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Chapter 1
UNDERSTANDING INVESTMENTS

Multiple Choice Questions

Establishing a Framework for Investors

1.Which of the following is the best definition of wealth?

a.the sum of all current and future income
b.the total of all assets and all income
c.the total of assets and income less any liabilities.
d. the sum of current income and the present value of future income.

(d, moderate)

2.Stocks and bonds would be classified as:

a. real assets
b. indirect assets
c. personal assets
d. financial assets

(d, easy)

3.Technically, investments include:

a. only financial assets.
b. only marketable assets.
c. financial and real assets that are marketable or non-marketable. d. only financial and real assets that are marketable.

(c, easy)

4.The retirement plans that guarantee retirees a set amount of money each month are known as:

a. 401(k) plans
b. self-directed plans
c. defined-benefit plans
d. defined-contribution plans

(c, moderate)

The Importance of Studying Investments

5.The investment professionals that arrange the sale of new securities are called:

a. arbitragers
b. traders
c. investment bankers
d. specialists

(c, moderate)

6.Another name for stockbrokers is:

a. specialists
b. registered representatives
c. security analysts
d. portfolio managers

(b, moderate)

7.Investment professionals whose jobs may depend on their performance relative to the market are the:

a. registered representatives
b. security analysts
c. investment bankers
d. portfolio managers

(d, moderate)

8.One reason for the declining importance of pension funds is the:

a. decrease in pension benefits for workers.
b. downsizing of U.S. companies
c. large number of conversions into self-directed plans. d. increasing number of federal regulations that restrict pension fund portfolios.

(c, difficult)

9.Most financial advisors are registered with the Securities and Exchange Commission as:

a.registered representatives.
b.registered investor advisors.
c.registered financial planners.
d.registered securities consultants.

(b, moderate)

10.A Chartered Financial Analyst designation is a (an)

a. SEC-approved and awarded designation.
b. certification of a successful investing record.
c. professional designation awarded for meeting recognized standards of conduct and competency. d. professional designation awarded by the brokerage industry.

(c, easy)

Understanding the Investment Decision Process

11.Underlying all investments is the tradeoff between:

a. expected return and actual return
b. low risk and high risk
c. actual return and high risk
d. expected return and risk

(d, moderate)

12.Which of the following investment areas is heavily tied to work using mathematical and statistical models?

a.Security analysis
b.Portfolio management
c.Institutional investing
d.Retirement planning

(b, moderate)

13.Most investors are risk averse which means:

a. they will assume more risk only if they are compensated by higher expected return. b. they will always invest in the investment with the lowest possible risk. c. they actively seek to minimize their risks.

d. they avoid the stock market due to the high degree of risk.

(a, moderate)

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