Corporate Finance: What is an Investment? - Definition & Overview questions and answers

Corporate Finance: What is an Investment? - Definition & Overview questions and answers Which of the following is NOT a type of government investment? Interest payments Infrastructure Research Subsidies How does investment affect the economy? It usually leads to economic growth. It always helps an economy. It hurts the economy because it takes away from consumption. It has no effect because if people aren't investing, they're consuming. Which of the following terms basically describes activity that is the opposite of investment? Spending Liability Loss Consumption Why do governments usually invest? To finance national debts To help stimulate economic growth To provide pork to constituents As an excuse to spend Which of the following is the BEST explanation of investment? Spending money to make money Buying assets and commodities Buying stocks and bonds Hiring people Which of the following is true regarding the investment planning process? None of these answers is true. Time horizon of investment depends only on returns. In the rational portfolio approach for goal setting, the chronological order of the goals is important. In the rational portfolio approach for goal setting, the priorities of the goals are important. Individuals in the accumulation stage are able to invest in _____, taking more risks. high growth stocks balanced mutual funds government bonds None of these answers is correct. Which of the following is NOT a decision made in the execution stage of investment planning? Asset mix Portfolio goals Security selection Risk parameters An investor, aged 57 years, wants to save for his retirement. What type of assets should the investment manager choose? High growth stocks Mutual funds High yield junk bonds Government bonds Which of the following is NOT necessary for investment planning? Financial goals of the investor Time specificity Asset mix Life stage of the investor If you have a portfolio with stocks from the energy industry and bonds from the same sector, what is your investment portfolio lacking? Objectives Balance Nothing Diversification You have decided it will be best to balance your portfolio with 60% stocks and 40%bonds. You have $30,000 in stocks and $20,000 in bonds. After six months, you analyze your portfolio and see that stocks have had a strong six months and have increased to$38,000 of your portfolio, while bonds have increased to $21,000. Which of the following actions would you take, to rebalance to your 60/40 asset allocation? Rebalance your portfolio by selling $2,600 of stocks and buying $2,600 in bonds so that you are back to a60%/40$ allocation. Don't do anything until you redefine the objectives of your investment portfolio. You should sell $8,000 of your stocks and $1,000 of your bonds; leave the profits as cash. Nothing. You don't want to react too quickly. Which term can be defined as how you divide your portfolio into different types of investments? Risk appetite Asset allocation Bond/stock division Balancing Which of the following is the MOST important part of developing an investment portfolio? Always having some percentage of your portfolio in cash or investments easily turned into cash Making sure that you follow your portfolio performance daily Not exceeding more than (100 - your age) percent of stocks in your portfolio Making sure you specifically have objectives for your investment portfolio Which term describes the action of buying and/or selling certain assets in your portfolio to make sure your asset allocation matches your investment objectives? Meeting your risk appetite Assigning asset allocation Diversifying your portfolio Rebalancing Which of these investments offers built-in diversification? Cash Mutual fund Bond Stock Why should investors periodically rebalance a portfolio? To maintain the desired asset allocation To buy more of an investment that has dramatically risen in value To get the greatest possible return in a short amount of time To avoid paying taxes Which of the following is a benefit of diversification? The portfolio is less prone to highly volatile swings in value. Diversification reduces the number of investments the investor has to keep track of. Diversification offers the best potential to make money fast. The investor reduces the amount of commissions paid to brokers. Which of the following is a type of asset class? Mutual fund Stock 401(k) IRA Why would asset allocation plans include cash as an investment? Cash investments have a guaranteed rate of return. Cash investments provide a volatile element to the asset allocation mix. Cash investments are not subject to taxes. Cash investments act as a cushion to reduce volatility. You own the following portfolio investments: -$4,000 of Stock A -$6,000 of Stock B -$3,000of Stock C What is the value weight of Stock B? 31% 46% 23% 44% The weight of an investment portfolio refers to: The percent of money an investment will make. The percent of an investment portfolio that is held by a single asset. How much an investment is worth in the market. How much return it will receive. A(n) _____ is a collection of financial assets or investments such as stocks, bonds, and cash. Investment collection Portfolio Market Asset Stock D has a 40% chance of producing a 30% profit and a 60% chance of producing a 15% loss. What is the expected return for this stock? 5% 22% 3% 21% The amount an investor anticipates he or she will receive on an investment is called the: Investor return Market rate Expected return Money rate Which of the following is true regarding standard deviation? All returns lie within one standard deviation. Standard deviation is always calculated using predicted data. It is not possible to compare standard deviations of stocks from different industries. Investment returns can be represented by a normal distribution. Which of the following is used in calculating standard deviation? Mean Median Mode Maximum John is evaluating four stocks and wants to choose the one with the highest potential return. The average return for each stock is: Stock A: 10% per annum (p.a.), Stock B: 11%p.a., Stock C: 8% p.a., and Stock D: 15% p.a. The standard deviations are as follows: Stock A:10% p.a., Stock B: 8% p.a., Stock C: 15% p.a., Stock D: 5% p.a. Which stock would offer the potential for the highest return? Stock A Stock D Stock C Stock B