Chapter 1 Fin Markets Practice Test

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34. Which of the following portfolio construction methods starts with asset allocation? A. Top-down B. Bottom-up C. Middle-out D. Buy and hold E. Asset allocation

A. Top-down

48. You purchased 100 shares of XON common stock on margin at $60 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. A. $42.86 B. $50.75 C. $49.67 D. $80.34

A. $42.86

60. You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 35%? A. $50 B. $65 C. $35 D. $40

A. $50

55. Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. A. -33.33% B. -25.63% C. -57.14% D. -77.23%

A. -33.33%

47. You purchased a share of stock for $65. One year later, you received $2.37 as a dividend and sold the share for $63. What was your holding-period return? A. 0.57% B. -0.2550% C. -0.89% D. 1.63% E. None of the options are correct.

A. 0.57%

40. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 2.5%. What is your approximate annual real rate of return if the rate of inflation was 3.4% over the year? A. 0.9% B. 0.9% C. 5.9% D. 3.4%

A. 0.9%

32. An investor purchased a bond 45 days ago for $985. He received $15 in interest and sold the bond for $980. What is the holding-period return on his investment? A. 1.02% B. 0.50% C. 1.92% D. 0.01%

A. 1.02%

4. A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year? A. 1.5% B. 10% C. 7% D. 3% E. None of the options are correct.

A. 1.5%

17. You have been given this probability distribution for the holding-period return for KMP stock: What is the expected holding-period return for KMP stock? A. 10.40% B. 9.32% C. 11.63% D. 11.54% E. 10.88%

A. 10.40%

36. You want to purchase XON stock at $60 from your broker using as little of your own money as possible. If initial margin is 50% and you have $3,000 to invest, how many shares can you buy? A. 100 shares B. 200 shares C. 50 shares D. 500 shares E. 25 shares

A. 100 shares

35. Over the past year, you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was A. 11.76%. B. 16.00%. C. 15.02%. D. 14.32%.

A. 11.76%.

22. If a portfolio had a return of 18%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 34%, the risk premium would be A. 13%. B. 18%. C. 49%. D. 12%. E. 29%.

A. 13%.

37. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 6%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year? A. 4% B. 2% C. 6% D. 3%

A. 4%

39. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%. What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year? A. 4.1% B. 2.5% C. 2.9% D. 1.6%

A. 4.1%

3. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year? A. 5% B. 10% C. 7% D. 3%

A. 5%

19. You have been given this probability distribution for the holding-period return for KMP stock: What is the expected variance for KMP stock? A. 66.04% B. 69.96% C. 77.04% D. 63.72% E. 78.45%

A. 66.04%

75. If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be A. 8%. B. 16%. C. 37%. D. 21%. E. 29%.

A. 8%.

45. You purchased a share of stock for $12. One year later, you received $0.25 as a dividend and sold the share for $12.92. What was your holding-period return? A. 9.75% B. 10.65% C. 11.75% D. 11.25% E. None of the options are correct.

A. 9.75%

55. ________ are, in essence, an insurance contract against the default of one or more borrowers. A. Credit default swaps B. CMOs C. ETFs D. Collateralized debt obligations E. All of the options

A. Credit default swaps

44. In a typical underwriting arrangement, the investment-banking firm I) sells shares to the public via an underwriting syndicate.II) purchases the securities from the issuing company.III) assumes the full risk that the shares may not be sold at the offering price.IV) agrees to help the firm sell the issue to the public but does not actually purchase the securities. A. I, II, and III B. I, III, and IV C. I and IV D. II and III E. I and II

A. I, II, and III

63. The securities act of 1933 I) requires full disclosure of relevant information relating to the issue of new securities.II) requires registration of new securities.III) requires issuance of a prospectus detailing financial prospects of the firm.IV) established the SEC.V) requires periodic disclosure of relevant financial information.VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers. A. I, II, and III B. I, II, III, IV, V, and VI C. I, II, and V D. I, II, and IV E. IV only

