Deck 18: Asset Allocation

Question 1

In constructing a portfolio,you should diversify across several investments.

Answer 1

True

Question 2

The more volatile the returns of individual investments in a portfolio,the more volatile the portfolio's returns are over time.

Answer 2

True

Question 3

Asset allocation is the process of allocating money across financial assets,such as stocks,bonds,and mutual funds,with the objective of eliminating risk altogether.

Answer 3

False

Question 4

A portfolio's risk is measured by its degree of volatility because the ________ volatile the returns,the ________ uncertain the future return on the portfolio.

A) more; more
B) more; less
C) less; more
D) None of the above.

Question 5

You can reduce investment risk by investing in

A) a corporate bond.
B) a portfolio of investments.
C) corporate stocks.
D) real estate.

Question 6

The objective of asset allocation is to

A) make investment decisions easier.
B) ensure the returns of the individual investments within a portfolio.
C) achieve a desired return on investment and eliminate the adverse risk of investing.
D) achieve a desired return on investment and maintain a tolerable risk level.

Question 7

The main benefit of diversification is that it reduces the exposure of your investments to the adverse effects of any individual stock.

Question 8

To reduce your risk,you should select stocks whose returns exhibit a ________ positive correlation rather than a ________ positive correlation.

A) high; high
B) low; high
C) high; low
D) low; low

Question 9

A portfolio can reduce risk when its

A) investments do not move in tandem.
B) investments move in tandem.
C) returns of individual investments are similar.
D) investments are from similar industries.

Question 10

Which of the following would not be a good method of asset allocation?

A) Restrict your portfolio to stocks
B) Include bonds
C) Include real estate
D) Include mutual funds

Question 11

When you compile a portfolio of stocks,you should avoid including stocks that exhibit

A) a high negative correlation.
B) a high positive correlation.
C) no correlation.
D) an inverse correlation.

Question 12

Which of the following is a true statement about diversification?

A) It will increase your overall risk.
B) It will increase your volatility.
C) It will decrease the number of investments in your portfolio.
D) It will increase your chances of obtaining your financial goals.

Question 13

Proper asset allocation can

A) increase your wealth.
B) decrease your assets.
C) increase your dividend income and decrease your interest income.
D) increase your expenses.

Question 14

The primary benefit of diversification is that it

A) is convenient.
B) is cheap.
C) reduces the exposure of your investments to adverse effects of any individual investment.
D) increases stock volatility.

Question 15

The more similar the returns of individual investments in a portfolio,the more volatile the returns are over time.

Question 16

Diversifying your investments could protect you to some degree from the problems associated with misleading financial statements from some companies.

Question 17

A portfolio can be less risky when its investments move in perfect tandem.

Question 18

The more ________ the returns of individual investments in a portfolio,the more ________ the portfolio's returns are over time.

A) similar; volatile
B) different; volatile
C) steady; unsteady
D) aggressive; predictable

Question 19

When you compile a portfolio,you should include investments that exhibit a high positive correlation.

Question 20

Asset allocation is the process of dividing money across financial assets that include all of the following except

A) stocks.
B) bonds.
C) mutual funds.
D) All of the above can be used for asset allocation.

Question 21

Proper risk-return management for a firm means that

A) the firm should take as few risks as possible.
B) the firm must determine an appropriate trade-off between risk and return.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.

Question 22

Use the following two columns of items to answer the matching questions below:
portfolio

A)a property of stocks that behave in a dissimilar manner
B)allocating money across financial assets
C)a set of multiple investments in different assets
D)a property of stocks that behave in a similar manner

Question 23

When investing outside the United States,stocks are typically ________ U.S.-based stocks.

A) as volatile as
B) less volatile than
C) more volatile than
D) more stable than

Question 24

Stocks in developing countries are generally ________ stocks in developed countries.

A) as volatile as
B) more volatile than
C) less volatile than
D) more stable than

Question 25

In compiling a portfolio,which of the following should you not consider?

A) Investments that exhibit a high positive correlation
B) Investments whose values are not influenced by similar conditions
C) Negatively correlated investments
D) Investments whose reaction to economic conditions will not be similar

Question 26

Use the following two columns of items to answer the matching questions below:
asset allocation

A)a property of stocks that behave in a dissimilar manner
B)allocating money across financial assets
C)a set of multiple investments in different assets
D)a property of stocks that behave in a similar manner

Question 27

The stocks,bonds,and mutual funds that an investor owns comprise his/her ________.

