Question 1

Marti is 31 years old and is saving for retirement.Which one of the following portfolio allocations might best suit her situation if she is willing to accept a fair amount of risk in exchange for long-term capital appreciation?
A)60% bonds, 15% money funds and 25% real estate
B)5% money funds, 10% bonds and 85% growth stocks
C)25% bank CDs, 40% corporate bonds, 15% money market, 20% value stocks
D)50% mortgage bonds, 5% money market, 45% municipal bonds

Accepted Answer

Option B has the highest allocation towards growth stocks which have the potential for long-term capital appreciation. Marti is relatively young and has a longer time horizon until retirement so she can afford to take on more risk in pursuit of higher returns. The smaller allocations towards money funds and bonds can provide some diversification and stability to the portfolio, but the majority of the portfolio should be allocated towards growth-oriented assets in order to achieve long-term capital appreciation. Option A has too much allocation towards bonds and real estate, which might not provide enough growth for capital appreciation. Option C has a high allocation towards bank CDs and corporate bonds which are more conservative investments, and Option D focuses too heavily on bond investments which may not provide enough growth in the long-term.

Question 2

The allocation of investments between types of assets (stocks, bonds, short-term securities, etc.)has less effect on a portfolio's return than the choice of securities within asset classes.

Accepted Answer

The allocation of investments between different types of assets (asset allocation) is generally considered to have a more significant effect on a portfolio's return and risk level than the selection of individual securities within those asset classes. Asset allocation determines the broad outline of a portfolio's performance characteristics, while security selection fine-tunes it.

Question 3

Utility stocks are often suitable for low-risk, current-income-oriented portfolios.

Accepted Answer

Utility stocks typically have stable earnings and offer dividends, making them appealing to investors seeking low-risk and current income.

Question 4

Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to asset allocation.Compare and contrast these three different approaches.

Accepted Answer

The answer of Fixed weightings, flexible weightings, and tactical asset...

Question 5

A conservative asset allocation would rely heavily on bonds and short-term securities.

Accepted Answer

A conservative asset allocation strategy typically prioritizes capital preservation and low-risk investments, which makes bonds and short-term securities attractive options. Therefore, a conservative portfolio would generally have a larger allocation to these types of assets.

Question 6

Mathew's 401-K plan offers a choice between and S&P 500 Index Fund, a large-cap stock fund, a blue chip stock fund that seeks high dividend income and modest growth, a fund that invests only in investment grade corporate bonds and a fund that that invests only in government bonds.Mathew allocates 20% of his money to each fund.Which of the following statements offers the best critique of Mathew's "1/N" allocation?
A)Mathew may not be as well diversified as he thinks because the three stock funds probably own many of the same stocks.
B)He should have allocated on 1/3 to stocks and 1/3 to each of the remaining funds.
C)His plan does not provide sufficient liquidity.
D)There is nothing wrong with Mathew's plan.

Accepted Answer

Allocating 20% to each fund may not result in optimal diversification because the three stock funds may hold many of the same stocks. It would be better to allocate the money across different asset classes, such as stocks, bonds, and real estate, rather than just across different funds within the same asset class.

Question 7

The fixed-weightings approach to asset allocation
A)is based on an allocation of an equal percentage of the portfolio to each separate asset category.
B)requires periodic rebalancing of the portfolio to maintain the desired weights.
C)is based on periodic adjustments to category weights in response to market changes.
D)uses stock-index futures and bond futures in a market timing strategy.

Accepted Answer

The fixed-weightings approach to asset allocation requires periodic rebalancing of the portfolio to maintain the desired weights, meaning that if one category outperforms the others, its weight will increase and adjustments need to be made by selling some of that category and buying others to reallocate back to the desired weights. A is incorrect as not all categories may have the same percentage weight. C is incorrect as the approach is based on maintaining the fixed weights, not responding to market changes. D is incorrect as it refers to a different approach (market timing) and the use of futures, which may not be applicable to the fixed-weightings approach.

