Question 1

Dollar cost averaging is a procedure by which an investor
A) buys more stock as its price increases.
B) times investments in order to buy low and sell high.
C) invests a fixed dollar amount in a security at fixed intervals.
D) maintains a constant ratio of conservative and aggressive investments.

Accepted Answer

Dollar cost averaging involves investing a fixed dollar amount at regular intervals, regardless of the security's price. This strategy helps to reduce the impact of market fluctuations on the investment and can result in lower average costs over time.

Question 2

Dollar cost averaging is a formula plan which automatically causes investors to purchase more shares when the price is low and purchase fewer shares when the price is high.

Accepted Answer

Dollar cost averaging is a strategy of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. This results in the investor buying more shares when the share price is low and fewer shares when the share price is high, resulting in a lower overall average cost per share.

Question 3

Investors who use formula plans believe that they have above average ability to time the market and pick successful investments.

Accepted Answer

Formula plans are designed to minimize the emotional aspect of investing by following a predetermined strategy for buying and selling, rather than relying on an investor's belief in their ability to time the market or pick successful investments.

Question 4

If a constant-dollar plan portfolio is profitable over the long run, the ________ in value over time.
A) conservative portion will increase
B) conservative portion will remain constant
C) aggressive portion will decrease
D) entire portfolio will remain constant

Accepted Answer

A constant-dollar portfolio involves investing in low-risk, conservative assets that are less susceptible to market fluctuations. Over the long run, these assets may generate returns that are sufficient to keep up with inflation, so the conservative portion of the portfolio will increase in value over time. Therefore, Choice A is the correct answer. Choices B, C, and D are incorrect because they do not accurately describe the behavior of a constant-dollar portfolio.

Question 5

Formula plans are high-risk investment strategies that attempt to benefit from cyclical price movements.

Accepted Answer

The answer of Formula plans are high-risk investment strategies that...

Question 6

A constant-ratio plan requires an investor to periodically rebalance the portfolio.

Accepted Answer

A constant-ratio plan requires an investor to periodically rebalance the portfolio in order to maintain the desired asset allocation.

Question 7

Explain the type of risk measured by each of the following measures. Also identify the factor in each formula that determines the type of risk that is being measured.
(a) Jensen's measure
(b) Sharpe's measure
(c) Treynor's measure

Accepted Answer

The answer of Explain the type of risk measured by...

Question 8

The formula plan that requires maintaining a target dollar investment in the speculative portion of an investor's portfolio is the
A) most passive of all the formula plans.
B) target return plan.
C) constant ratio plan.
D) constant dollar plan.

Accepted Answer

The formula plan that requires maintaining a target dollar investment in the speculative portion of an investor's portfolio is the constant dollar plan. This plan involves investing a fixed dollar amount in the speculative portion of the portfolio, regardless of market conditions or portfolio performance. It is a more active approach than the target return plan or constant ratio plan, as it requires ongoing adjustments to maintain the fixed dollar investment in the speculative portion.

Question 9

The general theory of dollar cost averaging is
A) to time the market to take advantage of low stock prices.
B) to buy more stock when prices are low and less when prices are high.
C) to equal the performance of market averages at the lowest dollar cost.
D) to sell as markets decline and buy as they begin to rise.

Accepted Answer

Dollar cost averaging involves investing a fixed amount of money at regular intervals, regardless of the price of the stock. This means that more shares are purchased when prices are low and fewer shares are purchased when prices are high, resulting in a lower average cost per share over time. The goal of dollar cost averaging is not to time the market but rather to minimize the impact of market fluctuations on the overall investment.

Question 10

The formula plan which requires the greatest management attention and is also the most aggressive is called the ________ plan.
A) dollar cost averaging
B) constant dollar
C) constant ratio
D) variable ratio

Accepted Answer

The variable ratio plan requires the most management attention because it involves adjusting the asset mix in a portfolio based on specific criteria or market indicators, making it an aggressive strategy. This approach often necessitates frequent monitoring and adjustments to maintain the desired asset allocation, hence requiring significant management effort.

Question 11

Successful dollar cost averaging depends on the investor's skill in timing the market.

Accepted Answer

Successful dollar cost averaging does not require timing the market. It involves investing a fixed amount of money at regular intervals, regardless of market fluctuations. This helps to reduce the impact of market volatility and can result in a lower average cost per share over time.

Question 12

Investors who who accept the random walk theory should use
A) a dollar cost averaging plan.
B) a constant dollar plan.
C) a constant ratio plan.
D) a variable ratio plan.

Accepted Answer

According to the random walk theory, stock prices are unpredictable and follow a random pattern. Therefore, a dollar cost averaging plan, which involves investing a fixed amount of money at regular intervals regardless of market conditions, can help investors mitigate the risk of buying high and selling low. This approach allows investors to average out the cost of their investments over time and potentially benefit from buying at lower prices during market downturns.

Question 13

Which one of the following statements concerning formula plans is correct?
A) The use of subjective judgment is important to the routine administration of most formula plans.
B) Formula plans are based on the adherence to a mechanical set of rules with regard to when to buy and/or sell.
C) The objective of most formula plans is to maximize profits.
D) Securities with very stable prices are best suited to nearly all formula plans.

