Question

1. Which of the following is NOT a true statement?

a. The fees for a stock index fund are usually less than for an actively-managed fund.

b. Over long periods of time, a majority of managers of actively-managed mutual funds have not been able to consistently beat the market; therefore, a good strategy is to “join the market” by investing broadly in index funds.

c. Because little trading occurs in a stock index fund, the index fund would typically incur fewer trading costs than an actively-managed fund in which stocks are constantly traded.

d. As investors age, they should allocate an increasing portion of their portfolio to stocks, so that a 100-year old investor should have 100% of his portfolio invested in stocks.

e. Young investors should not be afraid to include well-diversified stocks in their retirement funds because the returns on stocks becomes less risky and more stable over long periods of time and provide a better chance of beating inflation.

2. Which of the following statements is true?

a. Treasury bills typically have more interest-rate risk than Treasury bonds.

b. Treasury bonds typically have more default risk than corporate bonds.

c. Large, blue-chip stocks typically have more default and liquidity risk than penny stocks.

d. AAA-rated corporate bonds typically have more default risk than CCC-rated bonds.

e. None of the above statements is true.

3. Which of the following statements is NOT true?

a. A basic concept of Modigliani & Miller’s so-called “M&M Proposition” is that if taxes and bankruptcy costs are ignored, the debt/equity ratio in a firm shouldn’t matter (i.e. the overall pizza is the same size whether cut into four or eight pieces).

b. According to the Economic Value Added (EVA) model, a firm can only generate value if it earns a return on the use of funds that is higher than the cost of those funds.

c. One reason a company might carry a heavy debt loads is that higher leverage magnifies the gain (or loss) percentage and therefore increases the return on investment (ROI) percentage.

d. The Beardstown Ladies became famous for their savvy investing by consistently beating the S&P500; as a result, they are, to this very day, one of the most respected investment clubs in the U.S.

e. Since the WACC represents the minimum required return, it is the rate used in NPV calculations in capital budgeting to evaluate investment alternatives.

4. Which of the following statements is true?

a. Holding a well-diversified stock portfolio for 1 year or for 20 years should generate the same level of risk; therefore, the holding period is irrelevant to a stock investor.

b. A high dividend-yield stock fund should be considered riskier than a high growth stock fund.

c. One problem with selecting stocks by throwing darts is that your portfolio may end up being poorly diversified (e.g., the same stock is picked twice, or multiple stocks in the same industry are selected).

d. Adding international stocks to a portfolio should increase portfolio standard deviation . . . and this increase is getting larger as markets become more globalized.

e. None of the above statements is true.

5. Which of the following statements is true?

a. Warren Buffet and other investors who rely on fundamental analysis mostly use a buy-and-hold strategy, as opposed to day-trading.

b. T-Bonds have more federal taxability risk than municipal bonds; but municipal bonds have more default and liquidity risk than T-bonds.

c. Compared to the arithmetic average, the geometric average tells you what you actually earned per year on average and is the true compound rate of return that causes a present value to become a future value under the principle of time-value-of-money.

d. All of the above statements are true.

e. None of the above statements is true.

Answer 1

1.

a. The fees for a stock index fund are usually less than for an actively-managed fund. - This is a true statement as the Fund manager of Stock index fund is not required to apply his knowledge in selecting securities, the cost of Fund manager's salary is reduced and so is the fees of stock fund.

b. Over long periods of time, a majority of managers of actively-managed mutual funds have not been able to consistently beat the market; therefore, a good strategy is to “join the market” by investing broadly in index funds. - This is true and has been observed in the US equity market

c. Because little trading occurs in a stock index fund, the index fund would typically incur fewer trading costs than an actively-managed fund in which stocks are constantly traded.- This statement is also true as there are lesser trades and lesser trading costs in a stock index fund.

d. As investors age, they should allocate an increasing portion of their portfolio to stocks, so that a 100-year old investor should have 100% of his portfolio invested in stocks. - This is incorrect. As the investors age, the fund size grows large and the goals approach nearer. Hence the portfolio should be gradually tilted towards debt or fixed income securities as one ages.

e. Young investors should not be afraid to include well-diversified stocks in their retirement funds because the returns on stocks becomes less risky and more stable over long periods of time and provide a better chance of beating inflation.- This is also true as beating inflation in th long run is important to build wealth and including well diversified stocks makes a portfolio give consistent returns