Question 1

Investing in antique guitars:

Accepted Answer

A)   is likely to bring high returns because many people enjoy playing guitar.
B)   will not bring high returns because fun activities yield lower financial returns.
C)   is a good idea because they "ain't making any more."
D)   None of the answers is correct.E) A) and D)
F) A) and C)

Question 2

Investors should avoid buying mutual funds with high fees because mutual funds with high fees:

Accepted Answer

A)   do not systemically outperform other funds.
B)   are difficult to redeem.
C)   do not diversify enough.
D)   are always risky.E) All of the above
F) B) and C)

Question 3

Consider the market for ABC Company's stock. What should happen to the stock for ABC Company after a merger with a highly successful supply firm is announced?

Accepted Answer

A)   The demand for the stock would shift to the left.
B)   The demand for the stock would shift to the right.
C)   The supply of the stock would shift to the left.
D)   The supply of the stock would shift to the right.E) C) and D)
F) A) and D)

Question 4

Which refers to the ability of an asset to generate returns, the returns of which are then reinvested in order to generate their own returns?

Accepted Answer

A)   buy and hold
B)   compounding
C)   simple returns
D)   extrapolationE) A) and D)
F) All of the above

Question 5

Passively investing in the S&P 500 Index:

Accepted Answer

A)   provides rates of return that are approximately 5% higher than the Dow Jones Industrial Average Index.
B)   beats the rate of returns of the majority of all mutual funds in a typical year.
C)   is a strategy that is less profitable over the long-term than investing in actively managed funds.
D)   provides rates of return that are about 20% lower than the Dow Jones Industrial Average Index.E) None of the above
F) C) and D)

Question 6

What is the risk-return trade-off?

Accepted Answer

A)   Assets with the least risk tend to outperform the market.
B)   To invest in less risky assets means higher returns.
C)   Bonds earn higher returns than stocks because bonds are riskier.
D)   To earn higher rates of return, a person must accept higher risk.E) B) and C)
F) None of the above

Question 7

Which is NOT a typical index used to practice a buy-and-hold strategy?

Accepted Answer

A)   The Dow Jones Industrial Average
B)   The Moody Index Scorecard
C)   The Standard and Poor's 500
D)   The NASDAQ Composite IndexE) B) and D)
F) A) and D)

Question 8

Assume that the money in your investment account grew from $30,000 to $60,000 in 9 years. What was your approximate annual rate of return?

Accepted Answer

A)   5%
B)   6.5%
C)   7.8%
D)   11.8%E) C) and D)
F) A) and B)

Question 9

Diversification is an investment strategy to:

Accepted Answer

A)   maximize the return in stock investment.
B)   minimize the risk in personal finance.
C)   outperform the average stock market return.
D)   reduce the risk of a given investment portfolio.E) A) and B)
F) C) and D)

Question 10

Asset price bubbles are:

Accepted Answer

A)   avoidable.
B)   possibly solved through greater transparency in assessing company values.
C)   inevitable.
D)   a recent phenomenon.E) All of the above
F) A) and D)

Question 11

Why does it make sense to avoid paying high fees when investing with mutual funds or stock brokers?

Accepted Answer

A)   The funds with high fees are too expensive.
B)   The funds with high fees likely hire managers who are not experts.
C)   The funds with high fees do not perform any better than other funds.
D)   It does make sense, since you should pay high fees to get access to experts.E) None of the above
F) A) and B)

Question 12

The investment approach of one of T. Rowe Price's mutual funds is: "Reflecting a value approach to investing, the fund will seek the stocks of companies whose current stock prices do not appear to adequately reflect their underlying value as measured by assets, earnings, cash flow, or business franchises." This fund is a(n) :

Accepted Answer

A)   active fund.
B)   passive fund.
C)   asset fund.
D)   market fund.E) C) and D)
F) B) and D)

Question 13

Which is an example of passive investing?

Accepted Answer

A)   investing in one specific stock
B)   investing in a mutual fund that tries to mimic the S&P 500
C)   investing in a mutual fund that is actively managed by a fund manager
D)   researching many different stocks and accumulating your own portfolio of investmentsE) All of the above
F) B) and C)

Question 14

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

Accepted Answer

A) True 
 B)False

Question 15

How should you approach broker fees and why?

Accepted Answer

A)   Seek high ones, because it signals a better investment product
B)   Seek high ones, because money managers will have a stronger incentive to make you more money
C)   Seek low ones, because only top investors need to pay the higher price
D)   Seek low ones, because no money manager could be worth a premium priceE) C) and D)
F) B) and C)

Question 16

The principle of compounding implies that:

Accepted Answer

A)   we should diversify enough so that the returns on different stocks will be the same at some time in the future.
B)   any difference in the rate of investment returns will stay constant over time.
C)   a small difference in the rate of investment returns makes no difference over a long period.
D)   a small difference in the rate of investment returns can have a large difference over a long period.E) All of the above
F) B) and C)

Question 17

If a cable news channel breaks news one morning that a major light bulb company announced a new long-lasting light bulb and you call your broker the next day to buy stock in the company, will you make money based on this information?