Question 28

Use the following two columns of items to answer the matching questions below:
positive correlation

A)a property of stocks that behave in a dissimilar manner
B)allocating money across financial assets
C)a set of multiple investments in different assets
D)a property of stocks that behave in a similar manner

Question 29

Diversifying among stocks based in countries outside the United States

A) makes your portfolio less vulnerable to conditions in the United States.
B) is too expensive to use as a means of diversification.
C) makes your portfolio's returns less volatile because foreign stocks are less volatile than U.S. stocks.
D) is too risky for individual investors to consider.

Question 30

During the financial crisis in 2008-2009,investors who were diversified across industries

A) experienced no losses.
B) experienced large gains.
C) experienced significant losses because most industries were suffering from weak economic conditions.
D) experienced losses in financial services companies but not in other industries.

Question 31

Asset allocation uses what to reduce your risk from investing?

Question 32

If you are trying to adequately diversify your portfolio,you would want to avoid investing in stocks that were

A) highly negatively correlated.
B) not at all correlated.
C) highly positively correlated.
D) in different regions of the world.

Question 33

Common stock diversification strategies include diversifying among stocks across industries and among stocks across countries.

Question 34

Because foreign stocks can produce such high returns,many investment advisers recommend that you invest about 45% of your portfolio in these stocks.

Question 35

Diversification among stocks in different industries will usually avoid fluctuations in stock values due to general economic conditions.

Question 36

Stocks from outside the United States have about the same volatility as those from U.S.markets.

Question 37

Investing in Coke and Pepsico would be an example of

A) highly correlated stocks.
B) investing in stocks that were not correlated.
C) diversifying by investing in both rather than one or the other.
D) investing in international growth stocks.

Question 38

Diversification is especially beneficial during periods where the stock market conditions are generally poor.

Question 39

Use the following two columns of items to answer the matching questions below:
negative correlation

A)a property of stocks that behave in a dissimilar manner
B)allocating money across financial assets
C)a set of multiple investments in different assets
D)a property of stocks that behave in a similar manner

Question 40

The objective of diversification in an investment portfolio is

A) to make sure you do not have all your eggs in one basket.
B) to eliminate non-systematic or company specific risk.
C) to eliminate systematic portfolio risk.
D) to hold a lot of strong growth stocks.

Question 41

In reality,many stocks are influenced by the same conditions as the stock market overall,so diversification by investing only in stocks is limited.

Question 42

Name two ways to diversify common stock.

Question 43

Mortgage REITs invest in mortgage loans,while equity REITs invest in real estate stocks or other equities.

Question 44

To which of the following markets would an investment adviser recommend you allocate approximately 80% of your money if you wanted to maintain a relatively low degree of risk?

A) European stocks
B) Asian stocks
C) U.S. stocks
D) Latin American stocks

Question 45

When two companies' profits tend to move in opposite directions in response to changing economic factors,the companies are likely

A) negatively correlated.
B) not correlated.
C) unrelated in industry sector.
D) in different regions of the world.

Question 46

Which of the following pairs of stocks seem to offer the most diversification benefits?

A) Exxon - Consolidated Coal
B) Exxon - Tesla
C) Netflix - Merck Pharmaceuticals
D) Not enough information to accurately judge since correlation coefficients are not provided.

Question 47

The price you pay when purchasing an option is referred to as an advance.

Question 48

Which of the following do not belong in a well diversified portfolio?

A) Global equities
B) Bonds
C) Precious metals like gold or silver
D) All of the above can be present in a well diversified portfolio.

Question 49

One way to reduce your diversification costs is to invest in various mutual funds.

Question 50

________ risk is the risk that a stock is susceptible to poor performance due to weak stock market conditions.

A) Business
B) Market
C) Default
D) Management

Question 51

Call options are the right to buy stock and put options are the right to sell stock,but both types of options can be either bought or sold.

Question 52

As you allocate more of your investment portfolio to bonds,you reduce your exposure to interest rate risk,but increase your exposure to market risk.

Question 53

The greater the proportion of stocks to bonds in your portfolio,the greater the ________ risk.

A) interest rate
B) reinvestment
C) inflation
D) market

Question 54

In order to add real estate to your investment portfolio,you may buy houses or other real estate directly or you may purchase real estate investment trusts (REITs).

