Deck 13: Investing Fundamentals

Question 1

Once you have developed an asset allocation plan for your investments,you never need to adjust it.

Answer 1

False

Question 2

The amount of time that your investments have to work for you is an important factor when managing your investment portfolio.

Answer 2

True

Question 3

Liquidity is the ability to buy or sell an investment quickly without substantially affecting the investment's value.

Answer 3

True

Question 4

A speculative investment is a high-risk investment that is made in the hope of earning a relatively large profit over a long period of time.

Question 5

The first step to creating an investment plan is to establish investment goals.

Question 6

There is no relationship between risk and safety.

Question 7

An investment that an investor expects will increase in value is known as a growth investment.

Question 8

During periods of high inflation,there is a risk that the financial return on an investment will not keep pace with the rate of inflation.

Question 9

The U.S.government is the world's largest provider of investment information.

Question 10

Generally,options are conservative,long-term investments.

Question 11

Younger investors tend to invest a large percentage of their nest egg in growth-oriented investments.

Question 12

With most investments,more information is available than you can read and comprehend.

Question 13

An emergency fund is an amount of money that can be obtained quickly in case of immediate need.

Question 14

A ceiling on a credit card is determined by the borrower and is the dollar amount that they want to borrow using the cash advance provision on their credit card.

Question 15

The rate of return on an investment has no effect on a long-term investment program.

Question 16

Potential investors should not wait until their financial affairs are in good shape before starting an investment program.

Question 17

Asset allocation is the process of spreading your assets among several different types of investments to lessen risk.

Question 18

The potential return on any investment should be directly related to the risk that the investor assumes.

Question 19

The most important priority an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends.

Question 20

A line of credit is a short-term loan that is approved before the money is actually needed.

Question 21

A corporation must give each potential investor an annual report.

Question 22

James Gripka has a mutual fund that automatically takes $50 out of his paycheck each month.Which suggestion for obtaining the money he needs for investing is he following?

A)Taking advantage of gifts, inheritance and other windfalls
B)Taking advantage of employer-sponsored retirement programs
C)Participating in an elective savings program
D)Making a special effort once or twice a year to save
E)Using financial leverage to increase investment returns

Question 23

All except which one of the following are good ways to acquire money for starting an investment program?

A)Pay bills first, and then save a reasonable amount of money for investment
B)Participate in an elective savings program
C)Make a special savings effort one month per year
D)Borrow money specifically for investment purposes
E)Take advantage of an employer-sponsored retirement program

Question 24

Although useful for many things,the Internet cannot be used to monitor the value of stock,bond,and mutual fund investments.

Question 25

An intermediate-term investment goal is defined as one that will be accomplished within a period of:

A)five to ten years.
B)two to five years.
C)more than five years.
D)one to five years.
E)less than one year.

Question 26

An emergency fund should be deposited in a:

A)savings account at the highest available interest rate.
B)six-month certificate of deposit.
C)checking account.
D)safe place at home.
E)safe deposit box in a bank vault.

Question 27

Which of the following is a true statement?

A)To be useful, investment goals must be written.
B)To be useful, investment goals must be very general.
C)Investment goals are the same for each individual.
D)Because investment goals deal with the future, it is useless to plan more than five years in the future.
E)A long-term investment goal involves a time period of five years or less.

Question 28

All of the following statements are considered to be good advice for a potential investor starting an investment program except:

A)Work to balance your budget.
B)Increase credit purchases to conserve cash.
C)Establish specific and measurable investment goals.
D)Start an emergency fund.
E)Establish a line of credit.

Question 29

Alice Cooper contributes ten percent of her monthly earnings to her 401k plan at work.The plan allows her to invest in several different types of mutual funds and her employer matches up to 5% of her salary.Which suggestion for obtaining the money she needs for investing is she following?

A)Paying herself first
B)Taking advantage of employer-sponsored retirement programs
C)Participating in an elective savings program
D)Making a special effort once or twice a year to save
E)Taking advantage of gifts, inheritance and other windfalls

Question 30

Jack Masters earns $40,000 a year.His monthly expenses total $2,100.What is the minimum amount of money that Mr.Masters should set aside in an emergency fund?

A)$2,100
B)$4,200
C)$6,300
D)$8,400
E)$10,000

Question 31

Eric Peltz earns $80,000 a year.His monthly expenses total $4,300.What is the minimum amount of money that Mr.Peltz should set aside in an emergency fund?

