Test Bank For Investment Analysis and Portfolio Management
Chapter 2
CHAPTER 2—THE ASSET ALLOCATION DECISION
TRUE/FALSE
1. Experts suggest life insurance coverage should be seven to ten times an individual's annual salary.
ANS: T PTS: 1
2. Term life insurance provides both a death benefit and a savings plan.
ANS: F PTS: 1
3. Most experts recommend a cash reserve of at least one year's worth of living expenses.
ANS: F PTS: 1
4. The spending phase occurs when investors are relatively young.
ANS: F PTS: 1
5. The gifting phase is similar to, and may be concurrent with, the spending phase.
ANS: T PTS: 1
6. Long-term, high-priority goals include some form of financial independence.
ANS: T PTS: 1
7. It is not a good idea to get too specific when constructing your policy statement.
ANS: F PTS: 1
8. Asset allocation is the process of dividing funds into different classes of assets.
ANS: T PTS: 1
9. The typical investor's goals rarely change during his/her lifetime.
ANS: F PTS: 1
10. Individual security selection is far more important than the asset allocation decision.
ANS: F PTS: 1
11. Return is the only important consideration when establishing investment objectives.
ANS: F PTS: 1
1
,Test Bank For Investment Analysis and Portfolio Management
Chapter 2
12. In constructing the portfolio, the manager should maximize the investor's risk level.
ANS: F PTS: 1
13. Risk tolerance is exclusively a function of an individual's psychological makeup.
ANS: F PTS: 1
14. An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as
capital preservation or current income.
ANS: F PTS: 1
15. Investment planning is complicated by the tax code.
ANS: T PTS: 1
16. Average tax rate is defined as total tax payment divided by total income.
ANS: T PTS: 1
17. The portfolio mixes of institutional investors around the world are approximately the same.
ANS: F PTS: 1
18. The ability to retire at a certain age is a typical example of a long-term, lower-priority goal.
ANS: F PTS: 1
19. It is essential that both the client and the portfolio manager agree on an appropriate benchmark
portfolio.
ANS: T PTS: 1
20. An example of a unique need in an investment policy statement is related to the legal responsibilities
of a fiduciary or trustee.
ANS: F PTS: 1
21. Equity allocations of pension funds in Japan and Germany are similar to those in the United States.
ANS: F PTS: 1
22. Investing 30 to 40 percent of your retirement funds in the company you work for is reasonable when
they match funds.
ANS: F PTS: 1
2
,Test Bank For Investment Analysis and Portfolio Management
Chapter 2
23. The majority of a pension fund's return is explained by asset allocation.
ANS: T PTS: 1
MULTIPLE CHOICE
1. The current outlay of money to guard against a potentially large future loss is commonly known as
a. Asset management.
b. Portfolio management.
c. Minimizing risk.
d. Loss control.
e. Insurance.
ANS: E PTS: 1 OBJ: Multiple Choice
2. In an investment policy statement the objectives of an investor are expressed in terms of
a. risk and return
b. risk
c. return
d. time horizon
e. liquidity needs
ANS: A PTS: 1 OBJ: Multiple Choice
3. ____ phase is the stage when investors in their early-to-middle earning years attempt to accumulate
assets to satisfy near-term needs, e.g., children's education or down payment on a home.
a. Accumulation
b. Spending
c. Gifting
d. Consolidation
e. Divestiture
ANS: A PTS: 1 OBJ: Multiple Choice
4. Which of the following is not a life cycle phase?
a. Discovery phase
b. Accumulation phase
c. Consolidation phase
d. Spending phase
e. Gifting phase
ANS: A PTS: 1 OBJ: Multiple Choice
5. Which of the following is not a step in the portfolio management process?
a. Develop a policy statement.
b. Study current financial and economic conditions.
c. Construct the portfolio.
3
, Test Bank For Investment Analysis and Portfolio Management
Chapter 2
d. Monitor investor's needs and market conditions.
e. Sell all assets and reinvestment proceeds at least once a year.
ANS: E PTS: 1 OBJ: Multiple Choice
6. The first step in the investment process is the development of a(n)
a. Objective statement.
b. Policy statement.
c. Financial statement.
d. Statement of cash needs.
e. Statement of cash flows.
ANS: B PTS: 1 OBJ: Multiple Choice
7. Which of the following is not considered to be an investment objective?
a. Capital preservation
b. Capital appreciation
c. Current income
d. Total return
e. None of the above (that is, all are considered investment objectives)
ANS: E PTS: 1 OBJ: Multiple Choice
8. ____ must be stated in terms of expected returns and risk. An investor's tolerance for risk must be
established before returns objectives can be stated.
a. Investment requirements
b. Investment constraints
c. Investment rewards
d. Investment objectives
e. Investment policy
ANS: D PTS: 1 OBJ: Multiple Choice
9. ____ is an appropriate objective for investors who want their portfolio to grow in real terms, i.e.,
exceed the rate of inflation.
a. Capital preservation
b. Capital appreciation
c. Portfolio growth
d. Value additivity
e. Nominal preservation
ANS: B PTS: 1 OBJ: Multiple Choice
10. ____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often
increase(s) as one approaches the later stages of the investment life cycle.
