Question

Dividend reinvestment plans tend to be chosen by individuals whose primary goal is to

	a.	avoid Social Security taxes.
	b.	chose tax-exempt assets.
	c.	provide a source of current income.
	d.	build wealth.
	e.	diversify their portfolio.

Suppose that an investor is willing to tolerate relatively higher asset price risk or volatility in order to seek relatively higher average annual rates of return mainly through capital gains over a long-term time horizon. Then the investor should seek a __________ mutual fund, generally made up of stocks of ________ firms.

	a.	growth; large-cap
	b.	growth; small-cap
	c.	income; large-cap
	d.	income; small-cap
	e.	balanced; government

For eligible individuals, Classic IRAs are

	a.	tax deferred, taxed on the contributions but tax deductible upon withdrawal.
	b.	tax deferred, tax deductible on the contributions but taxed upon withdrawal.
	c.	tax exempt on the contributions, but taxed on the withdrawals.
	d.	taxed on the contributions, but tax exempt on the withdrawals.
	e.	tax exempt on the contributions and the withdrawals.

Answer 1

1).

d. build wealth

Dividend reinvestment plans invests dividends back, giving an opportunity to increase earnings. So, It is chosen by those whose primary goal is to build wealth

2).

b. growth, small-cap

As the investor has high tolerance for risk, he/she will chose growth funds instead of income funds which are generally made up of small cap stocks

3).

b. tax deferred, tax deductible on the contributions but taxed upon withdrawal.

Classic IRAs are tax deferred, till the investments are kept invested and the contributions are tax deductible resulting in tax savings and when the withdrawals are done, they are taxed accordingly.