Question 55

Bond prices are inversely related to interest rates and are not directly influenced by stock market conditions.

Question 56

The returns from investing in stocks and from investing in bonds are not highly correlated.

Question 57

In general,the larger the proportion of your portfolio that is allocated to bonds,the lower will be your portfolio's overall risk.

Question 58

According to the text,many investment advisors recommend ________% of foreign stocks for a diversified portfolio.

A) 0
B) 10
C) 20
D) 30

Question 59

Asset allocation should be restricted to stocks because they have the highest potential returns.

Question 60

If your portfolio consists of 100 shares of Facebook,100 shares of Twitter,and 100 shares of Google,which of the following statements would be true of your portfolio?

A) It is well diversified by industry.
B) It is well diversified by type of asset.
C) It has poor diversification.
D) It has more diversification than is necessary.

Question 61

In a portfolio,stocks and bonds are

A) different in risk and return.
B) not highly correlated.
C) highly correlated.
D) Both A and B are correct

Question 62

During the financial crisis in 2008-2009,General Electric's share price dropped significantly.This was because of the

A) business risk.
B) market risk.
C) exchange risk.
D) interest rate risk.

Question 63

________ increase risk while ________ decrease risk in a portfolio.

A) Stocks; bonds
B) Bonds; mutual funds
C) Bonds; REITs
D) Mutual funds; stocks

Question 64

An alternative to purchasing real estate directly and finding renters is investing in a

A) management rental company.
B) real estate investment trust.
C) condominium.
D) townhouse.

Question 65

Bond

A) prices are positively related to interest rates.
B) prices are not directly influenced by stock market conditions.
C) returns are usually higher than stock returns.
D) Both A and B are correct

Question 66

If your portfolio currently consists of common stock in three companies,you could increase your diversification by all of the following except

A) selling one of the companies and putting the money in a bond.
B) selling one of the companies and putting the money in a REIT.
C) buying another stock.
D) selling one of the companies and putting the money in the other two.

Question 67

In reality,many stocks are influenced by ________ the stock market overall.

A) different conditions than
B) the same conditions as
C) other conditions than
D) unrelated conditions to

Question 68

REITs are classified according to how they invest their money.They include

A) equity REITs.
B) mortgage REITs.
C) mutual fund REITs.
D) Both A and B are correct.

Question 69

Which of the following is not true of REITs?

A) They are an easy way to invest in real estate.
B) They are a way to diversify your portfolio.
C) They are a very low risk investment.
D) They commonly invest in commercial real estate.

Question 70

Stock prices are influenced the most by

A) general market conditions.
B) the price of bonds.
C) interest rates.
D) inflation.

Question 71

If you are willing to accept only a moderate level of risk,you should invest in

A) savings accounts.
B) small-cap technology stocks.
C) a stock mutual funds.
D) Treasury bills.

Question 72

Selling options on stock you already own

A) is illegal under federal law.
B) cannot benefit you financially.
C) is called a covered call strategy.
D) is not a very good idea.

Question 73

Advantages of investing in REITs are that

A) shares can be purchased directly from the company.
B) the shareholders decide which properties to buy and sell.
C) the managers take care of maintenance.
D) the income is nontaxable.

Question 74

As you allocate more of your investment portfolio to bonds,you reduce your exposure to ________ risk,but increase your exposure to ________.

A) interest rate; business risk
B) business; default risk
C) market; interest rate risk
D) default; liquidity risk

Question 75

________ REITs invest money directly in properties.

A) Asset
B) Equity
C) Mortgage
D) Property

Question 76

If stock prices overall decline in a given month,a well-diversified portfolio will likely experience

A) a decline.
B) no change.
C) a gain.
D) an unrelated change.

Question 77

REITs are

A) similar to open-end mutual funds.
B) not traded on stock exchanges.
C) pooled funds that invest in real estate.
D) purchased directly from the company.

Question 78

Stock options

A) are traded on exchanges.
B) are relatively simple.
C) are less risky than stocks.
D) pay dividends.

Question 79

In general,the ________ the proportion of your portfolio that is allocated to bonds,the ________ will be your portfolio's overall risk.

A) larger; lower
B) smaller; lower
C) larger; higher
D) None of the above.

Question 80

A trust that invests in loans to help finance the development of properties is called a(n)

A) equity REIT.
B) real estate REIT
C) mortgage REIT.
D) option REIT.