Chapter 3 Practice Questions
1.In examining the suitability of a particular investment recommendation for a customer, you are expected to consider all of the following except:
A.Information about the customer that is commonly known but that the customer refuses to disclose
B.The customer’s financial status and past investment experience
C.The customer’s tax status
D.The customer’s investment objectives and expectations
2.The risk that a bond might be redeemed by its issuer prior to the maturity date is known as:
A.Interest rate risk
B.Default risk
C.Credit risk
D.Call risk
3.The risk that an investment will lose its value due to an overall decline in the market is called:
A.Systematic risk
B.Interest rate risk
C.Inflation risk
D.Specific risk
4.The riskiest investment-grade bond, according to Moody’s, is rated:
A.B3
B.Ba3
C.Baa3
D.Baa1
5.The risk of fluctuation in the market value of fixed-income investment products, due to interest rate movements, is considered:
A.Credit risk
B.Call risk
C.Market risk
D.Interest rate risk
6.To qualify for long-term capital gains tax treatment, an asset must be held for:
A.A month or more
B.More than a month
C.A year or more
D.More than a year
7.All of the following are true of diversification except:
A.It involves investing in uncorrelated assets.
B.It can lower systematic risk.
C.It can be used to reduce risk within an asset class or across asset classes.
D.It supports the old adage, “Don’t put all your eggs in one basket.”
8.Which of the following would you not expect from someone with an income strategy?
A.Investment in a rental building
B.Investment in growth stocks
C.Investment in corporate bonds
D.Investment in preferred stock
9.Which of the following would be most subject to purchasing power risk?
A.Common blue chip stock
B.Preferred stock