Ch22

Practice please print

1. The first step any investor should take before beginning to invest is to __________.

A. establish investment objectives

B. develop a list of investment managers with superior records to interview
C. establish asset allocation guidelines
D. decide between active management and passive management

2. If an investor wants to invest 100% of her portfolio in safe assets but does not want to
manage her portfolio, she should invest in __________.

A. a money market fund

B. a growth stock fund
C. several different money market instruments
D. several different stocks

3. The two most important factors in describing an individual's or organization's investment

objectives are ________________.

A. income level and age

B. income level and risk tolerance
C. age and risk tolerance
D. return requirement and risk tolerance

4. Life insurance companies try to hedge the risks inherent in whole-life insurance policies
by investing in __________.

A. long-term bonds
B. money market mutual funds
C. savings accounts
D. short-term commercial paper

5. Empirical evidence confirms that investors become __________ as they approach

retirement.

A. greedier
B. less interested in investments
C. more risk averse
D. more risk tolerant

6. Of the following, the investment time horizon is typically the shortest for __________.

A. banks
B. endowment funds
C. life insurance companies
D. pension funds
Ch22 Practice please print

7. A passive asset allocation strategy involves _________.

A. investing in the stock of companies that are price takers

B. maintaining approximately the same proportions of a portfolio in each asset class over
time
C. varying the proportions of a portfolio in each asset class in response to changing market
conditions
D. selecting individual securities in different sectors that are believed to be undervalued

8. An active asset allocation strategy involves _________.

A. investing in the stock of companies that are price takers

B. maintaining approximately the same proportions of a portfolio in each asset class over
time
C. varying the proportions of a portfolio in each asset class in response to changing market
conditions
D. selecting individual securities in different sectors that are believed to be undervalued

9. The amount of risk an individual should take depends on his or her:

I. Return requirements
II. Risk tolerance
III. Time horizon

A. I only
B. I and II only
C. II and III only
D. I, II, and III

10. An investor has a long time horizon and desires to earn the market rate of return.
However, the investor will need to withdraw funds each year from her investment
portfolio. The biggest constraint a planner would face with this client is a ___________
constraint.

A. tax
B. risk-tolerance
C. liquidity
D. social

11. When used in the context of investment decision making, the term liquidity refers to ___.

A. the ease and speed with which an asset can be sold at any value possible
B. the ease and speed with which an asset can be sold without having to discount the value
C. an aspect of monetary policy
D. the proportion of short-term to long-term investments held in an investor's portfolio
Ch22 Practice please print

12. The term investment horizon refers to __________.

A. the proportion of short-term to long-term investments held in an investor's portfolio

B. the planned liquidation date of an investment
C. the average maturity date of investments held in a portfolio
D. the maturity date of the longest investment in the portfolio

13. Conservative investors are likely to want to invest in __________ mutual funds, while risk-
tolerant investors are likely to want to invest in __________.

A. income; high growth

B. income; moderate growth
C. moderate-growth; high growth
D. high-growth; moderate growth

14. Which of the following is the least likely to be included in the portfolio management
process?

A. Monitoring market conditions and relative values

B. Monitoring investor circumstances
C. Identifying investor constraints and preferences
D. Organizing the investment management process itself

15. A clearly understood investment policy statement is not critical for which one of the
following?

I. Mutual funds
II. Individuals
III. Defined benefit pension funds

A. II only
B. III only
C. I only
D. None of these options (A policy statement is necessary for all three.)

16. A life insurance firm wants to minimize its interest rate risk, and it is planning on paying
out $250,000 in 5 years. Which one of the following investments best matches its goal?

A. High-yield utility stocks

B. 5-year zero-coupon bonds
C. 10-year coupon bonds
D. Money market investments rolled over as needed
Ch22 Practice please print

17. An investor with high risk aversion will likely prefer which of the following risk and return
combinations?

A. Expected return = 12%, historical standard deviation = 17%

B. Expected return = 14%, historical standard deviation = 19%
C. Expected return = 16%, historical standard deviation = 21%
D. Expected return = 18%, historical standard deviation = 23%

18. Your sister, an avid outdoors person, works in the airline industry, and she has come to
you (the financial guru) for investment advice. She is looking into purchasing stocks she
knows something about. She is considering purchasing stock in Boeing, Lockheed Martin,
United Technologies (maker of aircraft engines), and Cabela's Sporting Goods. Based
only on the information given, which stock should you recommend for her?

A. Boeing
B. Lockheed Martin
C. United Technologies
D. Cabela's

19. One of the major functions of the investment committee is to ________________.

A. determine security selection of each portfolio operated by the investment company

B. translate the objectives and constraints of the investment company into an asset universe
C. determine the percentages of each security in the total investment company portfolio
D. calculate and report the overall rate of return to investment company constituents

20. For an investor concerned with maximizing liquidity, which of the following investments
should be avoided?

A. Real estate
B. Bonds
C. Domestic stocks
D. International stocks

21. A portfolio consists of three index funds: an equity index, a bond index, and an
international index. The portfolio manager changes the weights periodically according to
forecasts for each sector. This is an example of __________.

A. a passively managed core with an actively managed component

B. a totally passively managed fund
C. passive asset allocation with active security selection
D. active asset allocation with passive security selection