Question 1

Suppose the shares of the Chickadee Corporation traded seven times in the following sequence one day last week: 46, 45.88, 45.75, 45.50, 45.63, 46, 46.13. In this case, a limit order to sell at 46 would have been executed

Accepted Answer

A limit order to sell at 46 would have been executed when the price reached 46 or higher, which happened three times in the sequence (46, 46, 46.13). A market order to sell would have been executed at the next available price after the order was placed, which could have been anywhere in the range of prices for that day (45.50 to 46.13).

Question 2

Warehousing liquidity protects a portion of the portfolio from market fluctuations.

Accepted Answer

Warehousing liquidity refers to setting aside cash or easily liquidated assets within a portfolio, which can help mitigate the impact of market fluctuations by providing a stable reserve that can be used without needing to sell off potentially undervalued assets.

Question 3

Under the variable-ratio plan, additional speculative investments are made when the ratio

Accepted Answer

Under a variable-ratio plan, additional speculative investments are made when the ratio of the value of speculative investments to the total portfolio value drops below a predetermined level. This strategy aims to maintain a certain level of speculative investment within the portfolio, adjusting the amount invested in speculative assets as the total portfolio value changes.

Question 4

A stop-loss order guarantees that an investor's unrealized profit will be protected.

Accepted Answer

A stop-loss order is designed to limit an investor's loss on a security position by selling the asset when it reaches a certain price, not to protect unrealized profit.

Question 5

Capital losses up to $5,000 on stock sales can be used to offset the taxes on ordinary income.

Accepted Answer

Capital losses on stock sales can be used to offset capital gains plus up to $3,000 ($1,500 if married filing separately) of other income.

Question 6

The primary risk in using a GTC limit sell order rather than a market order is that

Accepted Answer

The primary risk of using a Good-Til-Cancelled (GTC) limit sell order instead of a market order is that the limit order may not be executed if the market price never meets or exceeds the specified limit price. Unlike a market order, which is executed immediately at the current market price, a limit order only executes at the limit price or better, leading to the possibility that it might not be executed at all if the market does not reach the specified price.

Question 7

The two primary media for warehousing liquidity are

Accepted Answer

The two primary media for warehousing liquidity are money market mutual funds and money market deposit accounts because they offer high liquidity and safety, making them ideal for storing funds that may be needed on short notice.

Question 8

The maximum capital loss that can be applied to ordinary income for income tax purposes in any one year is $3000.

Accepted Answer

The IRS allows individuals to deduct up to $3,000 ($1,500 if married filing separately) of capital losses against ordinary income per year. Any loss exceeding this limit can be carried forward to future years.

Question 9

Alex bought 100 shares of CBG corporation at $20 per share. It is now selling at $50 and Alex has placed a stop loss order at $47.50, good til canceled. Which of the following is true?

Accepted Answer

The answer of Alex bought 100 shares of CBG corporation...

Question 10

Which of the following are reasons why a person may want to warehouse liquidity?
I. protect against total loss
II. ability to exploit future opportunities
III. capitalize on the high rates of return available on cash
IV. protect against the need to disturb the existing portfolio

Accepted Answer

Warehousing liquidity allows individuals to protect against total loss and the need to disturb their existing portfolio, as well as to exploit future opportunities. Capitalizing on high rates of return available on cash is not typically a reason for warehousing liquidity, as liquidity often involves holding assets in forms that are readily accessible but do not offer high returns.

Question 11

A stop loss order may not protect an investor's profits if

Accepted Answer

An unexpected event causing the price to drop steeply when the markets are closed can result in the stock opening at a much lower price than the stop loss level, bypassing the stop loss order and not protecting the investor's profits.

Question 12

Emily's marginal tax rate is 28%. She will have $100,000 in taxable income before any stock transactions. If she sells stock at long-term losses totaling $2,500 , her losses will reduce her taxes by

Accepted Answer

The answer of Emily's marginal tax rate is 28%. She...

Question 13

Over a period of time if an investment has not met its return objective, it should be sold.

Accepted Answer

If an investment has not met its return objective over a period of time, it is generally advisable to sell it to avoid further losses and seek alternative investments that align with the desired financial goals.

Question 14

One important tax rule concerning capital losses is that

Accepted Answer

The IRS allows individuals to deduct up to $3,000 ($1,500 if married filing separately) of net capital losses (the amount by which your total capital losses exceed your total capital gains) against ordinary income per year. Any amount exceeding this limit can be carried forward to future years.

Question 15

Late in the calendar year, Jessica must choose between selling stock that was purchased 2 years ago for $10,000 and has fallen to $7,000 or a different stock that was purchased 1 year ago for $5,000 and has risen to $7,000. If the investor has no other capital gains, which stock should she sell?

Accepted Answer

The answer of Late in the calendar year, Jessica must...

Question 16

Net asset values at the end of each month for the no-load Currier & Ives fund are shown below. Holly Tannenbaum invests $500 in the fund each month through an automatic investment plan. Compute:
a. the number of shares purchased each month
b. the number of shares she owns at the end of December
c. the average price of the shares over the period
d. the average price per share paid by Holly
 $\begin{array}{|l|l|l|}
\hline \text { Month } & \begin{array}{l}
\text { NAV end of } \
\text { month }
\end{array} & \begin{array}{l}
\text { Shares } \
\text { purchased }
\end{array} \
\hline \text { July } & 12.85 & \
\hline \text { August } & 11.08 & \
\hline \text { September } & 9.99 & \
\hline \text { October } & 9.85 & \
\hline \text { November } & 13.55 & \
\hline \text { December } & 12.21 & \
\hline & & \
\hline
\end{array}$

Accepted Answer

The answer of Net asset values at the end of...

Question 17

Which of the following are characteristics of stop-loss orders?
I. the risk of whipsawing
II. the ability to limit downside losses
III. the guaranteed execution within the order period
IV. the conversion to a market order

Accepted Answer

Stop-loss orders are characterized by the risk of whipsawing (I), the ability to limit downside losses (II), and the conversion to a market order once the stop price is reached (IV). They do not guarantee execution within the order period (III), as the market price may not reach the stop price within the desired timeframe.

Question 18

Dollar-cost averaging plans and constant-dollar plans are both formula approaches to portfolio management. Briefly explain the two plans.

Accepted Answer

The answer of Dollar-cost averaging plans and constant-dollar plans are...

Question 19

An investor adopts a variable ratio policy of investing in both a high beta mutual fund and a money market fund. Money will be moved from the money market fund to the high beta fund

Accepted Answer

A variable ratio policy involves adjusting the investment between assets based on their performance. When the high beta fund's value declines, it's an opportunity to buy more shares at a lower price, hence the transfer of money from the money market fund to the high beta fund.

Question 20

If an investor has a loss position in an investment and wants to sell it, the best time to sell for tax purposes is when a capital gain is available against which the loss can be applied.

Accepted Answer

Selling a loss position when there is a capital gain available allows the investor to offset the capital gain with the capital loss, potentially reducing the tax liability on the capital gains.

Quiz 13: Managing Your Own Portfolio