A)$2,150
B)$4,300
C)$8,600
D)$12,900
E)$43,000

Question 32

Most large investors find many of the investor services to be too expensive for personal subscriptions.

Question 33

Accurate record keeping can help you spot opportunities to maximize profits or reduce dollar losses when you sell your investments.

Question 34

Which of the following features does not accurately describe a line of credit?

A)Credit line approved before the money is actually needed
B)Funds available immediately when needed
C)Obtainable from a credit union, savings and loan association, or bank
D)It has a ceiling
E)Long-term loan

Question 35

A short-term investment goal is one that will be accomplished within a period of:

A)one year or less.
B)two to five years.
C)more than five years.
D)three years or less.
E)two years or less.

Question 36

A prospectus discloses information about corporate earnings,assets and liabilities,products or services,and the qualifications of top management.

Question 37

Brokerage firms,investment companies,banks,and most corporations have a home page where you can obtain valuable investment information.

Question 38

Once you have developed an investment program,there is no need for continued evaluation of it.

Question 39

A good rule of thumb is to limit consumer credit payments to no more than ____________ percent of your net (after tax)income.

A)20
B)30
C)40
D)50
E)60

Question 40

Allen Arnold earns $3,000 per month.He pays his mortgage,utilities,grocery and other bills and then he makes sure to set aside $150 for his savings and investment accounts before he spends money to go to movies and other personal expenses.Which suggestion for obtaining the money he needs for investing is he following?

A)Paying himself first
B)Taking advantage of employer-sponsored retirement programs
C)Participating in an elective savings program
D)Making a special effort once or twice a year to save
E)Taking advantage of gifts, inheritance and other windfalls

Question 41

An example of ____________ risk occurs when the financial return on an investment does not keep up with prices that are increasing in the overall economy.

A)market
B)interest
C)inflation
D)business failure
E)current

Question 42

If interest rates in the overall economy decrease,what will happen to the market value of a corporate bond with a fixed interest rate?

A)The bond will lose all its value.
B)The value of the bond will increase.
C)The value of the bond will decrease.
D)The value of the bond will not change.
E)It is impossible to determine if the bond's value will increase, decrease, or remain constant.

Question 43

If interest rates in the overall economy decrease to 6 percent,which one of the following is most likely to be the approximate market value of a $1,000 corporate bond with a fixed interest rate of 7 percent? Round to the nearest hundred.

A)$400
B)$1,200
C)$900
D)$1,000
E)$700

Question 44

After the death of her husband,Gina Baker,35,received a check for $350,000 from a life insurance company.Gina has two small children and wants to make sure that both she and the children are taken care of in the future.Based on this information,which of the investment factors listed below would be the most important to Gina in her investment program?

A)Beta
B)Safety
C)Business failure
D)Market risk
E)Liquidity

Question 45

Which one of the following individuals should have a higher tolerance for risk?

A)Joan Cummings, who is a single mother with two small children
B)Darren Carter, who works for American Airlines and is worried that he is going to be laid off soon
C)Barry Parks, who is an investment banker and earns over $200,000 per year
D)Michael Clark, who is 74 years old and has been retired for 6 years
E)Fred Funderbunk, who is a pizza delivery person and makes about $15,000 per year

Question 46

A $1,000 corporate bond pays 6.5 percent a year.What is the annual interest you will receive?

A)$0.65
B)$6.50
C)$65.00
D)$1,060.50
E)$1,065.00

Question 47

Unsuccessful products or poor corporate management may result in investors experiencing ______________ risk.

A)inflation
B)interest rate
C)business failure
D)systematic
E)income

Question 48

Lester McCann wants to invest but is worried about risk.In particular,he is worried that the money he invests today will not buy as much ten years from now.What type of risk concerns Lester?

A)Inflation
B)Interest rate risk
C)Business failure
D)Market
E)Global investment

Question 49

Brenda Lee has received a $10,000 gift from her mother and is trying to decide how to invest it.She thinks she would like to invest it in stocks,because she knows that stocks have been appreciating by about 10% over the last several years.What aspect of investing interests Brenda?

A)Risk
B)Return
C)Diversification
D)Liquidity
E)Income

Question 50

Sam Waters just received $10,000 from his grandmother's estate.He has thought about buying himself a new Harley with the money but has decided instead to add the money to his mutual fund account.What is he doing to obtain the money for investing?

