(Test Bank) Investments Analysis and Management

Jones, 14

Business

Test Bank

14th Edition

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Test Bank for Investments Analysis and Management, The downloadable file consists of 358 pages, and the total size of the file is 3.83 MB. Purchase now only for highly discounted price.

Author(s): Jones

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Chapter One Understanding Investments 1 Chapter 1: Understanding Investments Multiple Choice 1. Which of the following is the best definition of wealth? a. The sum of all current and future income b. The total of all assets and all income c. The total of assets and income less any liabilities d. The sum of current income and the present value of future income Ans: d Difficulty: Moderate Ref: Establishing a Framework for Investors 2. Gold coins would be classified as: a. real assets. b. indirect assets. c. personal assets. d. financial assets. Ans: a Difficulty: Easy Ref: Establishing a Framework for Investors 3. Technically, investments include: a. only financial assets. b. only marketable assets. c. financial and real assets that are marketable or non-marketable. d. only financial and real assets that are marketable. Ans: c Difficulty: Easy Ref: Establishing a Framework for Investors 4. Retirement plans that guarantee a set amount of money each month are known as: a. 401(k) plans. b. self-directed plans. c. defined-benefit plans. d. defined-contribution plans. Ans: c Difficulty: Moderate Ref: Establishing a Framework for Investors Chapter One Understanding Investments 2 5. The investment professionals that arrange the sale of new securities are called: a. arbitragers. b. traders. c. investment bankers. d. specialists. Ans: c Difficulty: Moderate Ref: The Importance of Studying Investments 6. Another name for stockbrokers is: a. specialists. b. financial advisors. c. security analysts. d. portfolio managers. Ans: b Difficulty: Moderate Ref: The Importance of Studying Investments 7. Investment professionals who take companies public, arrange mergers and acquisitions, and participate in municipal bond issues are: a. registered representatives. b. security analysts. c. investment bankers. d. portfolio managers. Ans: c Difficulty: Moderate Ref: The Importance of Studying Investments 8. One reason for the declining importance of pension funds is the: a. decrease in pension benefits for workers. b. downsizing of U.S. companies. c. large number of conversions into self-directed plans. d. increasing number of federal regulations that restrict pension fund portfolios. Ans: c Difficulty: Difficult Ref: The Importance of Studying Investments Chapter One Understanding Investments 3 9. Most financial advisors are registered with the Securities and Exchange Commission as: a. registered representatives. b. registered investment advisors. c. registered financial planners. d. registered securities consultants. Ans: b Difficulty: Moderate Ref: The Importance of Studying Investments 10. A Chartered Financial Analyst designation is a(n) a. SEC-approved and awarded designation. b. certification of a successful investing record. c. professional designation awarded for meeting recognized standards of conduct and competency. d. professional designation awarded by the brokerage industry. Ans: c Difficulty: Easy Ref: The Importance of Studying Investments 11. Underlying all investments is the tradeoff between: a. expected return and actual return. b. low risk and high risk. c. actual return and high risk. d. expected return and risk. Ans: d Difficulty: Moderate Ref: Understanding the Investment Decision Process 12. Which of the following investment areas relies heavily on mathematical and statistical models? a. Security analysis b. Portfolio management c. Institutional investing d. Retirement planning Ans: b Difficulty: Moderate Ref: Understanding the Investment Decision Process Chapter One Understanding Investments 4 13. Most investors are risk averse, which means they: a. will assume more risk only if they are compensated by higher expected return. b. will always invest in the investment with the lowest possible risk. c. actively seek to minimize their risks. d. avoid the stock market due to the high degree of risk. Ans: a Difficulty: Moderate Ref: Understanding the Investment Decision Process 14. Which of the following would be considered a risk-free investment? a. Gold b. Equity in a house c. High-grade corporate bond d. U.S. Treasury security Ans: d Difficulty: Easy Ref: Understanding the Investment Decision Process 15. Security analysis is most concerned with: a. analysis of the overall securities market and its direction. b. valuation and analysis of individual securities. c. purchasing securities at the best price. d. determination of the investor’s required return. Ans: b Difficulty: Moderate Ref: Understanding the Investment Decision Process 16. In general, the ex ante risk-return tradeoff: a. slopes upward. b. slopes downward. c. is flat. d. is