Deck 4: Personal Investing - Investing Fundamentals

Question 1

Preferred shares always pay their dividends.

Answer 1

False

Question 2

Ellie bought a stock for $18 and sold it for $26.She has a taxable capital gain of $4.

Answer 2

True

Question 3

Mutual fund gains can be in the form of dividends,interest and/or capital gains.

Answer 3

True

Question 4

The higher the dividend paid by a firm,the lower its potential stock price appreciation.

Question 5

A stock trading at $20 pays a dividend annually of $0.50.The yield is 2.5 percent.

Question 6

For people in the highest marginal tax bracket,a $1000 capital gain would be taxed less than $1000 dividend income.

Question 7

Because dividends on preferred shares are fixed,the price is not as volatile as those of common stock.

Question 8

An investment with a return of 9.5 percent,while the government rate for a similar investment is 3.5 percent,has a 6 percent risk premium.

Question 9

A younger firm,with more growth opportunities,is less likely to pay dividends than an older company.

Question 10

The primary market is used by firms to raise funds and is a market where newly issued securities are traded.

Question 11

Real estate is a good investment option for individuals and it offers the same liquidity as stocks or bonds.

Question 12

When the Blackberry share price fell due to disappointment after the launch of their new phone,that is an example of systematic risk.

Question 13

Growth stocks are likely to pay high dividends.

Question 14

One of the advantages of investing in bonds is that their value is guaranteed and they pay predictable interest (coupon)payments.

Question 15

Savvy investors can find investments that generate high rates of return with low levels of risk.

Question 16

One of the attractive features of mutual funds is that they offer investors a diversified portfolio and professional management.

Question 17

Many more shares of stock are traded daily on the primary market than on the secondary market.

Question 18

Owners of common stock have the right to vote on key corporate issues and have the last claim to the profits of a company.

Question 19

The standard deviation of a stock's monthly returns is an indication of its investment risk.

Question 20

Bonds are certificates representing Chapterial ownership of a firm.

Question 21

Before you start to invest,you should ensure you have liquidity by owning

A)a line of credit.
B)money market securities.
C)credit cards.
D)corporate bonds.

Question 22

An investor whose income is less than $20 000 will pay more tax on capital gains than on the same amount of divided income.

Question 23

Low-risk bonds tend to offer higher interest payments.

Question 24

Which is true about dividends?

A)They are earnings distributed to shareholders.
B)They usually provide the same return as bonds.
C)They are retained earnings.
D)They change each quarter.

Question 25

More than half of all trading in the financial markets is attributable to individual investors.

Question 26

In the secondary market,stock prices are

A)determined by supply and demand.
B)often undervalued.
C)easy to predict.
D)less expensive than on the primary market.

Question 27

Stocks that are undervalued by the market for reasons other than the performance of their business are called

A)growth stocks.
B)value stocks.
C)preferred stocks.
D)dividend stocks.

Question 28

Which one thing do you always have with a common stock?

A)Dividends
B)Voting rights
C)Capital appreciation
D)A guarantee of minimum par value

Question 29

A stock with larger standard deviations of returns has higher risk than a stock with lower standard deviations.

Question 30

Asset allocation improves diversification,but has no effect on the risk premium of your portfolio.

Question 31

Which of the following is good investment advice?

A)Set high goals and expectations for your investments even if they are unrealistic.
B)Investing in mutual funds is an effective way to diversify if you have $200 per month to invest.
C)If you are not getting the returns you need on your savings,select a more risky investment.
D)If you own a stock that has dropped 50 percent in value,purchase more to average your price down.

Question 32

When diversifying a portfolio,you should select investments with high positive correlation.

Question 33

Institutional investors

A)are responsible for most of the trading in financial markets.
B)focus most of their investment decisions on less than one year.
C)primarily select stocks using technical analysis.
D)invest primarily in stocks rather than bonds.

Question 34

Which of the following is true about dividends?

A)Dividends are not based on earnings.
B)All large companies pay dividends.
C)Dividends are usually around five percent of the stock price.
D)Dividends are likely paid by older,established companies.

Question 35

The market for newly issued securities and initial public offerings (IPOs)is the

A)initial market.
B)open market.
C)primary market.
D)secondary market.

Question 36

Taking a loan for $5000 to invest in a conservative portfolio is always more risky than saving $5000 to invest in the conservative portfolio.

Question 37

Which of the following is true about growth stocks?

A)They are more established companies.
B)They mainly produce a return to investors via capital gains.
C)They pay high dividends.
D)They are the opposite of value stocks.

Question 38

An investor's willingness to accept (or not accept)risk in their investments is referred to as risk intolerance.

Question 39

Research shows that sophisticated investors are able to outperform various stock indexes on average.

Question 40

Investing prescribed percentages in stocks,bonds,and preferred shares is a type of asset allocation.

Question 41

The return-risk relationship means

A)the ideal investment has high return and low risk.
B)the downside risk is all that really matters to investors.
C)the higher the return expectation of an investment,the greater the uncertainty.
D)a diversified mutual fund will have low risk.