A)Paying himself first
B)Taking advantage of employer-sponsored retirement programs
C)Participating in an elective savings program
D)Making a special effort once or twice a year to save
E)Sacrificing some purchases to provide financing for investments

Question 51

If interest rates in the overall economy increase to 8 percent,which one of the following is most likely to be the approximate market value of a $1,000 corporate bond with a fixed interest rate of 7 percent? Round to the nearest hundred.

A)$0
B)$1,100
C)$900
D)$1,000
E)$1,300

Question 52

Which one of the following is a true statement?
A.When choosing an investment, it is not necessary to consider the risk factor.
B.During inflationary times, there is no risk that the financial return on an investment will differ from the rate of inflation.
C.The interest rate risk associated with investments in bonds is the result of changes in the interest rates in the economy.
D.The risk of business failure deals with changes in the value of stocks and bonds due to changes in interest rates in the market.
E.The prices of stocks, bonds, and other investments never fluctuate in the market.

Question 53

Which one of the following statements is true?

A)Global investments must be evaluated just like domestic investments.
B)Global investments can only be bought in the U.S.
C)Today, very few investors are investing in stocks and bonds issued by foreign firms or in global mutual funds.
D)For most small investors, it makes more sense to invest in foreign firms, rather than in global mutual funds.
E)Investing in global investments does not diversify your portfolio.

Question 54

Allison Peavy wants to invest but is worried about risk: In particular,she is worried that bad management and increased competition in the wireless phone market will make these companies less profitable than expected.What type of risk is Allison most concerned with?

A)Inflation
B)Interest rate
C)Business failure
D)Systematic
E)None of these

Question 55

After Christmas is over,Ted Riley works hard to control his expenses in February so that he can make an extra payment into a mutual fund.Which suggestion for obtaining the money needs for investing is he following?

A)Paying himself first
B)Taking advantage of employer-sponsored retirement programs
C)Participating in an elective savings program
D)Making a special effort once or twice a year to save
E)Taking advantage of gifts, inheritance and other windfalls

Question 56

Gina Davidson has received $50,000 in a divorce settlement and is trying to decide how to invest it.She has looked at stocks but is uncertain as some stocks have lost a lot of value for their owners recently.What aspect of investing is she most concerned about?

A)Risk
B)Inflation
C)Diversification
D)Liquidity
E)Investment growth

Question 57

John Hernandez is 24 years old and has saved enough money to fund an adequate emergency fund.In addition,he has saved $5,600 that can be used to fund an investment program.He is single,has no dependents,and would like to retire when he is 60 years old.Which one of the investment factors listed below would be most important for an investor like Mr.Hernandez?

A)Beta
B)Income
C)Growth
D)Risk
E)Liquidity

Question 58

When a bondholder loses money because interest rates in the economy increase,it is an example of ____________ risk.

A)market
B)interest rate
C)inflation
D)business failure
E)current

Question 59

Twenty years ago,you began investing $2,000 a year.Because your investments earned an average of 8 percent a year,your investment portfolio has a current dollar value of $92,000.How much did you earn on your investments over the 20-year period of time?

A)$2,000
B)$40,000
C)$52,000
D)$92,000
E)$132,000

Question 60

Twenty years ago,you began investing $250 a month.Because your investments earned an average of 8 percent a year,your investment portfolio has a current dollar value of $145,000.How much did you earn on your investments over the 20-year period of time?

A)$142,000
B)$80,000
C)$85,000
D)$140,000
E)$132,000

Question 61

Terry Hamilton has just received $30,000 from an uncle who died and is trying to decide how to invest it.She has done some research and has decided that about 30% of the money should go into large cap stocks,20% into medium cap stocks,15% into small cap stocks,10% into bonds,10% into foreign stock,and 15% into cash.She thinks that even if one area does not do that well,the rest will so that her overall return will be pretty good.What aspect of investing is Terry most concerned about?

A)Income
B)Return
C)Diversification
D)Liquidity
E)Investment growth

Question 62

Audrey is thinking about an investment that involves buying a written pledge by a corporation to repay a specified amount of money.It also pays interest every 6 months until it matures.What investment is Audrey thinking about purchasing?