A. I, II, and III

12. In 2016, which of the following financial assets make up the greatest proportion of the financial assets held by U.S. households? A. Pension reserves B. Life insurance reserves C. Mutual fund shares D. Debt securities E. Personal trusts

A. Pension reserves

24. The ____________ refers to the potential conflict between management and shareholders. A. agency problem B. diversification problem C. liquidity problem D. solvency problem E. regulatory problem

A. agency problem

6. In a "firm commitment," the investment banker A. buys the stock from the company and resells the issue to the public. B. agrees to help the firm sell the stock at a favorable price. C. finds the best marketing arrangement for the investment-banking firm. D. agrees to help the firm sell the stock at a favorable price and finds the best marketing arrangement for the investment-banking firm.

A. buys the stock from the company and resells the issue to the public.

32. Security selection refers to A. choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. top-down analysis.

A. choosing which securities to hold based on their valuation.

21. The value of a derivative security A. depends on the value of the related security. B. is unable to be calculated. C. is unrelated to the value of the related security. D. has been enhanced due to the recent misuse and negative publicity regarding these instruments. E. is worthless today.

A. depends on the value of the related security.

13. Ceteris paribus, a decrease in the demand for loans A. drives the interest rate down. B. drives the interest rate up. C. might not have any effect on interest rates. D. results from an increase in business prospects and a decrease in the level of savings.

A. drives the interest rate down.

68. Kurtosis is a measure of A. how fat the tails of a distribution are. B. the downside risk of a distribution. C. the normality of a distribution. D. the dividend yield of the distribution. E. how fat the tails of a distribution are.

A. how fat the tails of a distribution are.

1. The trading of stock that was previously issued takes place A. in the secondary market. B. in the primary market. C. usually with the assistance of an investment banker. D. in the secondary and primary markets.

A. in the secondary market.

39. In 2016, ____________ was(were) the most significant financial asset(s) of U.S. commercial banks in terms of total value. A. loans and leases B. cash C. real estate D. deposits E. investment securities

A. loans and leases

46. New issues of securities are sold in the ________ market(s). A. primary B. secondary C. over-the-counter D. primary and secondary

A. primary

10. In 2016, ____________ was the most significant asset of U.S. households in terms of total value. A. real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves

A. real estate

62. The preliminary prospectus is referred to as a(n) A. red herring. B. indenture. C. greenmail. D. tombstone. E. headstone.

A. red herring.

61. Annual percentage rates (APRs) are computed using A. simple interest. B. compound interest. C. either simple interest or compound interest. D. best estimates of expected real costs. E. None of the options are correct.

A. simple interest.

69. When a distribution is positively skewed, A. standard deviation overestimates risk. B. standard deviation correctly estimates risk. C. standard deviation underestimates risk. D. the tails are fatter than in a normal distribution.

A. standard deviation overestimates risk.

15. Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2015 show that A. stocks offered investors greater rates of return than bonds and bills. B. stock returns were less volatile than those of bonds and bills. C. bonds offered investors greater rates of return than stocks and bills. D. bills outperformed stocks and bonds. E. Treasury bills always offered a rate of return greater than inflation.

A. stocks offered investors greater rates of return than bonds and bills.

66. According to the CFA Institute Standards of Professional Conduct, CFA Institute members have responsibilities to all of the following, except A. the government. B. the profession. C. the public. D. the employer. E. clients and prospective clients.

A. the government.

27. In words, the real rate of interest is approximately equal to A. the nominal rate minus the inflation rate. B. the inflation rate minus the nominal rate. C. the nominal rate times the inflation rate. D. the inflation rate divided by the nominal rate. E. the nominal rate plus the inflation rate.

