Deck 11: Investment Planning

Question 1

Sheltering income from taxes is an illegitimate goal.

Answer 1

False

Question 2

A limit order may be used to either buy or sell.

Answer 2

True

Question 3

Exchange-traded notes (ETNs) face both market risk and the risk of default of the issuing bank.

Answer 3

True

Question 4

A short sale transaction will be profitable when prices are falling.

Question 5

The most widely followed measure of stock market performance is the New York Stock Exchange (NYSE) index.

Question 6

The over-the-counter (OTC) market is a primary market.

Question 7

Securities Investor Protection Corporation (SIPC) insurance guarantees the dollar value of your securities will not dip below a certain level.

Question 8

Common stocks are liabilities.

Question 9

Buying on margin allows you to purchase securities using 100% borrowed funds.

Question 10

When completed, an investment plan is a way of translating an abstract investment target into a specific investment program.

Question 11

Reviewing the amounts of income that you can realistically expect to receive from Social Security and your employee pension plan helps you to decide whether they will be adequate to meet your needs.

Question 12

When a brokerage house gives a margin call, you need to provide more collateral or your investment will be liquidated.

Question 13

The New York Stock Exchange (NYSE) is a part of the broker market.

Question 14

Your goals tend to set the tone for your investment program, and they play a major role in determining how conservative (or aggressive) you're likely to be in making investment decisions.

Question 15

The financial ratios of a company are included in its annual stockholders' report.

Question 16

Mutual funds provide professional management and diversification that individual investors-especially those with limited resources-can rarely obtain on their own.

Question 17

The Securities Act of 1933 formally established the Securities and Exchange Commission (SEC) as being in charge of administering federal securities laws.

Question 18

Brokers prefer active traders to buy-and-hold investors.

Question 19

The Sarbanes-Oxley Act of 2002 led to the creation of the National Association of Securities Dealers (NASD).

Question 20

A corporation's annual stockholders' report provides financial data and other information related to both past and planned activities.

Question 21

A retired couple can probably bear more risk in their portfolio than a young investor with a secure job.

Question 22

_____ is a risky short-term investment activity.

A) Purchasing life insurance
B) Buying real estate
C) Speculating in securities
D) Investing in mutual funds
E) Systematically saving for retirement

Question 23

_____  have no maturity date.

A) Common stocks
B) Bonds
C) Exchange-traded notes (ETNs)
D) Insurance policies
E) Certificates of deposit (CDs)

Question 24

Two investment prerequisites that are essential to developing a successful investment program are:

A) ample income and debt.
B) ample income and confidential information.
C) ample insurance and liquidity.
D) an investment plan and a nonmonetary goal.
E) inconsistency and risk awareness.

Question 25

_____ are senior, unsecured, unsubordinated debt securities issued by an underwriting bank.

A) Mutual funds
B) Exchange-traded notes (ETNs)
C) Corporate bonds
D) Collateral debt obligations
E) Treasury bills

Question 26

Diversification of investment securities increases risk.

Question 27

Online trading is financially safer than trading with a human broker.

Question 28

Reallocation of the assets in a portfolio is called rebalancing.

Question 29

Which of the following statements about exchange-traded notes (ETNs) is true?

A) ETNs are more similar to mutual funds than to exchange-traded funds (ETFs).
B) ETNs are backed only by the issuer of the creditor.
C) ETNs have no maturity dates.
D) ETNs cannot be sold short.
E) ETNs can be bought or sold only at the end of the day.

Question 30

Online calculators and worksheets can help you find answers to financial planning and investing questions.

Question 31

Security selection to satisfy an asset allocation plan is final.

Question 32

You have been offered an opportunity to buy shares of a collection of diversified securities. You will be investing in:

A) bonds.
B) common stocks.
C) mutual funds.
D) real estate.
E) stock options.

Question 33

There is generally a trade-off between earning a high current income from an investment and obtaining significant capital appreciation from it.

