Chapter 1

Multiple Choice
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.
Ans: d
2. toc!s and bonds would be classified as:
a. real assets
b. indirect assets
c. personal assets
d. financial assets
Ans: d
". #echnically$ investments include:
a. only financial assets.
b. only mar!etable assets.
c. financial and real assets that are mar!etable or non%mar!etable.
d. only financial and real assets that are mar!etable.
Ans: c
&. #he investment professionals that arrange the sale of new securities are
called:
a. arbitragers
b. traders
c. investment ban!ers
d. specialists
Ans: c
'ifficulty: moderate
(ef: #he )mportance of tudying )nvestments
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,. Another name for stoc!bro!ers is:
a. specialists
b. financial advisors
c. security analysts
d. portfolio managers
Ans: b
-. )nvestment professionals whose .obs may depend on their performance relative
to the mar!et are the:
a. registered representatives
b. security analysts
c. investment ban!ers
d. portfolio managers
Ans: d
/. Most financial advisors are registered with the ecurities and 01change
Commission as:
a. registered representatives.
b. registered investment advisors.
c. registered financial planners.
d. registered securities consultants.
Ans: b
2. +nderlying all investments is the tradeoff between:
a. e1pected return and actual return
b. low ris! and high ris!
c. actual return and high ris!
d. e1pected return and ris!
Ans: d
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3. Which of the following investment areas is heavily tied to wor! using
mathematical and statistical models?
a. ecurity analysis
b. 4ortfolio management
c. )nstitutional investing
d. (etirement planning
Ans: b
15. Most investors are ris! averse which means:
a. they will assume more ris! only if they are compensated by higher e1pected
return.
b. they will always invest in the investment with the lowest possible ris!.
c. they actively see! to minimi6e their ris!s.
d. they avoid the stoc! mar!et due to the high degree of ris!.
Ans: a
11. Which of the following would be considered a ris!%free investment?
a. gold
b. e7uity in a house
c. high%grade corporate bonds
d. +.. #reasury bills
Ans: d
12. ecurity analysis is most concerned with:
a. analysis of the overall securities mar!et and its direction.
b. valuation and analysis of individual securities.
c. purchasing securities at the best price.
d. determination of the investor8s re7uired return.
Ans: b
1". )n general$ the e1 ante ris!%return tradeoff
a. slopes upward.
b. slopes downward
c. is flat
d. is impossible to determine.
Ans: a
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1&. )nternational investing:
a. is only practical for institutional investors.
b. increases the overall ris! of a stoc! portfolio.
c. always leads to higher returns than a domestic portfolio.
d. can reduce ris! due to increased diversification.
Ans: d
1,. )nvestment decision ma!ing traditionally consists of two steps:
a. investment ban!ing and security analysis
b. buying and selling
c. ris! and e1pected return.
d. security analysis and portfolio management.
Ans: d
1-. (egulation 9' applies to disclosure between:
a. private companies and public officials
b. public companies and investment professionals
c. public companies and public officials
d. private companies and investment professionals
Ans: b
1/. #he rise of the )nternet has:
a. greatly increased the cost of security trading.
b. significantly democrati6ed the flow of investment information.
c. led to fewer number of discount bro!ers
d. led to large amounts of security fraud.

Ans: b
12. Which of the following professionals would be considered an institutional
investor?
a. )nvestment :an!er
b. ecurity Analyst
c. toc!bro!er
d. 4ortfolio Manager
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Ans: d
13. #he ris!%free rate of return ;(9(< e7uals:
a. ".,=
b. the return on long%term #reasury bonds
c. the average of the last " years8 inflation rate
d. the return on short%term #reasury bills
Ans: d
#rue%9alse >uestions
1. )nvestors always see! to minimi6e their ris! of investing.
Ans: 9alse
2. #he two ma.or considerations in investing are return and timing.
Ans: 9
". (is! is defined as the possibility of loss.
Ans: 9alse
&. #he minimum actual return necessary to induce investors to invest is !nown as
the e1pected return.
Answer: 9alse
,. )nvestors unwilling to assume ris! should be satisfied with the rate of
inflation as their investment return.
Answer: 9alse
-. ecurity analysts are typically employed only at bro!erage houses.
Answer: 9alse
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/. 'ue to the )nternet$ institutional investors have gained in importance.
Ans: 9
hort%Answer >uestions
1. :riefly e1plain the difference between e1pected returns and reali6ed returns and
between e1 ante returns an e1 post returns.
Answer: 01pected returns are mean returns based on probability distributions
dealing with the future. (eali6ed returns are the returns that actually
occurred in the past. 01 ante returns are in the future. 01 post returns are
in the past.
2. ?What are some of the career opportunities in the investment industry?
Answer: )nvestment ban!er$ merger and ac7uisition specialist$ security traders$
sales people$ security analyst$ portfolio manager$ registered investment
advisor and financial planner.
". 'efine ris! in the conte1t of investments?
Answer: (is! is the chance that the actual return on an investment will differ from
its e1pected return.
&. Will ris!%averse investors ever include commodity futures or options in their
portfolios? 01plain.
Answer: #hey may include these items in their portfolios since ris!%averse is not
the same thing as ris! avoidance. (is!%averse investors would e1pect a
higher return from these assets as they are ris!ier than many other assets.
,. ecurity analysis ta!es place before portfolio management. Why?
Answer: Consideration of information generated by security analysts is a
necessary component in portfolio construction.
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Critical #hin!ing@0ssay >uestions
1. What are some of the steps involved in valuing a company8s common stoc!?
Answer: #he investor must evaluate the overall economy$ industry and individual
company$ since all have an impact on the value of the stoc!. )n
addition$ the e1pected return and appropriate ris! must be estimated$ based
upon the e1pected future cash flows of the company. And lastly$ the
efficiency of stoc! mar!ets must be considered and whether the current
mar!et value of the stoc! is greater or less than its perceived economic
value.
2. What are some of the reasons driving so many individual investors to manage
their own investments today$ versus the conventional route of investing through a
financial advisor$ or stoc!bro!er?
Answer: #he emergence of the )nternet has produced a host of online$ discount
bro!ers offering ultra low%cost commissions$ sometimes free trades$ and
real%time 7uotes on stoc!s and bonds. #here is also now a preponderance
of websites offering information on corporate news and 0C filings$
which helps investors become more self%sufficient if they so choose. Also$
e1treme levels of mar!et volatility seen in the last decade have eroded the
wealth of many investors$ including whatever portion was being
professionally managed by mutual funds or through financial advisors.
#hat begs the 7uestion of whether professional management or advice is
worth the cost in the face of such tremendous wealth erosion. Many
investors have decided to go out on their own$ using a discount bro!er.
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