A. the nominal rate minus the inflation rate.

16. You purchased 100 shares of IBM common stock on margin at $70 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. A. $21 B. $50 C. $49 D. $80

B. $50

20. You sold short 300 shares of common stock at $55 per share. The initial margin is 60%. At what stock price would you receive a margin call if the maintenance margin is 35%? A. $51.00 B. $65.19 C. $35.22 D. $40.36

B. $65.19

38. A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 3%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year? A. 1% B. -1% C. 7% D. 3%

B. -1%

51. You purchased 1,000 shares of common stock on margin at $30 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24? Ignore interest on margin. A. 0.33 B. 0.375 C. 0.20 D. 0.23 E. 0.25

B. 0.375

59. You purchase a share of CAT stock for $90. One year later, after receiving a dividend of $4, you sell the stock for $97. What was your holding-period return? A. 14.44% B. 12.22% C. 13.33% D. 5.56%

B. 12.22%

8. You purchased a share of stock for $68. One year later, you received $3.00 as a dividend and sold the share for $74.50. What was your holding-period return? A. 12.5% B. 14.0% C. 13.6% D. 11.8%

B. 14.0%

24. Toyota stock has the following probability distribution of expected prices one year from now: If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding-period return on Toyota? A. 17.72% B. 18.89% C. 17.91% D. 18.18%

B. 18.89%

33. An investor purchased a bond 63 days ago for $980. He received $17 in interest and sold the bond for $987. What is the holding-period return on his investment? A. 1.52% B. 2.45% C. 1.92% D. 2.68%

B. 2.45%

58. Assume you sold short 100 shares of common stock at $40 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $50? A. 40% B. 20% C. 35% D. 25%

B. 20%

56. You want to purchase GM stock at $40 from your broker using as little of your own money as possible. If initial margin is 50% and you have $4,000 to invest, how many shares can you buy? A. 100 shares B. 200 shares C. 50 shares D. 500 shares E. 25 shares

B. 200 shares

58. You have been given this probability distribution for the holding-period return for GM stock: What is the expected variance for GM stock?\ A. 200.00% B. 221.04% C. 246.37% D. 14.87% E. 16.13%

B. 221.04%

21. Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintenance margin if a margin call is made at a stock price of $60? A. 40% B. 33% C. 35% D. 25%

B. 33%

34. Over the past year, you earned a nominal rate of interest of 8% on your money. The inflation rate was 3.5% over the same period. The exact actual growth rate of your purchasing power was A. 15.55%. B. 4.35%. C. 5.02%. D. 4.81%. E. 15.04%.

B. 4.35%.

42. You buy 300 shares of Qualitycorp for $30 per share and deposit initial margin of 50%. The next day, Qualitycorp's price drops to $25 per share. What is your actual margin? A. 50% B. 40% C. 33% D. 60% E. 25%

B. 40%

63. If an investment provides a 1.25% return quarterly, its effective annual rate is A. 5.23%. B. 5.09%. C. 4.02%. D. 4.04%.

B. 5.09%.

7. You purchased a share of stock for $20. One year later, you received $1 as a dividend and sold the share for $29. What was your holding-period return? A. 45% B. 50% C. 5% D. 40% E. None of the options are correct.

B. 50%

6. If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.7%, the nominal rate of interest would be approximately A. 3.7%. B. 6.2%. C. 2.5%. D. -1.2%.

B. 6.2%.

18. You have been given this probability distribution for the holding-period return for KMP stock: What is the expected standard deviation for KMP stock? A. 6.91% B. 8.13% C. 7.79% D. 7.25% E. 8.85%

B. 8.13%

5. If the annual real rate of interest is 5%, and the expected inflation rate is 4%, the nominal rate of interest would be Approximately A. 1%. B. 9%. C. 20%. D. 15%.

B. 9%.

33. Which of the following portfolio construction methods starts with security analysis? A. Top-down B. Bottom-up C. Middle-out D. Buy and hold E. Asset allocation

B. Bottom-up

65. Which of the following is not required under the CFA Institute Standards of Professional Conduct? A. Knowledge of all applicable laws, rules, and regulations B. Disclosure of all personal investments, whether or not they may conflict with a client's investments C. Disclosure of all conflicts to clients and prospects D. Reasonable inquiry into a client's financial situation E. All of the options are required under the CFA Institute standards.