Question 34

James purchased five bonds with a face value of $1,000 that paid a 5% annual interest rate. James's total annual interest income for each year is:

A) $50.
B) $175.
C) $250.
D) $100.
E) $500.

Question 35

Which of the following is an example of a hybrid security?

A) Mutual fund
B) Convertible security
C) Exchange-traded fund (ETF)
D) Exchange-traded note (ETN)
E) Real estate

Question 36

Which of the following is a difference between an exchange-traded fund (ETF) and a mutual fund?

A) An ETF is a fixed-income instrument, whereas a mutual fund is a variable-income instrument.
B) An ETF can only be traded at the end of the day, whereas a mutual fund can be bought or sold throughout the trading day.
C) An ETF provides more favorable tax treatment than a mutual fund.
D) An ETF is a convertible security, whereas a mutual fund is a nonconvertible security.
E) An ETF is a hybrid security, whereas a mutual fund is not a hybrid security.

Question 37

Subscription advisory services provide information and recommendations on various industries and specific securities.

Question 38

Online trading is the only valuable investment service available through the Internet.

Question 39

Which of the following statements regarding bonds is true?

A) Bonds are liabilities of the issuer.
B) Individuals investing in bonds receive dividends.
C) Bonds cannot be purchased or sold prior to maturity.
D) Income from bonds varies every year.
E) The principal invested in bonds is not returned at the time of maturity.

Question 40

Megan invested in 10 bonds with a total face value of $5,000, issued by Zen Corporation. The bonds paid 10% semiannual interest until the maturity date. Which of the following is the value of interest earned in the first installment on a single bond?

A) $50
B) $100
C) $500
D) $250
E) $75

Question 41

When a trade occurs in a securities exchange:

A) the buyer purchases directly from the seller.
B) the dealer executes the trade.
C) an investment banker arranges the trade.
D) the Securities and Exchange Commission (SEC) executes the trade.
E) the central bank guarantees the sale.

Question 42

Which of the following is an order to sell a stock when the market price drops to or below a specified level?

A) A market order
B) A limit order
C) A stop-loss order
D) A fill-or-kill order
E) A day order

Question 43

The _____ requires investment companies to register with the Securities and Exchange Commission (SEC) and to fulfill certain disclosure requirements.

A) Investment Company Act of 1940
B) Securities Exchange Act of 1934
C) Securities Investor Protection Act of 1970
D) Sarbanes-Oxley Act of 2002
E) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Question 44

A market order is transacted at the:

A) lowest price of the day.
B) best price when the order is entered.
C) limit price.
D) price quoted by the broker.
E) average price of the stock on the transaction day.

Question 45

The federal government regulates the disclosure of information about securities through the:

A) Department of Commerce.
B) Federal Reserve System.
C) National Association of Securities Dealers (NASD).
D) Securities and Exchange Commission (SEC).
E) Federal Securities Agency.

Question 46

The Securities Investor Protection Corporation (SIPC) provides insurance to protect the investor from:

A) declining security prices.
B) the company's failure to make dividend payments.
C) a brokerage firm's financial failure.
D) the loss of the marginal investment on the stock exchange.
E) the loss of the security deposit with the broker.

Question 47

Instructing your broker to buy or sell a stock at a particular price is a:

A) limit order.
B) market order.
C) margin order.
D) regular order.
E) stop order.

Question 48

Which of the following securities laws regulates the sale of mutual fund shares?

A) The Securities Act of 1933
B) The Securities and Exchange Act of 1934
C) The Investment Company Act of 1940
D) The Sarbanes-Oxley Act of 2002
E) The Securities Investor Protection Act of 1970

Question 49

The new securities sold in primary markets are handled by a(n):

A) security exchange council.
B) securities dealer.
C) investment banker.
D) credit bureau.
E) insurance agent.

Question 50

Stockbrokers are also known as:

A) market makers.
B) account executives.
C) underwriters.
D) commission sellers.
E) traders.