Question 42

Real estate returns can be in the form of

A)capital gains,losses,interest and rental income.
B)interest and dividends.
C)capital gains,losses and dividends.
D)capital gains,losses and rental income.

Question 43

You have $10 000 to invest now and can add $550 a month,have a moderate risk profile,and would like to set these funds aside for retirement in 20 years.Your most appropriate option would be to

A)put the money in a money market savings account.
B)buy one-year GICs.
C)invest in small cap mutual funds.
D)invest in mutual funds managed by the asset allocation method.

Question 44

Which of the following is a good example of systematic risk?

A)The low interest rates in effect since the 2008 - 2009 credit crisis
B)The decline in Nortel stock price after the crash of 2000 - 2001
C)The decline in Blackberry stock price since the 2008 - 2009 credit crisis
D)The decline in the stock price of Canadian banks in the 2008 - 2009 credit crisis

Question 45

Of the following,which is not used in measuring a stock's return?

A)The price of the stock at the time of purchase
B)The average price of stock during the period owned
C)The price of stock at the time of sale
D)The dividends earned during the period owned

Question 46

One advantage of investing in your home compared to stocks,bonds,and mutual funds is

A)real estate is more likely to go up in value.
B)only fifty percent of the capital gains are taxed.
C)the capital gains are usually tax exempt.
D)real estate is less risky.

Question 47

Investment risk refers to

A)the risk premium in the markets.
B)Beta.
C)the risk of investments dropping in value.
D)volatility in investment returns.

Question 48

The difference between common and preferred stock is that preferred stock

A)may or may not receive dividends.
B)has more predictable income and more safety.
C)has greater potential for capital appreciation.
D)is issued more frequently than common stock.

Question 49

Which of the following is true about mutual funds?

A)They offer a diversified portfolio of stocks to investors with specific investment objectives.
B)Professionally managed mutual funds consistently beat the TSX index returns.
C)Dividends received from their investments are used to pay the fund's expenses.
D)They provide access to professional money management for a low investment.

Question 50

If you wish to have a direct voice in the running of a company,you should purchase

A)directorships.
B)debentures.
C)common stock.
D)preferred stock.

Question 51

If you predicted that a stock would be worth $40 in five years and that you wanted to get a nine percent average annual return,what price should you be willing to pay for it now? (Assume no fees or taxes.)

A)$38.53
B)$22.00
C)$26.00
D)$25.54

Question 52

For someone whose salary is $120 000,what type of investment income receives the lowest tax consequences?

A)Dividends
B)Interest
C)Capital gains
D)Trust income

Question 53

If you invest $1000 in stock that pays no dividends and sell the stock exactly one year later for $1100,what will be your return? (Ignore commissions and trading fees.)

A)1 percent
B)5 percent
C)10 percent
D)100 percent

Question 54

If you purchase 100 shares of Ajax Corporation for $15 a share and one year later sell it for $20 a share,what was your return if the stock paid $2 per share dividends? (Ignore commissions and trading fees.Round to the nearest whole percent.)

A)10 percent
B)33 percent
C)47 percent
D)40 percent

Question 55

To measure an investment's risk,which of the following would you use?

A)Time value of money
B)Range of returns on the entire market
C)Standard deviation of returns
D)Standard deviation of prices

Question 56

You can reduce your investment risk most effectively through

A)asset allocation.
B)limiting the time horizon.
C)diversifying stocks.
D)maximizing the beta.

Question 57

Corporate bonds

A)offer a return to investors in the form of interest payments.
B)maintain their value even in periods of changing interest rates.
C)appreciate in value as the maturity date nears.
D)lose value as the maturity date nears.

Question 58

If you have $3000 to invest,but could need the money at any time in the next year,you should

A)put the money in a liquid short-term interest-bearing investment.
B)invest in a one-year closed GIC.
C)put the money in a dividend mutual fund.
D)invest in an asset allocation mutual fund.

Question 59

Compared with common stock,preferred stock values

A)are more variable.
B)are less variable.
C)are lower.
D)are higher.

Question 60

If you believe that a firm will grow rapidly in the future,you should buy its

A)bonds.
B)debentures.
C)common stock.
D)preferred stock.

Question 61

Your after tax return on your investments is 2.8 percent compounded monthly.Approximately how much will you have to save per month in order to have $80 000 in 25 years to buy a retirement cottage? Assume your investments are not tax sheltered.

A)$123
B)$193
C)$189
D)$184

Question 62

An income trust

A)pays taxes on its earnings and then distributes the remainder of the cash flow to investors.
B)is a good replacement for bonds in your asset allocation.
C)is similar to a stock investment in price volatility but pays all cash flows to investors.
D)has tax implications similar to dividends.

Question 63

Which portfolio provides the advantage of asset allocation?

