1. Apply What You've Learned - Investment Fundamentals Scenario: You are 40 years old. Your investment portfolio currently consists of: (1) a savings account, with a $15,000 balance, (2) certificates of deposit (CDs) worth $25,000, and (3) an investment portfolio consisting of 40% bonds, 40% equities, and 20% cash and cash equivalents. Your bonds are thirty-year U.S. government bonds, while your equities are made up solely of your employer's stock. Your cash holdings consist of your savings account and CDs. Your employer's stock paid a 1% dividend and its market value has increased 10% over the last year. The bonds have paid 5.0% interest. The rate of inflation is 3.0%. Your investment goals are mainly focused on retirement, and you have no large purchases planned in the short term. This consists of in cash and cash equivalents, The value of your current investment portfolio is in bonds, and in equities. Given the existing composition of your investment portfolio, how would you characteristic your investment strategy? Is it conservative, moderate, or aggressive? The investment strategy is conservative. O The investment strategy is moderate. The investment strategy aggressive Given the existing composition of your investment portfolio, how would you characterize your risk tolerance? Are you risk averse, risk neutral, or risk seeking? O You appear to be risk neutral. O You appear to be risk seeking. O You appear to be risk averse. Think about the government bonds in your portfolio. To what kind of risk are you most susceptible because of this investment? O Foreign exchange risk O Inflation risk O Liquidity risk O Marketability risk O Business failure risk The real return on your government bonds is Think about the stock in your investment portfolio. To what type of risk (or risks) are you most susceptible? Only liquidity risk O Only random, or unsystematic, risk O Only market, or systematic, risk Pure risk O Both market (systematic) and random (unsystematic) risks Do you perceive a deficiency of some type in your equity holdings, and if so, of what type? No, it is better to invest in one company that you know really well than in companies you don't know as well O No, my current equity holdings are appropriately diversified O Yes, according to the concept of asset allocation, I have too much stock in my portfolio Yes, my current equity holdings are inadequately diversified Consider the following table of recommended asset allocation percentages of cash/bonds/equity: 0-5 years 6-10 years Risk tolerance / Investment strategy Low risk / Conservative 20 / 40 / 40 35 / 40 / 25 20 / 40 / 40 11+ years 10 / 30 / 60 0 / 20/ 80 0/0 / 100 Moderate risk / Moderate 10 / 30 / 60 High risk / Aggressive 10 / 30 / 60 0 / 20 / 80 If you believe that the allocation of assets in your portfolio should be modified to meet your retirement needs, then it is recommended that your holding of: Check all that apply. Equities be decreased O Cash and cash equivalents be increased Bonds be increased Equities be increased U Cash and cash equivalents be decreased O Bonds be decreased Financial experts recommend that you should review and rebalance your investment portfolio at least once every Which of the following statements is true regarding the dollar-cost averaging strategy? Check all that apply. Using this strategy, you can purchase a larger number of shares in a rising market than in a declining market. For this strategy to be successful, you must be lucky and knowledgeable; discipline is irrelevant. An advantage of dollar-cost averaging is that it imposes and requires-investor discipline. Dollar-cost averaging is successful in a rising, fluctuating, or declining market. An advantage of dollar-cost averaging is that it can reduce the average cost of purchased shares over a long investment period. As a long-term investor, how should you respond to a bear market? Hold tight; do not sell, but do not continue investing. O Continue with your investment plan; it is good to buy while the prices are low. O Sell quickly to "stop the bleeding." 1. Apply What You've Learned - Investment Fundamentals Scenario: You are 40 years old. Your investment portfolio currently consists of: (1) a savings account, with a $15,000 balance, (2) certificates of deposit (CDs) worth $25,000, and (3) an investment portfolio consisting of 40% bonds, 40% equities, and 20% cash and cash equivalents. Your bonds are thirty-year U.S. government bonds, while your equities are made up solely of your employer's stock. Your cash holdings consist of your savings account and CDs. Your employer's stock paid a 1% dividend and its market value has increased 10% over the last year. The bonds have paid 5.0% interest. The rate of inflation is 3.0%. Your investment goals are mainly focused on retirement, and you have no large purchases planned in the short term. This consists of in cash and cash equivalents, The value of your current investment portfolio is in bonds, and in equities. Given the existing composition of your investment portfolio, how would you characteristic your investment strategy? Is it conservative, moderate, or aggressive? The investment strategy is conservative. O The investment strategy is moderate. The investment strategy aggressive Given the existing composition of your investment portfolio, how would you characterize your risk tolerance? Are you risk averse, risk neutral, or risk seeking? O You appear to be risk neutral. O You appear to be risk seeking. O You appear to be risk averse. Think about the government bonds in your portfolio. To what kind of risk are you most susceptible because of this investment? O Foreign exchange risk O Inflation risk O Liquidity risk O Marketability risk O Business failure risk The real return on your government bonds is Think about the stock in your investment portfolio. To what type of risk (or risks) are you most susceptible? Only liquidity risk O Only random, or unsystematic, risk O Only market, or systematic, risk Pure risk O Both market (systematic) and random (unsystematic) risks Do you perceive a deficiency of some type in your equity holdings, and if so, of what type? No, it is better to invest in one company that you know really well than in companies you don't know as well O No, my current equity holdings are appropriately diversified O Yes, according to the concept of asset allocation, I have too much stock in my portfolio Yes, my current equity holdings are inadequately diversified Consider the following table of recommended asset allocation percentages of cash/bonds/equity: 0-5 years 6-10 years Risk tolerance / Investment strategy Low risk / Conservative 20 / 40 / 40 35 / 40 / 25 20 / 40 / 40 11+ years 10 / 30 / 60 0 / 20/ 80 0/0 / 100 Moderate risk / Moderate 10 / 30 / 60 High risk / Aggressive 10 / 30 / 60 0 / 20 / 80 If you believe that the allocation of assets in your portfolio should be modified to meet your retirement needs, then it is recommended that your holding of: Check all that apply. Equities be decreased O Cash and cash equivalents be increased Bonds be increased Equities be increased U Cash and cash equivalents be decreased O Bonds be decreased Financial experts recommend that you should review and rebalance your investment portfolio at least once every Which of the following statements is true regarding the dollar-cost averaging strategy? Check all that apply. Using this strategy, you can purchase a larger number of shares in a rising market than in a declining market. For this strategy to be successful, you must be lucky and knowledgeable; discipline is irrelevant. An advantage of dollar-cost averaging is that it imposes and requires-investor discipline. Dollar-cost averaging is successful in a rising, fluctuating, or declining market. An advantage of dollar-cost averaging is that it can reduce the average cost of purchased shares over a long investment period. As a long-term investor, how should you respond to a bear market? Hold tight; do not sell, but do not continue investing. O Continue with your investment plan; it is good to buy while the prices are low. O Sell quickly to "stop the bleeding