Question 51

When you buy 300 shares of a company, you have purchased a(n):

A) odd lot.
B) round lot.
C) combined lot.
D) even lot.
E) prime lot.

Question 52

A potential investor in a new issue must be given a(n):

A) annual stockholders' report.
B) investment newsletter.
C) established brokerage fee schedule.
D) prospectus.
E) brokerage report.

Question 53

A bear market condition is associated with:

A) investor optimism.
B) declining securities prices.
C) economic recovery.
D) an increased tax rate.
E) high returns.

Question 54

Discount brokers will:

A) charge low commissions.
B) give a commission to the investment bankers.
C) issue a prospectus of the new issue in the primary market.
D) provide finances to underwrite the shares issued for the first time.
E) maintain a minimum balance of unsold shares of loss-making corporations.

Question 55

A company that provides little information about its operations and has not filed its audited financial statements with the Securities and Exchange Commission (SEC) would trade its stock:

A) on the OTC Bulletin Board (OTCBB).
B) in the OTC Pink Sheets.
C) on the National Association of Securities Dealers Automated Quotation System (Nasdaq).
D) on the New York Stock Exchange (NYSE).
E) on the American Stock Exchange (AMEX).

Question 56

The _____ contains the so-called Volcker Rule, which prohibits depository banks from proprietary trading.

A) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B) Sarbanes-Oxley Act of 2002
C) Securities Act of 1933
D) Securities Investor Protection Act of 1970
E) Maloney Act of 1938

Question 57

Which of the following statements regarding broker markets is true?

A) In a broker market, buy/sell orders are executed separately through securities dealers.
B) A key feature of the broker market is that it doesn't have centralized trading floors.
C) The biggest broker market is made up of a select list of stocks that are traded on the National Association of Securities Dealers Automated Quotation System (Nasdaq).
D) Broker markets account for about 40% of all shares traded in the U.S. market.
E) The broker market consists of national and regional "securities exchanges."

Question 58

The most important reason why people invest is to:

A) accumulate funds for retirement.
B) save for a major purchase.
C) seek shelter from taxes.
D) enhance current income.
E) save for college education.

Question 59

Which of the following types of brokers enables an investor to trade electronically from his or her personal computer?

A) A full-service broker
B) A bank broker
C) A futures broker
D) An online broker
E) A market maker

Question 60

A bull market is characterized by:

A) investor optimism.
B) low returns.
C) economic slowdown.
D) falling stock prices.
E) lack of growth.

Question 61

The _____ of securities in a worksheet of investments will be the most helpful in calculating the cumulative return on investments.

A) types
B) market values
C) descriptions
D) dates of purchase
E) classes

Question 62

Maria has invested $200,000 in mutual funds and $20,000 in bonds. The total value of her portfolio is:

A) $220,000.
B) $130,000.
C) $250,000.
D) $400,000.
E) $310,000.

Question 63

Mathew purchased 100 shares of Blue Corporation for $100 per share. Currently, the stocks of Blue Corporation are trading at $150. Which of the following is the rate of return on Mathew's investment in one share?

A) 65%
B) 50%
C) 75%
D) 80%
E) 40%

Question 64

You have just bought 100 shares of ABC Corporation common stock at $70.50 per share. The commission is calculated as 1.5% of the total value of the transaction plus $30. What commission will you be charged, and how much must you pay the broker for the entire transaction? (Show all work.)

Question 65

The _____ is the amount earned on an investment per dollar invested.

A) rate of return
B) rate of savings
C) rate of inflation
D) rate of consumption
E) rate of interest

Question 66

A stop-loss order:

A) is the quickest way to have an order filled.
B) allows buy orders to be filled at the lowest price.
C) allows stocks to be purchased at the current market price.
D) sells a stock when the market price drops below a specified price.
E) is used to buy stocks at a 10% margin.

Question 67

The _____ is often used as a benchmark in assessing the price behavior of high-tech stocks.