impossible to determine. Ans: a Difficulty: Moderate Ref: Understanding the Investment Decision Process Chapter One Understanding Investments 5 17. International investing: a. is only practical for institutional investors. b. increases the overall risk of a stock portfolio. c. always leads to higher returns than a domestic portfolio. d. can reduce risk due to increased diversification. Ans: d Difficulty: Moderate Ref: Understanding the Investment Decision Process 18. Investment decision making traditionally consists of two steps: a. investment banking and security analysis. b. buying and selling. c. risk and expected return. d. security analysis and portfolio management. Ans: d Difficulty: Difficult Ref: Understanding the Investment Decision Process 19. Which of the following statements concerning global stock market capitalization is true? a. The United States accounts for roughly 65 percent of stock market capitalization worldwide. b. The United States accounts for roughly 40 percent of stock market capitalization worldwide. c. The United States accounts for roughly 25 percent of stock market capitalization. d. It is expected that the United States will increase its future percentage of global stock market capitalization. Ans: b Difficulty: Moderate Ref: Important Considerations in the Investment Decision Process for Today's Investor 20. Regulation FD applies to disclosure between: a. private companies and public officials. b. public companies and investment professionals. c. public companies and public officials. d. private companies and investment professionals. Ans: b Difficulty: Moderate Ref: Important Considerations in the Investment Decision Process for Today's Investor Chapter One Understanding Investments 6 21. Which of the following statements is true regarding multi-national corporations? a. Exxon Mobil earns the majority of its profits from its overseas operations. b. Google currently derives the majority of its earnings from outside the U.S. c. Wal-Mart earns the majority of its profits from outside the U.S. d. Coca-Cola has no overseas operations and no earnings outside the U.S. Ans: a Difficulty: Difficult Ref: Important Considerations in the Investment Decision Process for Today's Investor 22. The rise of the Internet has: a. greatly increased the cost of security trading. b. significantly democratized the flow of investment information. c. led to fewer discount brokers. d. led to large amounts of security fraud. Ans: b Difficulty: Moderate Ref: Important Considerations in the Investment Decision Process for Today's Investor 23. Which of the following professionals would be considered an institutional investor? a. Investment banker b. Security analyst c. Stockbroker d. Portfolio manager Ans: d Difficulty: Difficult Ref: Important Considerations in the Investment Decision Process for Today's Investor 24. The risk-free return (RF) equals: a. 0.0%. b. the rate on the bonds of financially sound corporations. c. the average of the last 3 years’ inflation rate. d. the return on Treasury securities. Ans: d Difficulty: Difficult Ref: Important Considerations in the Investment Decision Process for Today's Investor Chapter One Understanding Investments 7 25. Which of the following is not a benefit of geographic diversification? a. Gaining exposure to currencies other than the U.S. dollar. b. Some global markets have growth rates higher than the U.S., offering potentially higher returns. c. Global markets behave completely independently of U.S. markets. d. Many global markets are not highly correlated with U.S. markets. Ans: c Difficulty: Difficult Ref: Important Considerations in the Investment Decision Process for Today's Investor 26. In investments, AUM stands for: a. automatic unit multiplier. b. annual unit multiplier. c. assets under management. d. active united manager. Ans: c Difficulty: Easy Ref: The Importance of Studying Investments 27. Which of the following securities should have the highest expected return? a. Corporate bonds b. Large firm stocks c. Small firm stocks d. Private equity Ans: d Difficulty: Moderate Ref: Understanding the Investment Decision Process 28. Martha Stewart was convicted of: a. insider trading. b. obstruction of justice. c. manipulating stock prices. d. participating in a Ponzi scheme. Ans: b Difficulty: Moderate Ref: Ethics in Investing Chapter One Understanding Investments 8 True-False Questions 1. A 401(k) plan is an example of a defined-benefit retirement plan. Ans: False Difficulty: Moderate Ref: The Importance of Studying Investments 2. Investors always seek to minimize their risk of investing. Ans: False Difficulty: Moderate Ref: Understanding the Investment Decision Process 3. Both 401(k) plans and IRAs are self-directed retirement plans. Ans: True Difficulty: Easy Ref: Understanding the Investment Decision Process 4. The two major considerations in investing are return and timing. Ans: False Difficulty: Easy Ref: Understanding the Investment Decision Process 5. Risk is