Question 1

The prudent investor rule requires ________.

Accepted Answer

A)   executives of companies to avoid investing in options of companies they work for
B)   executives of companies to disclose their transactions in stocks of companies they work for
C)   professional investors who manage money for others to avoid all risky investments
D)   professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor D

Question 2

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 ________.

Accepted Answer

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 D

Question 3

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

Accepted Answer

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 A

Question 4

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

Accepted Answer

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

Question 5

At the early stage of an individual's working career, his or her retirement portfolio should probably consist mostly of ________.

Accepted Answer

A)   annuities
B)   stocks
C)   bonds
D)   commodities

Question 6

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

Accepted Answer

A)   expected return = 11%, historical standard deviation = 12%
B)   expected return = 12%, historical standard deviation = 14%
C)   expected return = 14%, historical standard deviation = 18%
D)   expected return = 17%, historical standard deviation = 21%

Question 7

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?

Accepted Answer

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

Question 8

For which one of the following institutions is liquidity usually the most important?

Accepted Answer

A)   mutual funds
B)   pension funds
C)   life insurers
D)   banks

Question 9

When a company sets up a defined contribution pension plan, the ________ bears all the risk and the ________ receives all the return from the plan's assets.

Accepted Answer

A)   employee; employee
B)   employee; employer
C)   employer; employee
D)   employer; employer

Question 10

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 ________.

Accepted Answer

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

Question 11

An employee has an average wage of $60,000 and has worked for the firm for 28 years. The defined benefit pension plan pays retirees 2.3% of the average wage times the years of service. The employee can expect to receive ________ per year upon retirement.

Accepted Answer

A)   $18,000
B)   $38,640
C)   $45,325
D)   $55,250

Question 12

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

Accepted Answer

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

Question 13

Personal trusts are typically allowed to engage in which of the following investment activities?
I. Buying and selling futures contracts.
II. Short-selling securities.
III. Purchasing and writing options.
IV. Buying stock on margin.

Accepted Answer

A)   I only
B)   II and III only
C)   II and IV only
D)   None of the given activities are allowed.

Question 14

An investor is looking at different retirement investment choices, and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select?

Accepted Answer

A)   fixed annuity
B)   defined benefit plan
C)   defined contribution plan
D)   bonds invested in a retirement plan

Question 15

_______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred savings plan.

Accepted Answer

A)   Term life
B)   Whole life
C)   Variable life
D)   Universal life

Question 16

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

Accepted Answer

A)   income; high growth
B)   income; moderate growth
C)   moderate-growth; high growth
D)   high-growth; moderate growth

Question 17

A pension fund will owe $15 million to retirees in 8 years. An actuary assumes an 7% rate of return on the funds invested in the pension plan. If the pension plan receives annual contributions from the company sponsor, how much must the company pay each year to fully fund the pension liability?

Accepted Answer

A)   $1,212,587
B)   $1,462,016
C)   $1,533,333
D)   $1,666,667

Question 18

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

Accepted Answer

A)   monitoring market conditions and relative values
B)   monitoring investor circumstances
C)   identifying investor constraints and preferences
D)   organizing the investment management process itself

Question 19

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

Accepted Answer

A)   banks
B)   endowment funds
C)   life insurance companies
D)   pension funds

Question 20

The prudent investor rule is an example of a regulation designed to ensure appropriate ________ by money managers.

Accepted Answer

A)   fiduciary responsibility
B)   fiscal responsibility
C)   monetary responsibility
D)   marketing procedures

Exam 22: Investors and the Investment Process