Accepted Answer

A)   Yes, because it will take a while for the company to recover the R&D costs of the light bulbs.
B)   Yes, because it will take time before the light bulbs show up in stores (and thus time before the new revenue's reflected in the company's bottom line) .
C)   No, because the broker fees will eat away all your profits.
D)   No, because the new information will already be reflected in the stock price when you purchase the stock.E) B) and C)
F) A) and B)

Question 18

Stock picking usually beats the market when buyers and sellers have the same information.

Accepted Answer

A) True 
 B)False

Question 19

An efficient stock market means that:

Accepted Answer

A)   it is difficult to outperform the market, since stock prices convey all relevant public information about a company.
B)   traders with inside information cannot even outperform market averages.
C)   new information is slowly reflected in stock prices.
D)   All of the answers are correct.E) A) and D)
F) All of the above

Question 20

When Chernobyl melted down in the Soviet Union, the:

Accepted Answer

A)   price of U.S. basketballs increased.
B)   prices of assets reacted slowly to the information.
C)   price of U.S. potatoes increased.
D)   stock prices of U.S. nuclear plants increased.E) A) and D)
F) None of the above

Exam 23: Stock Markets and Personal Finance

What is the risk-return trade-off?

Correct Answer
verified

Which refers to the ability of an asset to generate returns, the returns of which are then reinvested in order to generate their own returns?

Correct Answer
verified

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

Correct Answer
verified

Why does it make sense to avoid paying high fees when investing with mutual funds or stock brokers?

Correct Answer
verified

Investing in antique guitars:

Correct Answer
verified

Stock picking usually beats the market when buyers and sellers have the same information.

Correct Answer
verified

If a cable news channel breaks news one morning that a major light bulb company announced a new long-lasting light bulb and you call your broker the next day to buy stock in the company, will you make money based on this information?

Correct Answer
verified

An efficient stock market means that:

Correct Answer
verified

Correct Answer
verified

Assume that the money in your investment account grew from $30,000 to $60,000 in 9 years. What was your approximate annual rate of return?

Correct Answer
verified

Consider the market for ABC Company's stock. What should happen to the stock for ABC Company after a merger with a highly successful supply firm is announced?

Correct Answer
verified

Asset price bubbles are:

Correct Answer
verified

Diversification is an investment strategy to:

Correct Answer
verified

When Chernobyl melted down in the Soviet Union, the:

Correct Answer
verified

Investors should avoid buying mutual funds with high fees because mutual funds with high fees:

Correct Answer
verified

Which is an example of passive investing?

Correct Answer
verified

The principle of compounding implies that:

Correct Answer
verified

Which is NOT a typical index used to practice a buy-and-hold strategy?

Correct Answer
verified

Passively investing in the S&P 500 Index:

Correct Answer
verified

How should you approach broker fees and why?

Correct Answer
verified

Exam 23: Stock Markets and Personal Finance

What is the risk-return trade-off?

Correct AnswerverifiedShow Answer

Which refers to the ability of an asset to generate returns, the returns of which are then reinvested in order to generate their own returns?

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns.

Correct AnswerverifiedShow Answer

Why does it make sense to avoid paying high fees when investing with mutual funds or stock brokers?

Correct AnswerverifiedShow Answer

Investing in antique guitars:

Correct AnswerverifiedShow Answer

Stock picking usually beats the market when buyers and sellers have the same information.

Correct AnswerverifiedShow Answer

If a cable news channel breaks news one morning that a major light bulb company announced a new long-lasting light bulb and you call your broker the next day to buy stock in the company, will you make money based on this information?

Correct AnswerverifiedShow Answer

An efficient stock market means that:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that the money in your investment account grew from $30,000 to $60,000 in 9 years. What was your approximate annual rate of return?

Correct AnswerverifiedShow Answer

Consider the market for ABC Company's stock. What should happen to the stock for ABC Company after a merger with a highly successful supply firm is announced?

Correct AnswerverifiedShow Answer

Asset price bubbles are:

Correct AnswerverifiedShow Answer

Diversification is an investment strategy to:

Correct AnswerverifiedShow Answer

When Chernobyl melted down in the Soviet Union, the:

Correct AnswerverifiedShow Answer

Investors should avoid buying mutual funds with high fees because mutual funds with high fees:

Correct AnswerverifiedShow Answer

Which is an example of passive investing?

Correct AnswerverifiedShow Answer

The principle of compounding implies that:

Correct AnswerverifiedShow Answer

Which is NOT a typical index used to practice a buy-and-hold strategy?

Correct AnswerverifiedShow Answer

Passively investing in the S&P 500 Index:

Correct AnswerverifiedShow Answer

How should you approach broker fees and why?

Correct AnswerverifiedShow Answer

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