a. Liquidity needs
b. Time horizons
c. Liquidation values
d. Liquidation essentials
4
Chapter 2
CHAPTER 2—THE ASSET ALLOCATION DECISION
TRUE/FALSE
1. Experts suggest life insurance coverage should be seven to ten times an individual's annual salary.
ANS: T PTS: 1
2. Term life insurance provides both a death benefit and a savings plan.
ANS: F PTS: 1
3. Most experts recommend a cash reserve of at least one year's worth of living expenses.
ANS: F PTS: 1
4. The spending phase occurs when investors are relatively young.
ANS: F PTS: 1
5. The gifting phase is similar to, and may be concurrent with, the spending phase.
ANS: T PTS: 1
6. Long-term, high-priority goals include some form of financial independence.
ANS: T PTS: 1
7. It is not a good idea to get too specific when constructing your policy statement.
ANS: F PTS: 1
8. Asset allocation is the process of dividing funds into different classes of assets.
ANS: T PTS: 1
9. The typical investor's goals rarely change during his/her lifetime.
ANS: F PTS: 1
10. Individual security selection is far more important than the asset allocation decision.
ANS: F PTS: 1
11. Return is the only important consideration when establishing investment objectives.
ANS: F PTS: 1
1
,Test Bank For Investment Analysis and Portfolio Management
Chapter 2
12. In constructing the portfolio, the manager should maximize the investor's risk level.
ANS: F PTS: 1
13. Risk tolerance is exclusively a function of an individual's psychological makeup.
ANS: F PTS: 1
14. An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as
capital preservation or current income.
ANS: F PTS: 1
15. Investment planning is complicated by the tax code.
ANS: T PTS: 1
16. Average tax rate is defined as total tax payment divided by total income.
ANS: T PTS: 1
17. The portfolio mixes of institutional investors around the world are approximately the same.
ANS: F PTS: 1
18. The ability to retire at a certain age is a typical example of a long-term, lower-priority goal.
ANS: F PTS: 1
19. It is essential that both the client and the portfolio manager agree on an appropriate benchmark
portfolio.
ANS: T PTS: 1
20. An example of a unique need in an investment policy statement is related to the legal responsibilities
of a fiduciary or trustee.
ANS: F PTS: 1
21. Equity allocations of pension funds in Japan and Germany are similar to those in the United States.
ANS: F PTS: 1
22. Investing 30 to 40 percent of your retirement funds in the company you work for is reasonable when
they match funds.
ANS: F PTS: 1
2
,Test Bank For Investment Analysis and Portfolio Management
Chapter 2
23. The majority of a pension fund's return is explained by asset allocation.
ANS: T PTS: 1
MULTIPLE CHOICE
1. The current outlay of money to guard against a potentially large future loss is commonly known as
a. Asset management.
b. Portfolio management.
c. Minimizing risk.
d. Loss control.
e. Insurance.
ANS: E PTS: 1 OBJ: Multiple Choice
2. In an investment policy statement the objectives of an investor are expressed in terms of
a. risk and return
b. risk
c. return
d. time horizon
e. liquidity needs
ANS: A PTS: 1 OBJ: Multiple Choice
3. ____ phase is the stage when investors in their early-to-middle earning years attempt to accumulate
assets to satisfy near-term needs, e.g., children's education or down payment on a home.
a. Accumulation
b. Spending
c. Gifting
d. Consolidation
e. Divestiture
ANS: A PTS: 1 OBJ: Multiple Choice
4. Which of the following is not a life cycle phase?
a. Discovery phase
b. Accumulation phase
c. Consolidation phase
d. Spending phase
e. Gifting phase
ANS: A PTS: 1 OBJ: Multiple Choice
5. Which of the following is not a step in the portfolio management process?
a. Develop a policy statement.
b. Study current financial and economic conditions.
c. Construct the portfolio.
3
, Test Bank For Investment Analysis and Portfolio Management
Chapter 2
d. Monitor investor's needs and market conditions.
e. Sell all assets and reinvestment proceeds at least once a year.
ANS: E PTS: 1 OBJ: Multiple Choice
6. The first step in the investment process is the development of a(n)
a. Objective statement.
b. Policy statement.
c. Financial statement.
d. Statement of cash needs.
e. Statement of cash flows.
ANS: B PTS: 1 OBJ: Multiple Choice
7. Which of the following is not considered to be an investment objective?
a. Capital preservation
b. Capital appreciation
c. Current income
d. Total return
e. None of the above (that is, all are considered investment objectives)
ANS: E PTS: 1 OBJ: Multiple Choice
8. ____ must be stated in terms of expected returns and risk. An investor's tolerance for risk must be
established before returns objectives can be stated.
a. Investment requirements
b. Investment constraints
c. Investment rewards
d. Investment objectives
e. Investment policy
ANS: D PTS: 1 OBJ: Multiple Choice
9. ____ is an appropriate objective for investors who want their portfolio to grow in real terms, i.e.,
exceed the rate of inflation.
a. Capital preservation
b. Capital appreciation
c. Portfolio growth
d. Value additivity
e. Nominal preservation
ANS: B PTS: 1 OBJ: Multiple Choice
10. ____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often
increase(s) as one approaches the later stages of the investment life cycle.
a. Liquidity needs
b. Time horizons
c. Liquidation values
d. Liquidation essentials
4
