Reading 49: The Asset Allocation Decision LOS b习题精选 statements, investment, following, expressed, 2010

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LOS b: Explain why investment objectives should be expressed in terms of risk and return and list the factors that may affect an investor's risk tolerance.

Which of the following statements about the importance of risk and return in the investment objective is least accurate?

A) Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return.

B) The return objective may be stated in dollar amounts even if the risk objective is stated in percentages.

C) The investor’s risk tolerance is likely to determine what level of return will be feasible.

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Expressing investment goals in terms of risk is not more appropriate than expressing goals in terms of return. The investment objectives should be stated in terms of both risk and return. Risk tolerance will likely help determine what level of expected return is feasible.

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Which of the following statements about risk and return is FALSE?

A) Risk and return may be considered on a mutually exclusive basis.

B) Specifying investment objectives only in terms of return may expose an investor to inappropriately high levels of risk.

C) Return objectives may be stated in absolute terms.

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Risk and return must always be considered together when expressing investment objectives. Return objectives may be expressed either in absolute terms (dollar amounts) or in percentages.

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Which of the following factors is least likely to affect an investor’s risk tolerance?

A) Number of dependent family members.

B) Level of inflation in the economy.

C) Level of insurance coverage.

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The level of inflation in the economy should be considered in determining the return objective. Risk tolerance is a function of the investor's psychological makeup and the investor's personal factors such as age, family situation, existing wealth, insurence coverage, current cash reserves and income.

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Which of the following statements about risk is FALSE? Generally, greater:

A) spending needs allows for greater risk.

B) insurance coverage allows for greater risk.

C) existing wealth allows for greater risk.

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Greater spending needs usually allow for lower risk because there is a definite need to ensure that the return may adequately fund the spending needs (a “fixed” cost).

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All of the following affect an investor’s risk tolerance EXCEPT:

A) family situation.

B) tax bracket.

C) years of experience with investing in the markets.

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Tax concerns play an important role in investment planning. However, these constitute an investment constraint, not an investment objective (i.e. risk tolerance).

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While assessing an investor’s risk tolerance, a financial adviser is least likely to ask which of the following questions?

A) “What rate of investment return do you expect?”

B) “How much insurance coverage do you have?”

C) “Is your home life stable?”

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While the degree of risk tolerance will have an affect on expected returns, assessing the risk tolerance comes first, and the resulting set of feasible returns follows. The other questions address risk tolerance.

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Which of the following statements about risk and return is FALSE?

A) Return-only objectives provide a more concise and efficient way to measure performance for investment managers.

B) Return objectives should be considered in conjunction with risk preferences.

C) Return objectives may be stated in dollar amounts.

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Return-only objectives may actually lead to unacceptable behavior on the part of investment managers, such as excessive trading (churning) to generate excessive commissions.