A)A portfolio invested in stocks of several different countries to maximize return with less risk
B)A portfolio invested in bonds and stocks in equal amounts to maximize return with less risk
C)A portfolio invested in a variety of assets to maximize return with less risk
D)A fully diversified equity portfolio eliminating unsystematic risk

Question 64

Buying more of a stock that has just plummeted in value is an example of

A)averaging your cost base down.
B)purchasing stocks on sale.
C)dollar cost averaging.
D)taking excessive risk to recover from a losing position.

Question 65

You want to save $10 000 toward the down payment on a house in five years.If you can earn 8 percent (compounded monthly),approximately how much should you save each month to reach this short-term goal?

A)$142
B)$136
C)$167
D)$131

Question 66

Amalgamated Monkey Nuts Inc.has a range of returns between 4 percent and 7 percent while Moose Pasture Minerals Ltd.has a range of returns between 3 percent and 10 percent.This means

A)Amalgamated Monkey Nuts Inc.is a less risky stock.
B)Moose Pasture Minerals Ltd.is a less risky stock.
C)Amalgamated Monkey Nuts Inc.is a more risky stock.
D)Moose Pasture Minerals Ltd.is a better investment.

Question 67

If you wish to supplement your retirement by saving $200000 in 25 years,how much more would you have to save monthly if you saved the money outside rather than in an RRSP? Consider that investment returns should provide a yield of 8.5 percent compounded monthly and your tax rate is 30 percent,so the after tax return would be 5.95 percent.

A)$9.71
B)$87.63
C)$97.05
D)$101.05

Question 68

You have invested $16 000.How long it will approximately take to accumulate $100000 at the fairly conservative rate of 6 percent?

A)38 years
B)34 years
C)28 years
D)31 years

Question 69

It is now 2030 and you have saved $250 000 since you started saving in 2007.During the same period inflation averaged 3 percent.What would your $250000 be worth in 2007 dollars?

A)$493 397
B)$126 673
C)$121 891
D)$236 047

Question 70

Your investment portfolio matches your risk profile perfectly but you are not meeting your investment goals.You should remedy this by

A)increasing the high-risk portion of the portfolio to achieve higher returns.
B)cutting expenses to increase savings and stay with the same asset allocation.
C)reviewing your investment goals to see if they are realistic and make adjustments.
D)selling all of the investment assets to reinvest in low risk investments.

Question 71

A stock was purchased at $23,sold exactly two years later at $25.50,and paid a $0.70 dividend per year.What was the annual return on investment?

A)7 percent
B)8)5 percent
C)17 percent
D)10.9 percent

Question 72

Given the bank rate of 3.5 percent,and a corporate bond that will pay 10 percent.What is the risk premium?

A)13.5 percent
B)6)5 percent
C)7)5 percent
D)0 percent

Question 73

Given the bank rate of 3 percent,purchasing an investment with a 9 percent risk premium means

A)the investor is expecting a 12 percent return and will likely get close to that.
B)the investor is expecting a 9 percent return but will not likely get that exact amount.
C)the investor is expecting a 12 percent return but will not likely get that exact amount.
D)the investor is expecting a 9 percent return and will likely get close to that.

Question 74

You are investing to achieve the following goals: A down payment for a cottage in the amount of $8000 in six years,$4000 for a trip to Europe in three years,and $150000 to supplement retirement income in 24 years.If you can earn 7 percent compounded monthly on your investments,how much should you be saving each month?

A)$392.
B)$377.
C)$409.
D)$396.

Question 75

Investing in growth stocks usually refers to

A)younger companies paying large dividends.
B)large companies paying large dividends.
C)younger companies with potential for large capital gains.
D)any company with a market expansion strategy.

Question 76

If the market value for ABC Ltd.is $70000000 and its number of shares outstanding is $35555555 ,the value of stock per share is

A)$19.69.
B)$1.969.
C)$196.90.
D)Insufficient information to answer this question

Question 77

How much more will you earn on a lump sum investment of $20000 if you increase your risk tolerance to improve your return from 6 percent to 8 percent over a 20-year period?

A)$29 077
B)$31 065
C)$28 555
D)$8000

Question 78

You have been very risky with your investments but,having just turned 50 years of age,your investment adviser suggests you reallocate to reduce your risk.He advises you that your returns will be lower but it would be a wise move.You have saved and wish to retire with $300000.When will you be able to achieve this if the return is now 5.5 percent compounded monthly?

A)In 4.37 years
B)In 5.5 years
C)In 9.91 years
D)In 1.3 years

Question 79

For your retirement you want to have enough funds in your RRSPs to provide an income stream of $22 000 for 30 years.How much money would you need to have accumulated if your RRSPs averaged a real return of four percent per year? (Round to the nearest thousand)

A)$384 000
B)$627 000
C)$660 000
D)$380 000

Question 80

You are investing a lump sum of $7200 with a goal of saving $200 000 total in 30 years.What annual interest rate on your investments would you need to reach your goal?

A)15 percent
B)11.7 percent
C)11.3 percent
D)12.4 percent