defined as the possibility of loss. Ans: False Difficulty: Difficult Ref: Understanding the Investment Decision Process 6. The minimum actual return necessary to induce investors to invest is known as the expected return. Answer: False Difficulty: Difficult Ref: Understanding the Investment Decision Process 7. Investors unwilling to assume risk should be satisfied with the rate of inflation as their investment return. Answer: False Difficulty: Difficult Ref: Understanding the Investment Decision Process Chapter One Understanding Investments 9 8. Security analysts are typically employed only at brokerage houses. Answer: False Difficulty: Moderate Ref: Importance of Studying Investments 9. Financial planners must pass a standardized test and possess certain credentials. Ans: False Difficulty: Easy Ref: Importance of Studying Investments 10. Many Wall Street jobs tend to be cyclical in nature. Ans: True Difficulty: Easy Ref: Importance of Studying Investments 11. Due to the Internet, institutional investors have gained in importance. Ans: False Difficulty: Difficult Ref: Important Considerations in the Investment Decision Process for Today's Investor 12. Most professionally-managed stock portfolios are able to outperform the overall market on a consistent basis. Ans: False Difficulty: Easy Ref: An Overall Perspective on Investing 13. Bond yields in some European countries have been negative in recent years. Ans: True Difficulty: Moderate Ref: An Overall Perspective on Investing 14. Blockchain technology is the underlying process that enables the existence of cryptocurrencies. Ans: True Difficulty: Moderate Ref: A Perspective on Investing Chapter One Understanding Investments 10 Short-Answer Questions 1. Briefly explain the difference between expected returns and realized returns and between ex ante returns and ex post returns. Answer: Expected returns are mean returns based on probability distributions dealing with the future. Realized returns are the returns that actually occurred in the past. Ex ante returns are in the future. Ex post returns are in the past. Difficulty: Moderate 2. What are some of the career opportunities in the investment industry? Answer: Investment banker, merger and acquisition specialist, security traders, sales people, security analyst, portfolio manager, registered investment advisor and financial planner. Difficulty: Moderate 2. Define risk in the context of investments. Answer: Risk is the chance that the actual return on an investment will differ from its expected return. Difficulty: Moderate 3. Will risk-averse investors ever include commodity futures or options in their portfolios? Explain. Answer: They may include these items in their portfolios since risk-averse is not the same thing as risk avoidance. Risk-averse investors would expect a higher return from these assets as they are riskier than many other assets. Difficulty: Moderate 4. Martha Stewart was banned from serving as an officer of a public corporation, sentenced to 5 months in prison, and fined $30,000. Why? Answer: Contrary to popular belief, she was not charged with insider trading but obstruction of justice due to her efforts to hide her alleged insider trading. Difficulty: Moderate 5. What is the primary advantage of blockchain technology and the cryptocurrencies that are enabled by it? How many different cryptocurrencies exist? Answer: Blockchain technology has the potential to create enormous gains in efficiency and greatly reduce costs by creating an easy, fast and secure payment system that eliminates the need for a third party in transactions. There are numerous alternative cryptocurrencies; however, Bitcoin is by far the most popular. Difficulty: Moderate Chapter One Understanding Investments 11 Critical Thinking/Essay Questions 1. What are some of the steps involved in valuing a company’s common stock? Answer: The investor must evaluate the overall economy, industry and individual company, since all have an impact on the value of the stock. In addition, the expected return and appropriate risk must be estimated, based upon the expected future cash flows of the company. And lastly, the efficiency of stock markets must be considered and whether the current market value of the stock is greater or less than its perceived economic value. Difficulty: Difficult 2. What are some of the reasons driving so many individual investors to manage their own investments today versus the conventional route of investing through a financial advisor or stockbroker? Answer: The emergence of the Internet has produced a host of online, discount brokers offering ultra low-cost commissions, sometimes free trades, and real-time quotes on stocks and bonds. There is also now a preponderance of websites offering information on corporate news and SEC filings, which helps investors become more self-sufficient if they so choose. Also, extreme levels of market volatility seen in the last two decades have eroded the wealth of many investors, including whatever