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Exam 4: Financial Planning, Taxation and the Efficiency of Financial Markets

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Question 1

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An implication of the efficient market hypothesis is

A) securities prices are randomly determined
B) stock prices reflect historical information
C) few investors can expect to outperform the market over a period of time
D) after adjusting for risk, money market securities offer superior returns

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Question 2

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Pension plans permit investors to defer income tax.

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Question 3

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The use of moving averages may produce superior investment results according to

Contributions to an IRA appear on the individual's estimate of cash receipts and disbursements.

What is the federal income tax owed by an investor in the 35 percent income tax bracket? The tax rate on long-term capital gains is 15 percent. a. Bob owns a savings account that paid $350 in interest and sold Stock B for a long-term capital gain of $1,200. b. Bill sold Stock A for a short-term capital gain of $3,500; sold Stock B for a short-term capital loss of $3,100. c. Brian sold Stock A for a long-term capital gain of $3,700; sold Stock B for a long-term capital loss of $5,100. d. Barbara sold Stock A for a $6,000 short-term loss and sold Stock B for a $2,000 long-term gain. e. Roberta's IRA account collected interest of $1,000 and a bond paid her interest of $1,000.

Examples of capital gains include sales of 1. IRA accounts 2. stocks sold for a profit 3. real estate sold for a profit

Securities prices tend to adjust slowly as new information is disseminated in an inefficient market.

Which of the following currently reduces taxes? 1. contributions to an IRA 2. contributions to a Roth account 3. purchases of life insurance 4. contributions to a 401(k) plan

Which of the following is not illustrative of a tax-sheltered retirement plan?

Examples of tax shelters for individuals include 1. pension plans 2. realized short-term capital gains 3. IRAs

The amount in a Keogh account appears on the investor's estimate of cash receipts and disbursements.

U.S. securities markets are efficient in part because these markets are very competitive.

The amount of an outstanding mortgage appears on the individual's balance sheet.

Possible investment objectives may include 1. capacity to meet financial emergencies 2. preservation of capital 3. desire to finance retirement

According to the efficient market hypothesis, purchasing high P/E stocks should produce higher returns.

An individual's net worth is determined by subtracting liabilities from assets.

Which of the following is excluded from an individual's cash budget?

In an efficient securities market, the investor should earn, over a period of years, a return comparable to the amount of risk the individual bears.

One of the first steps an investor should take is to establish the goals and objectives of the portfolio.

A small firm may offer a Roth IRA instead of a 401(k)or Keogh account.