Question 8

Jordan invests 10% of his money in each of the 10 mutual funds available in his 401-K plan.This tendency is known as the 1/N heuristic.

Accepted Answer

The 1/N heuristic suggests investing an equal amount in each available option. In this case, Jordan is investing 10% in each of the 10 mutual funds available in his 401-K plan, which follows the 1/N heuristic.

Question 9

The Dow Jones Industrial Average (DJIA)includes 500 of the largest companies traded on U.S.exchanges.

Accepted Answer

The DJIA actually includes 30 of the largest companies traded on U.S. exchanges. The S&P 500 index includes 500 companies.

Question 10

An asset allocation plan should consider which of the following investor characteristics?
I.income and employment security
II.marital status
III.age and proximity to retirement
IV.social relationships and peer groups
A)II only
B)I, II and III only
C)I, III and IV only
D)I, II, III and IV

Accepted Answer

Investor characteristics that are relevant to an asset allocation plan include income and employment security, age and proximity to retirement, and marital status. Social relationships and peer groups are not typically relevant to determining an appropriate asset allocation.

Question 11

The investor's overall economic security should an important consideration when allocating assets within a portfolio.

Accepted Answer

The statement is true. An investor should consider their overall economic security and risk tolerance when determining how to allocate assets within their portfolio. This includes diversifying their investments and considering factors like age, financial goals, and other personal circumstances.

Question 12

Tactical asset allocation is most suitable for
A)young, single individuals with good incomes.
B)retirees.
C)large institutional investors.
D)investors who have already accumulated a fair amount of wealth.

Accepted Answer

Tactical asset allocation is most suitable for large institutional investors who have significant resources and expertise to actively manage their portfolios and react quickly to market conditions. It may not be suitable for young individuals or retirees, who may have different investment goals and risk tolerance. While investors who have already accumulated wealth may benefit from tactical asset allocation, their personal circumstances and objectives should also be taken into account.

Question 13

Which one of the following provides the greatest reduction in total risk?
A)diversification
B)asset allocation
C)security selection
D)beta reduction

Accepted Answer

Asset allocation provides the greatest reduction in total risk because it involves diversifying investments across different asset classes (such as stocks, bonds, and real estate), which each have their own risk and return profiles. This helps to reduce the overall risk of the portfolio by spreading investments across different types of assets. Diversification (option A) is also important, but does not provide as much risk reduction as asset allocation. Security selection (option C) and beta reduction (option D) are more focused on managing specific risks within investments rather than reducing overall portfolio risk.

Question 14

An asset allocation plan should consider which of the following factors?
I.economic outlook
II.capital preservation
III.changing investment goals
IV.investor risk tolerance
A)II only
B)II, III and IV only
C)I, III and IV only
D)I, II, III and IV

Accepted Answer

An asset allocation plan should consider all of the factors listed. The economic outlook can impact the performance of investments, changing investment goals may require a reallocation of assets, and investor risk tolerance will determine the appropriate asset mix. Additionally, capital preservation is an important consideration in designing an asset allocation plan to ensure that the portfolio is able to weather market volatility and unforeseen events.

Question 15

Jessica's portfolio consists of 30% common stock, 40% bonds, 15% foreign securities and 15% short-term securities.This asset allocation would be considered
A)aggressive.
B)moderate.
C)conservative.
D)passive.

Accepted Answer

A portfolio consisting of 30% common stock, 40% bonds, 15% foreign securities, and 15% short-term securities is a moderate asset allocation. This allocation strikes a balance between risk and return, with a higher allocation to bonds and short-term securities providing some stability while still allowing for growth potential from stocks and foreign securities.

Question 16

When developing an asset allocation scheme, it is best to weight each type of asset equally.