portion was being professionally managed by mutual funds or through financial advisors. That begs the question of whether professional management or advice is worth the cost in the face of such tremendous wealth erosion. Many investors have decided to go out on their own, using a discount broker. Difficulty: Moderate 3. A 25-year old college graduate is participating in a 401(k) retirement plan and wishes to minimize risk by eliminating stock-based mutual funds and other equities from his investment portfolio. What will this probably do to his ending retirement funds in 40 years? Answer: If he minimizes risk, then he will also minimize return. His retirement fund will likely be much smaller than if he chose to take more risk over the long run. Difficulty: Moderate 10 Chapter Two Investment Alternatives Chapter 2: Investment Alternatives Multiple Choice Questions 1. The largest single institutional owner of common stocks is: a. mutual funds. b. insurance companies. c. pension funds. d. commercial banks. Ans: c Difficulty: Moderate Ref: Organizing Financial Assets 2. Which of the following is not a characteristic of the primary nonmarketable financial asset owned by most individuals? a. High liquidity b. High return c. Often issued by the U.S. government d. Low risk Ans: b Difficulty: Moderate Ref: Nonmarketable Financial Assets 3. Savings accounts are: a. negotiable but are not liquid. b. marketable but are not liquid. c. liquid but are not personal. d. liquid but are not marketable. Ans: d Difficulty: Difficult Ref: Nonmarketable Financial Assets 4. Nonmarketable financial assets that protect against inflation include: a. nonnegotiable certificates of deposit (CDs). b. money market deposit accounts (MMDAs). c. Series EE US government savings bonds. d. US government savings bonds, I bonds. Ans: d Difficulty: Moderate Ref: Nonmarketable Financial Assets 11 Chapter Two Investment Alternatives 5. Treasury bills are traded in the: a. money market. b. capital market. c. government market. d. regulated market. Ans: a Difficulty: Easy Ref: Money Market Securities 6. Which of the U.S. Treasury securities is always sold at a discount? a. Treasury bills b. Treasury notes c. Treasury bonds d. Treasury inflation protected securities (TIPS) Ans: a Difficulty: Moderate Ref: Money Market Securities 7. Which of the following statements regarding money market instruments is not true? a. They tend to be highly marketable. b. They have maturities from 1 to 3 years. c. They tend to have a low probability of default. d. Their rates tend to move together. Ans: b Difficulty: Moderate Ref: Money Market Securities 8. Which of the following would not be considered a capital market security? a. A 20-year corporate bond b. A common stock c. A 6-month Treasury bill d. A mutual fund share Ans: c Difficulty: Moderate Ref: Capital Market Securities 12 Chapter Two Investment Alternatives 9. The coupon rate is another name for the: a. market interest rate. b. current yield. c. stated interest rate. d. yield to maturity. Ans: c Difficulty: Easy Ref: Fixed-Income Securities 10. Zero-coupon bonds are similar to Treasury bills in that both are: a. issued exclusively by the U.S. Treasury. b. money-market securities. c. capital-market securities. d. sold on a discount basis. Ans: d Difficulty: Moderate Ref: Fixed-Income Securities 11. Each point on a corporate bond quote represents: a. $100. b. 1 percent of $100. c. 1 percent of $1000. d. $1000. Ans: c Difficulty: Difficult Ref: Fixed-Income Securities 12. Treasury STRIPS are most similar to which type of corporate security? a. Preferred stock b. Premium bond c. High-yield bond d. Zero-coupon bond Ans: d Difficulty: Moderate Ref: Fixed-Income Securities 13 Chapter Two Investment Alternatives 13. Bonds trade on an accrual interest basis. This means an investor: a. can sell a bond at any time without losing the interest that has accrued. b. can buy a bond at any time and gain the interest accrued from the time of the last payment. c. can sell a bond at any time and retain the interest portion of the bond. d. can buy a bond at any time and receive an immediate interest check. Ans: a Difficulty: Moderate Ref: Fixed-Income Securities 14. Bonds called in are likely to be: a. bonds already in default. b. replaced with new bonds that have a lower interest rate. c. replaced with new bonds that have a higher interest rate. d. junk bonds. Ans: b Difficulty: Moderate Ref: Fixed-Income Securities 15. What will a bond be worth on the day it matures? a. $0 b. $100 c. Its face value (plus remaining coupon, if applicable) d. Its remaining coupon, if applicable Ans: c Difficulty: Moderate Ref: Fixed-Income Securities 16. Which of the following statements is true regarding an investment in mortgage-backed securities? a. There is little default risk. b. The stated maturity is generally 10 years. c. They receive a fixed payment per month. d. They are not subject to prepayment. Ans: a Difficulty: Moderate Ref: Fixed-Income Securities