A) Standard & Poor's (S&P) composite index
B) Dow Jones Industrial Average (DJIA)
C) New York Stock Exchange (NYSE) index
D) Dow Jones Wilshire 5000 index
E) National Association of Securities Dealers Automated Quotation System (Nasdaq) Composite index

Question 68

An _____ provides financial and descriptive information about a firm's operations in the recent past to stockholders and other interested parties.

A) annual stockholders' report
B) annual tax report
C) annual portfolio report
D) annual research report
E) annual education report

Question 69

Which of the following best describes portfolio management?

A) The management of a marketplace in which stocks, bonds, and other financial instruments are traded
B) A plan for dividing a portfolio among different classes of securities in order to preserve capital by protecting the portfolio against negative market development
C) The management of an agency of the federal government that regulates the disclosure of information about securities and generally oversees the operation of the securities exchanges and markets
D) The process of creation of a document that is made available to prospective security buyers that describes the firm and a new security issue
E) The buying, selling, and holding of various securities in order to meet a set of predetermined investment needs and objectives

Question 70

Which of the following terms best describes a day trader?

A) Speculative
B) Long-term perspective
C) Money market maker
D) Buy-and-hold mentality
E) Illegal gambler

Question 71

A collection of securities assembled to meet common investment goals is called a(n):

A) treasury.
B) diversification.
C) grouping.
D) envelope.
E) portfolio.

Question 72

Which of the following characteristics of an investor should be evaluated in order to formulate an effective portfolio strategy?

A) Level of educational attainment
B) Interest in specific activities
C) Level and stability of income
D) Level of Internet skills
E) Judgment skills to buy and sell securities

Question 73

The decision on how to divide your portfolio among different types of securities is known as:

A) arbitration
B) asset allocation
C) portfolio tracking
D) estate planning
E) investment planning

Question 74

The _____ reflects the total market value of 98 to 99% of all publicly traded stock in the United States.

A) Dow Jones Industrial Average (DJIA)
B) Standard & Poor (S&P) 500 composite index
C) National Association of Securities Dealers Automated Quotation System (Nasdaq) Composite index
D) Dow Jones Wilshire 5000 index
E) New York Stock Exchange (NYSE) index

Question 75

Which of the following sections in an annual stockholders' report gives information on ongoing litigation?

A) The chief executive's letter
B) Management's discussion and analysis
C) Income statement
D) Auditor's report
E) Notes about the financial statements

Question 76

_____ is a process to settle disputes between a brokerage firm and its clients.

A) Diversification
B) Estate planning
C) Arbitration
D) Asset allocation
E) Portfolio tracking

Question 77

The Dow Jones Industrial Average (DJIA) is based on:

A) 50 stocks.
B) 30 stocks.
C) 500 stocks.
D) 200 stocks.
E) 100 stocks.

Question 78

Which of the following individuals would a portfolio containing 80 to 90% in common stocks be appropriate for?

A) John and Vanessa, a retired couple in their mid-60s
B) Michelle, a divorced middle-aged mother who has custody of her children, ages 2 and 6, and earns $60,000 a year in salary
C) Meredith and Joe, a blue-collar, two-income family with 2 children, both of whom will be starting college within the next 3 years
D) Ryan and Ramona, newlyweds who are in their mid-20s, have steady jobs, and are putting money aside for retirement
E) Antonio and Lora, a couple in their mid-50s who earn a combined $150,000 in salary and are planning to retire in 10 years

Question 79

A diversified portfolio of securities is characterized by:

A) dissimilar risk-return characteristics of the financial instruments.
B) concentration on a single industry that has the highest growth rate.
C) erratic loss potential due to investment in the latest financial vehicles.
D) unstable earnings for the entire investment horizon.
E) investing in a single security that has the lowest risk and the highest returns.

Question 80

Clara's portfolio is worth $200,000, and her portfolio consists of common stocks worth $56,000. Therefore, equity constitutes _____ of Clara's portfolio.

A) 10%
B) 33%
C) 28%
D) 56%
E) 61%