A)Common stock
B)Preferred stock
C)Corporate bond
D)Real estate
E)Mutual fund

Question 63

Which one of the following investments would rank the highest with regard to safety?

A)Government bond
B)Common stock
C)Preferred stock
D)Corporate bond
E)Real estate

Question 64

Which one of the following statements is true?

A)Investors should put all of their "eggs in one basket."
B)Individuals can ignore their tolerance for risk when selecting specific investments.
C)Diversification is one way to increase your risk.
D)The amount of time a specific investment has to work is an important factor when managing an investment.
E)Younger investors tend to invest a large percentage of their portfolio in income-producing securities.

Question 65

The ability of an investment to be converted to cash without a substantial loss in dollar value is called:

A)asset value.
B)liquidity.
C)growth potential.
D)fixed cost factor.
E)variable cost factor.

Question 66

Which one of the following investments offers the least liquidity?

A)Checking account
B)Government bond
C)Real estate
D)Savings account
E)Certificate of deposit

Question 67

Matt Jackson is single and 24 years old.He has just graduated from college and obtained a job making $26,400 a year.Which one of the following investments would you recommend for his long-term investment program?

A)Corporate bonds
B)Government bonds
C)Growth stocks
D)Certificates of deposits
E)Savings account

Question 68

Garrett Jennings is thinking about buying an investment that represents safety and income within the investment pyramid.Which investment is Garrett thinking about purchasing?

A)Speculative stocks, options, and commodities
B)Growth stocks and rental property
C)U.S.securities and conservative mutual funds
D)CDs and U.S.government bonds
E)All of these are appropriate for safety and income.

Question 69

Which one of the following investments offers the least amount of growth potential?

A)Real estate
B)Common stock
C)Mutual funds
D)Options
E)Preferred stock

Question 70

If you seek financial security,which investments are appropriate for you?

A)Speculative stocks, options, and commodities
B)Growth stocks and rental property
C)U.S.securities and conservative mutual funds
D)CDs and U.S.government bonds
E)All of these are appropriate for financial security.

Question 71

Which one of the following investments offers the greatest opportunity for growth?

A)Bank accounts
B)Common stock
C)Corporate bonds
D)Government bonds
E)Options

Question 72

Bill Teague has just gotten a gift of $20,000 from his parents and is trying to decide how to invest it.He is thinking about investing in a money market mutual fund because he knows he can withdraw the money whenever he needs it with little chance of a loss in value.What aspect of investing is Bill most concerned about?

A)Risk
B)Return
C)Diversification
D)Liquidity
E)Investment growth

Question 73

An investor concerned with a predictable source of income provided by an investment would choose:

A)government securities.
B)commodities.
C)options.
D)common stocks.
E)speculative investments.

Question 74

Which one of the following investments offers the greatest liquidity?

A)Checking account
B)Common stock
C)Corporate bond
D)Real estate
E)Collectibles

Question 75

Equity capital is money:

A)obtained from the owners of a business.
B)borrowed through banks.
C)obtained by employee benefit programs.
D)that has to be repaid.
E)that has been allocated to a retirement program.

Question 76

Based on historical performance,which one of the following investments is most likely to provide an average return of 10 percent a year between now and the year 2025?

A)U.S.Treasury bills
B)Corporate bonds
C)Stocks
D)Options
E)Zero-coupon bonds

Question 77

Carl Reimer has just received an inheritance of $40,000 from his mother and is trying to decide how to invest it.Carl is young and earns a good salary.Carl wants to invest in a small cap mutual fund.While he won't receive much in the way of cash dividends,the companies are reinvesting significant amounts so the sales revenue and earnings in the future will be much larger.What aspect of investing is Carl most concerned about?

A)Risk
B)Return
C)Diversification
D)Liquidity
E)Investment growth

Question 78

What is the primary goal of asset allocation?

A)Investment income
B)Growth
C)Liquidity
D)Return
E)Risk reduction

Question 79

A change in the value of stocks,bonds,or other investments due to political activity may cause investors to experience ____________ risk.

A)inflation
B)interest rate
C)business failure
D)market
E)income

Question 80

Mike Lively is thinking about buying an investment that represents an ownership claim on a company.The most important priority he has with this investment is receiving his dividends before dividends are paid on other types of investments.What investment is Mike thinking about purchasing?

A)Common stock
B)Preferred stock
C)Corporate bond
D)Option
E)Mutual fund