixed or floating and may change. A floating rate is usually based on another interest benchmark, such as the U.S. prime rate, a widely recognized benchmark of prevailing interest rates. A zero-coupon bond has a coupon rate of zero: it pays no interest and repays only the principal at maturity. A "zero" may be attractive to investors, however, because it can be purchased for much less than its face value. There are deferred coupon bonds (also called split-coupon bonds and issued below par), which pay no interest for a specified period, followed by higher-than-normal interest payments until maturity. There are also step-up bonds that have a coupon that increases over time.

Investors in private placements are least likely to be... A) mutual funds. B) endowments. C) pension funds. D) insurance companies. E) individuals.

E) individuals. Private placement refers to bonds that are issued in a private sale rather than through the public markets. The investors in privately placed bonds are institutional investors such as insurance companies, endowments, and pension funds.

In contrast to non-discretionary services, if a client account allows discretionary trading services, the broker is empowered to... A) execute a client's will. B) act as a trustee. C) give advice. D) execute trades. E) make decisions.

E) make decisions. Discretionary trading means that the broker is empowered to make investment trading decisions on behalf of the client.

A mutual fund can... A) maximize diversification only. B) maximize diversification and hedge against commodities prices. C) minimize transaction costs only. D) hedge against commodities prices only. E) maximize diversification and minimize transaction costs.

E) maximize diversification and minimize transaction costs. Mutual funds have become popular because they can provide diverse investments with a minimum of transaction costs. Derivatives such as forwards, futures, and options are used to hedge or protect against an existing risk or to speculate on a future price.

If a stock is more popular than similar stocks, it will be... A) underpriced. B) efficiently priced. C) traded at a premium. D) traded at a discount. E) overpriced.

E) overpriced. The more demand or popularity there is for a company's stock, the higher its price will go (unless the company issues more shares). A stock is popular, and thus in greater demand, if it is thought to be more valuable-that is, if it has more earnings and growth potential.Sometimes a company is under or overpriced relative to the going price for similar companies. If the market recognizes the "error," the stock price should rise or fall as it "corrects" itself.

The most widely used measures to gauge the economic cycle least likely include measures of... A) interest rates. B) price levels. C) output. D) employment. E) participation in credit markets.

E) participation in credit markets. To gauge the economic environment or cycle, the most widely used measures are the following: - Gross domestic product (GDP) is a common measure of the value of output. - Inflation measures the currency's purchasing power and affects price levels and interest rates. - Unemployment measures the extent to which the economy creates opportunities for participation.

After family obligations have been fulfilled, you will most likely decide to... A) retire or choose a lower paying job only. B) turn a hobby into a business only. C) retire only. D) choose a lower-paying job only. E) retire, choose a lower-paying job, or turn a hobby into a business.

E) retire, choose a lower-paying job, or turn a hobby into a business. When your family has grown and you once again have fewer dependents, you may really enjoy fulfilling your ambitions, as you have decades of skills and knowledge to apply and the time to apply them. Increasingly, as more people retain their health into older age, they are working in retirement—earning a wage to improve their quality of life or eliminate debt, turning a hobby into a business, or trying something they have always wanted to do.

Diversification of default risk can be achieved by comparing... A) coupons. B) time to maturity. C) coupon rates. D) holding period yields. E) spreads.

E) spreads. The most commonly quoted spread is the difference between the yield to maturity for a Treasury bond and a corporate bond with the same term to maturity. Treasury bonds are considered to have no default risk because it is unlikely that the U.S. government will default. Treasuries are exposed to reinvestment, interest rate, and inflation risks, however.Corporate bonds are exposed to all four types of risk. So the difference between a 20-year corporate bond and a 20-year Treasury bond is the difference between a bond with and without default risk. The difference between their yields—the spread—is the additional yield for the investor for taking on default risk. The riskier the corporate bond is, the greater the spread will be.

When you invest in a derivative, you least likely assume the risk of... A) the underlying asset's market. B) the underlying asset. C) foreign trade. D) the contract. E) the leverage.

E) the leverage. Commodity investing is risky business, because it is done through derivatives—assets whose value depends on the value of another asset. For instance, the value of a contract to buy or sell soybeans at some time in the future depends on the value of the soybeans. When you invest in a derivative, you are taking on the risk of both the contract and the asset that it depends on, and the market for that asset. Because commodities are raw materials and most trade into a global supply chain, you also assume the risk of foreign trade.