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Questions and Answers
Which of the following is not a step in the planning system for asset allocation?
Which of the following is not a step in the planning system for asset allocation?
Why can investments be viewed as a delivery mechanism?
Why can investments be viewed as a delivery mechanism?
Which of the following factors is not a personal consideration that enters into the asset allocation process?
Which of the following factors is not a personal consideration that enters into the asset allocation process?
Which of the following time frames is associated with a long-term horizon?
Which of the following time frames is associated with a long-term horizon?
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Which of the following is not part of the investment policy associated with a short-term horizon?
Which of the following is not part of the investment policy associated with a short-term horizon?
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Normal long-term asset allocation is the investment policy associated with which of the following horizons?
Normal long-term asset allocation is the investment policy associated with which of the following horizons?
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Which of the following influences one's risk tolerance?
Which of the following influences one's risk tolerance?
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Which of the following is the holding period return?
Which of the following is the holding period return?
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What does semi-variance measure?
What does semi-variance measure?
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Which of the following best defines unsystematic risk?
Which of the following best defines unsystematic risk?
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What does the risk premium represent?
What does the risk premium represent?
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If the risk-free rate is 5% and the risk premium is 4%, what is the expected rate of return?
If the risk-free rate is 5% and the risk premium is 4%, what is the expected rate of return?
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The expected rate of return is calculated by which of the following?
The expected rate of return is calculated by which of the following?
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Which of the following is furthest to the left of the security market line?
Which of the following is furthest to the left of the security market line?
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Which of the following statements best describes the efficient market hypothesis?
Which of the following statements best describes the efficient market hypothesis?
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Which of the following is NOT a characteristic of unsystematic risk?
Which of the following is NOT a characteristic of unsystematic risk?
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What is the formula for calculating the holding period return?
What is the formula for calculating the holding period return?
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If the sum of dividends is $45,000, gains in principal invested are $2,500, and the original cost is $365,500, what is the holding period return?
If the sum of dividends is $45,000, gains in principal invested are $2,500, and the original cost is $365,500, what is the holding period return?
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What is liquidity risk?
What is liquidity risk?
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Which risk refers to unfavorable business conditions caused by weakness in the overall economy?
Which risk refers to unfavorable business conditions caused by weakness in the overall economy?
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Which of the following is the most common measurement of price fluctuations?
Which of the following is the most common measurement of price fluctuations?
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How does standard deviation differ from semi-variance?
How does standard deviation differ from semi-variance?
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Which option best defines market risk?
Which option best defines market risk?
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Which of these does NOT contribute to systematic risk?
Which of these does NOT contribute to systematic risk?
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Which of the following characterizes a defensive stock?
Which of the following characterizes a defensive stock?
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Which of the following is a weakness associated with mutual funds?
Which of the following is a weakness associated with mutual funds?
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Which of the following statements regarding ETFs is false?
Which of the following statements regarding ETFs is false?
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Greater potential returns and greater risk is a characteristic of which of the following?
Greater potential returns and greater risk is a characteristic of which of the following?
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A fund that attempts to duplicate market performance and keeps costs low by using computerized programs to purchase holdings is called:
A fund that attempts to duplicate market performance and keeps costs low by using computerized programs to purchase holdings is called:
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Which of the following is a characteristic of Total Portfolio Management?
Which of the following is a characteristic of Total Portfolio Management?
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Which of the following is not a question that is asked during the performance evaluation?
Which of the following is not a question that is asked during the performance evaluation?
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Which of the following is true about mutual funds?
Which of the following is true about mutual funds?
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What is considered a strength of keeping records by fund management?
What is considered a strength of keeping records by fund management?
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Which of the following poses a risk associated with market conditions?
Which of the following poses a risk associated with market conditions?
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What risk is associated with receiving a lower price when selling an asset?
What risk is associated with receiving a lower price when selling an asset?
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Which risk is primarily influenced by government actions or policy changes?
Which risk is primarily influenced by government actions or policy changes?
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What type of risk involves unexpected price increases affecting purchasing power?
What type of risk involves unexpected price increases affecting purchasing power?
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What does currency risk involve in international activities?
What does currency risk involve in international activities?
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Which type of risk can result from shifts in consumer preferences?
Which type of risk can result from shifts in consumer preferences?
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Which risk is directly related to the specific financial operations of a single firm?
Which risk is directly related to the specific financial operations of a single firm?
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Study Notes
Asset Allocation Planning
- Personal factors, investment alternatives, and portfolio management principles are all critical steps in the asset allocation planning system.
- Viewing investments as a delivery mechanism relates to transforming current savings into future spending.
Investment Horizons
- Long-term investment horizons typically span 10-20 years or 15-35 years.
- Short-term investment policies commonly include money market funds and short-term bond funds.
Risk Factors
- Key personal considerations in asset allocation include current resources, future cash flows, taxes, and risk neutrality.
- Risk tolerance can be influenced by personality, upbringing, and expected household cash flows.
Holding Period Return Calculation
- Holding period return can be determined using the formula based on dividends or interest paid and gains in principal.
- Example calculation: With dividends of $45,000, gains of $2,500, and an original cost of $365,500, the holding period return is approximately 11.5%.
Types of Risk
- Liquidity risk refers to the potential to sell an investment at a lower price than the market value.
- Market risk indicates unfavorable business conditions due to economic weakness, while inflation risk involves purchasing power reduction from unexpected price rises.
- Unsystematic risk relates specifically to an individual company's performance as opposed to the overall market.
Risk Premium and Expected Returns
- The risk premium compensates for the additional risk taken with a security over a risk-free asset.
- An expected rate of return can be calculated by adding the risk-free rate to the risk premium, e.g., with a risk-free rate of 5% and a risk premium of 4%, the expected return is 9%.
Security Market and Efficient Market Hypothesis
- Securities such as government bonds are typically seen on the left side of the security market line, indicating lower risk.
- The efficient market hypothesis suggests that all available information is already reflected in security prices.
Defensive Stocks and Mutual Fund Weaknesses
- Defensive stocks tend to be less affected by cyclical conditions and may grow at average rates.
- Weaknesses associated with mutual funds include overhead costs and tax implications.
Exchange-Traded Funds (ETFs) Characteristics
- ETFs are not traditionally actively managed, combine investor funds for joint management, and are traded like stocks.
- They usually have a lower cost structure compared to mutual funds.
Total Portfolio Management
- This concept involves considering all household assets and their correlations in investment decisions.
- Investment strategies include assessing individual asset returns and risks comprehensively.
Performance Evaluation Questions
- Performance assessment involves reflecting on outcomes, understanding causes for under or overperformance, and planning for improvement.
Fundamental Risks of Financial Assets
- Key risks associated with financial assets include market, liquidity, economic, inflation, political, regulatory, currency, technological, preference, industry, and company risks.
Mutual Fund Strengths
- Mutual funds offer diversification, professional management, immediate exposure to a variety of assets, and cost efficiency due to pooled resources, among others.
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Description
Test your knowledge on asset allocation planning, investment horizons, and risk factors that affect financial decisions. This quiz also covers the calculation of holding period returns and the principles of portfolio management. Perfect for anyone looking to enhance their investment strategy skills.