Accepted Answer

When developing an asset allocation scheme, it is not necessarily best to weight each type of asset equally. The optimal asset allocation will depend on the investor's individual goals, risk tolerance, and time horizon. Investing in a diverse mix of asset classes, such as stocks, bonds, and real estate, can help manage risk and maximize returns. The specific allocation percentages will vary based on the individual's unique circumstances.

Question 17

Tatiana is following a fixed weighting approach to managing her portfolio, which on January 1 consisted of 45% common stock, 40% bonds, and 15% short-term securities.Because stocks had a good year, at the end of the year, it consisted of 55% common stock, 35% bonds and 10% short-term securities.As a result,
A)Tatiana should leave her portfolio as it is to take advantage of momentum in stocks.
B)she should sell stock and buy bonds and short-term securities to restore the original weightings.
C)she should sell stock index futures to protect herself from falling prices.
D)she should sell stock and increase the proportions of bonds and short-term securities because she is now one year older.

Accepted Answer

Tatiana should sell some of her stock and use the proceeds to buy bonds and short-term securities in order to restore her portfolio to its original weightings. This is known as rebalancing and helps to manage risk by ensuring that one asset class does not become too dominant in the portfolio. It is not advisable to leave the portfolio unchanged as it may become too risky. Selling stock index futures is a hedging strategy and is not necessary in this scenario. The age of Tatiana is not relevant to this decision.

Question 18

Asset allocation should focus on
A)the investor's financial and family situation.
B)selection of individual securities within an asset class.
C)maximization of current income.
D)maximization of short-term profits.

Accepted Answer

Asset allocation should take into account the investor's financial goals, risk tolerance, and family situation. It is important to tailor the allocation to the individual rather than focusing on short-term profits or maximizing current income. Selection of individual securities within an asset class is also important, but it should be done in the context of an overall asset allocation strategy.

Question 19

Asset allocation focuses on selecting specific securities within an asset class.

Accepted Answer

Asset allocation focuses on dividing an investment portfolio among different asset classes (such as stocks, bonds, and cash equivalents) based on an investor's goals, risk tolerance, and investment horizon. It does not involve selecting specific securities within an asset class. That falls under the realm of security selection.

Question 20

Before analyzing needs and objectives, investors should first construct a portfolio.

Accepted Answer

Before constructing a portfolio, investors should first analyze their needs and objectives to determine the appropriate allocations for their investments.

Quiz 13: Managing Your Own Portfolio

Marti is 31 years old and is saving for retirement.Which one of the following portfolio allocations might best suit her situation if she is willing to accept a fair amount of risk in exchange for long-term capital appreciation?

The allocation of investments between types of assets (stocks, bonds, short-term securities, etc.)has less effect on a portfolio's return than the choice of securities within asset classes.

Utility stocks are often suitable for low-risk, current-income-oriented portfolios.

Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to asset allocation.Compare and contrast these three different approaches.

A conservative asset allocation would rely heavily on bonds and short-term securities.

The fixed-weightings approach to asset allocation

Jordan invests 10% of his money in each of the 10 mutual funds available in his 401-K plan.This tendency is known as the 1/N heuristic.

The Dow Jones Industrial Average (DJIA)includes 500 of the largest companies traded on U.S.exchanges.

An asset allocation plan should consider which of the following investor characteristics? I.income and employment security II.marital status III.age and proximity to retirement IV.social relationships and peer groups

The investor's overall economic security should an important consideration when allocating assets within a portfolio.

Tactical asset allocation is most suitable for

Which one of the following provides the greatest reduction in total risk?

An asset allocation plan should consider which of the following factors? I.economic outlook II.capital preservation III.changing investment goals IV.investor risk tolerance

Jessica's portfolio consists of 30% common stock, 40% bonds, 15% foreign securities and 15% short-term securities.This asset allocation would be considered

When developing an asset allocation scheme, it is best to weight each type of asset equally.

Asset allocation should focus on

Asset allocation focuses on selecting specific securities within an asset class.

Before analyzing needs and objectives, investors should first construct a portfolio.