B. Disclosure of all personal investments, whether or not they may conflict with a client's investments

49. Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities. A. Sarbanes-Oxley B. Glass-Steagall C. SEC D. Sarbanes-Oxley and SEC E. None of the options

B. Glass-Steagall

10. Which of the following statement(s) is(are) true? I) The real rate of interest is determined by the supply and demand for funds. II) The real rate of interest is determined by the expected rate of inflation. III) The real rate of interest can be affected by actions of the Fed. IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation. A. I and II only B. I and III only C. III and IV only D. II and III only E. I, II, III, and IV only

B. I and III only

53. Which of the following is true about mortgage-backed securities? I) They aggregate individual home mortgages into homogeneous pools.II) The purchaser receives monthly interest and principal payments received from payments made on the pool.III) The banks that originated the mortgages maintain ownership of them.IV) The banks that originated the mortgages may continue to service them. A. II, III, and IV B. I, II, and IV C. II and IV D. I, III, and IV E. I, II, III, and IV

B. I, II, and IV

37. ________ specialize in helping companies raise capital by selling securities. A. Commercial bankers B. Investment bankers C. Investment issuers D. Credit raters

B. Investment bankers

27. Which of the following orders instructs the broker to sell at or below a specified price? A. Limit-sell order B. Stop-loss C. Limit-buy order D. Stop-buy order E. Market order

B. Stop-loss

17. A fixed-income security pays A. a fixed level of income for the life of the owner. B. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security. C. a variable level of income for owners on a fixed income. D. a fixed or variable income stream at the option of the owner.

B. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

1. The material wealth of a society is a function of A. all financial assets. B. all real assets. C. all financial and real assets. D. all physical assets.

B. all real assets.

23. Shares for short transactions A. are usually borrowed from other brokers. B. are typically shares held by the short seller's broker in street name. C. are borrowed from commercial banks. D. are typically shares held by the short seller's broker in street name and are borrowed from commercial banks.

B. are typically shares held by the short seller's broker in street name.

43. In 2016, ____________ was(were) the least significant liability(ies) of U.S. nonfinancial businesses in terms of total value. A. bonds and mortgages B. bank loans C. inventories D. trade debt E. marketable securities

B. bank loans

44. In terms of total value, the most significant liability(ies) of U.S. nonfinancial businesses in 2016 was(were) A. bank loans. B. bonds and mortgages. C. trade debt. D. other loans. E. marketable securities.

B. bonds and mortgages.

52. The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of A. credit enhancement. B. credit swap. C. unbundling. D. derivatives.

B. credit swap.

12. Other things equal, an increase in the government budget deficit A. drives the interest rate down. B. drives the interest rate up. C. might not have any effect on interest rates. D. increases business prospects.

B. drives the interest rate up.

60. When comparing investments with different horizons, the ____________ provides the more accurate comparison. A. arithmetic average B. effective annual rate C. average annual return D. historical annual average

B. effective annual rate

38. Commercial banks differ from other businesses in that both their assets and their liabilities are mostly A. illiquid. B. financial. C. real. D. owned by the government. E. regulated.

B. financial.

3. Firms raise capital by issuing stock A. in the secondary market. B. in the primary market. C. to unwary investors. D. only on days when the market is up.

B. in the primary market.

28. If the Federal Reserve lowers the Fed Funds rate, ceteris paribus, the equilibrium levels of funds lent will __________, and the equilibrium level of real interest rates will ___________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease E. reverse direction from their previous trends; reverse direction from their previous trends

B. increase; decrease

Financial assets A. directly contribute to the country's productive capacity. B. indirectly contribute to the country's productive capacity. C. contribute to the country's productive capacity, both directly and indirectly. D. do not contribute to the country's productive capacity, either directly or indirectly. E. are of no value to anyone.

B. indirectly contribute to the country's productive capacity.

42. In 2016, ____________ was(were) the least significant real asset(s) of U.S. nonfinancial businesses in terms of total value. A. equipment and software B. inventory C. real estate D. trade credit E. marketable securities

B. inventory

11. In 2016, ____________ were the most significant liability of U.S. households in terms of total value. A. credit cards B. mortgages C. bank loans D. student loans E. other forms of debt

B. mortgages

14. The largest component of domestic net worth in 2016 was A. nonresidential real estate. B. residential real estate. C. inventories. D. consumer durables. E. equipment and software.