Accepted Answer

Formula plans are based on a mechanical set of rules, usually incorporating technical analysis indicators, to determine when to buy and/or sell securities. The use of subjective judgment is usually minimized in the routine administration of formula plans. The objective of most formula plans is to achieve a predetermined investment objective, such as capital appreciation or income generation, rather than maximizing profits. Securities with volatile prices are more suitable for formula plans as they enable the rules to be triggered more frequently, providing more opportunities for trades.

Question 14

When using a constant dollar plan,
A) gains from the speculative portion of the portfolio are transferred to the safe portion of the portfolio.
B) the amount of money in the speculative portion of the portfolio should decline over time.
C) the percentage of funds in the speculative portion of the portfolio should increase over time.
D) the ratio of safe funds to speculative funds remains constant over time.

Accepted Answer

In a constant dollar plan, gains from the speculative portion are transferred to the safe portion to maintain a fixed dollar amount in the speculative portion.

Question 15

The constant-ratio plan
A) requires the establishment of trigger points for portfolio rebalancing.
B) utilizes a predetermined ratio between desired current yield and expected capital gains.
C) strictly adheres to a buy-and-hold strategy.
D) is an attempt to time the cyclical movements of the market.

Accepted Answer

The constant-ratio plan requires the establishment of trigger points for portfolio rebalancing. It is a strategy that involves adjusting the portfolio's asset allocation based on a predetermined ratio of assets, and trigger points are set to rebalance the portfolio back to its target allocation when market conditions cause deviations from the desired ratio.

Question 16

Which one of the following statements is correct concerning dollar cost averaging plans?
A) Dollar cost averaging is an active trading strategy.
B) Dollar cost averaging is a short-term trading strategy.
C) The goal of dollar cost averaging is current dividend income.
D) The goal of dollar cost averaging is long-term capital appreciation.

Accepted Answer

The goal of dollar cost averaging is to achieve long-term capital appreciation by investing a fixed amount of money at regular intervals over a long period of time. It is not an active or short-term trading strategy, nor is it focused on generating current dividend income.

Question 17

Dollar cost averaging is a formula plan to purchase the same number of shares of stock at regular intervals of time.

Accepted Answer

Dollar cost averaging involves investing a fixed amount of money at regular intervals, which means the number of shares purchased varies depending on the stock's price at each interval.

Question 18

Which of the following is ideally suited to automatic investing through a payroll deduction plan?
A) a dollar cost averaging plan
B) a constant dollar plan
C) a constant ratio plan
D) a variable ratio plan

Accepted Answer

A dollar cost averaging plan is ideal for automatic investing through a payroll deduction plan because it involves investing a fixed dollar amount at regular intervals, such as monthly or biweekly. This approach helps to reduce the impact of market volatility on the overall cost of the investment by purchasing more shares when prices are low and fewer shares when prices are high. This strategy can help to smooth out market fluctuations over time and potentially improve returns. The other options listed (B, C, and D) involve different methods of adjusting the investment amount based on market performance, which may not be suited to automatic payroll deductions.

Question 19

The theory behind the variable ratio plan is to
A) passively buy and hold a wide variety of securities.
B) time the cyclical movements of the stock market and thereby "buy low and sell high."
C) avoid selling any security for a capital gain, and thus indefinitely avoiding the capital gains tax.
D) keep the unit cost of the portfolio at a constant level.

Accepted Answer

The variable ratio plan involves timing the cyclical movements of the stock market and buying or selling assets accordingly, with the goal of buying low and selling high. This is in contrast to options A, C, and D, none of which accurately describe the theory behind the variable ratio plan.

Question 20

A constant ratio plan allows for speculative gains while limiting potential losses.

Accepted Answer

A constant ratio plan involves maintaining a set ratio of assets in one's portfolio, which allows for potential speculative gains while also limiting potential losses.

Quiz 13: Managing Your Own Portfolio

Dollar cost averaging is a procedure by which an investor

Dollar cost averaging is a formula plan which automatically causes investors to purchase more shares when the price is low and purchase fewer shares when the price is high.

Investors who use formula plans believe that they have above average ability to time the market and pick successful investments.

If a constant-dollar plan portfolio is profitable over the long run, the ________ in value over time.

Formula plans are high-risk investment strategies that attempt to benefit from cyclical price movements.

A constant-ratio plan requires an investor to periodically rebalance the portfolio.

Explain the type of risk measured by each of the following measures. Also identify the factor in each formula that determines the type of risk that is being measured. (a) Jensen's measure (b) Sharpe's measure (c) Treynor's measure

The formula plan that requires maintaining a target dollar investment in the speculative portion of an investor's portfolio is the

The general theory of dollar cost averaging is

The formula plan which requires the greatest management attention and is also the most aggressive is called the ________ plan.

Successful dollar cost averaging depends on the investor's skill in timing the market.

Investors who who accept the random walk theory should use

Which one of the following statements concerning formula plans is correct?

When using a constant dollar plan,

The constant-ratio plan

Which one of the following statements is correct concerning dollar cost averaging plans?

Dollar cost averaging is a formula plan to purchase the same number of shares of stock at regular intervals of time.

Which of the following is ideally suited to automatic investing through a payroll deduction plan?

The theory behind the variable ratio plan is to

A constant ratio plan allows for speculative gains while limiting potential losses.