LOS a: Discuss the role of equities in the overall portfolio.

Q1. Which of the following is least accurate regarding equities in a portfolio?

A)   European institutions hold more equity than U.S. institutions in their portfolio.

B)   U.S. equity typically constitutes about half of world equity.

C)   Equities have been shown to be an inflation hedge worldwide.

Q2. Which of the following is least accurate regarding using equities as an inflation hedge?

A)   The effectiveness of an individual stock as a hedge depends on its product market.

B)   The historical record is impressive as to their effectiveness.

C)   Their ability to hedge is unaffected by taxes.

Q3. Which of the following statements regarding using equities as an inflation hedge is most accurate? They have been a good inflation hedge:

A)   in many countries over a long time span.

B)   in many countries over a short time span.

C)   but only in the U.S for a short time span.

LOS a: Discuss the role of equities in the overall portfolio. fficeffice" />

Q1. Which of the following is least accurate regarding equities in a portfolio?

A)   European institutions hold more equity than ffice:smarttags" />U.S. institutions in their portfolio.

B)   U.S. equity typically constitutes about half of world equity.

C)   Equities have been shown to be an inflation hedge worldwide.

Correct answer is A)

In the U.S., institutional investors hold about 60% of their portfolio in equity. In Europe, the percentage is closer to 20%. The historical evidence in the U.S. and in other countries indicates that equities have been a good inflation hedge.

Q2. Which of the following is least accurate regarding using equities as an inflation hedge?

A)   The effectiveness of an individual stock as a hedge depends on its product market.

B)   The historical record is impressive as to their effectiveness.

C)   Their ability to hedge is unaffected by taxes.

Correct answer is C)

Because corporate income and capital gains tax rates are not indexed to inflation, inflation can reduce the stock investor’s return, unless this effect was priced into the stock when the investor bought it. Equities have had consistently positive real returns in 17 countries from 1900-2005. The more competition in a firm’s product market, the less effective their stock will be as a hedge.

Q3. Which of the following statements regarding using equities as an inflation hedge is most accurate? They have been a good inflation hedge:

A)   in many countries over a long time span.

B)   in many countries over a short time span.

C)   but only in the U.S for a short time span.

Correct answer is A)

Using data for 17 countries for 106 years, equities have had consistently positive real returns (i.e., their nominal return has been higher than that of inflation).

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