B. residential real estate.

37. A sale by IBM of new stock to the public would be a(n) A. short sale. B. seasoned equity offering. C. private placement. D. secondary-market transaction. E. initial public offering.

B. seasoned equity offering.

47. Investors trade previously issued securities in the ________ market(s). A. primary B. secondary C. primary and secondary D. derivatives

B. secondary

8. Initial margin requirements are determined by A. the Securities and Exchange Commission. B. the Federal Reserve System. C. the New York Stock Exchange. D. the Federal Reserve System and the New York Stock Exchange.

B. the Federal Reserve System.

43. When a firm markets new securities, a preliminary registration statement must be filed with A. the exchange on which the security will be listed. B. the Securities and Exchange Commission. C. the Federal Reserve. D. all other companies in the same line of business. E. the Federal Deposit Insurance Corporation.

B. the Securities and Exchange Commission.

14. The holding-period return (HPR) on a share of stock is equal to A. the capital gain yield during the period plus the inflation rate. B. the capital gain yield during the period plus the dividend yield. C. the current yield plus the dividend yield. D. the dividend yield plus the risk premium. E. the change in stock price.

B. the capital gain yield during the period plus the dividend yield.

41. You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is A. $4,500. B. unlimited. C. zero. D. $9,000. E. Cannot be determined from the information given.

B. unlimited.

78. The most common measure of loss associated with extremely negative returns is A. lower partial standard deviation. B. value at risk. C. expected shortfall. D. standard deviation.

B. value at risk.

46. You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was A. $4,800. B. $12,000. C. $2,250. D. $7,200.

C. $2,250.

61. You sold short 100 shares of common stock at $75 per share. The initial margin is 50%. At what stock price would you receive a margin call if the maintenance margin is 30%? A. $90.23 B. $88.52 C. $86.54 D. $87.12

C. $86.54

50. You purchased 100 shares of common stock on margin at $40 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin. A. 0.33 B. 0.55 C. 0.20 D. 0.23 E. 0.25

C. 0.20

73. If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be A. 0.12. B. 0.04. C. 0.32. D. 0.16. E. 0.25.

C. 0.32.

52. Over the past year, you earned a nominal rate of interest of 3.6% on your money. The inflation rate was 3.1% over the same period. The exact actual growth rate of your purchasing power was A. 3.6%. B. 3.1%. C. 0.48%. D. 6.7%.

C. 0.48%.

41. A year ago, you invested $12,000 in an investment that produced a return of 18%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year? A. 18% B. 2% C. 16% D. 15%

C. 16%

79. Practitioners often use a ________% VaR, meaning that ________% of returns will exceed the VaR, and ________% will be worse. A. 25; 75; 25 B. 75; 25; 75 C. 1; 99; 51 D. 95; 5; 95 E. 80; 80; 20

C. 1; 99; 51

19. Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. A. 20.03% B. 25.67% C. 22.22% D. 77.46%

C. 22.22%

2. Over the past year, you earned a nominal rate of interest of 8% on your money. The inflation rate was 4% over the same period. The exact actual growth rate of your purchasing power was A. 15.5%. B. 10.0%. C. 3.8%. D. 4.8%. E. 15.0%.

C. 3.8%.

57. You want to purchase IBM stock at $80 from your broker using as little of your own money as possible. If initial margin is 50% and you have $2,000 to invest, how many shares can you buy? A. 100 shares B. 200 shares C. 50 shares D. 500 shares E. 25 shares

C. 50 shares

54. Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. A. 20.47% B. 25.63% C. 57.14% D. 77.23%

C. 57.14%

In 2016, _______ of the assets of U.S. households were financial assets as opposed to tangible assets. A. 20.4% B. 34.2% C. 69.4% D. 71.7% E. 82.5%

C. 69.4%

36. Over the past year, you earned a nominal rate of interest of 12.5% on your money. The inflation rate was 2.6% over the same period. The exact actual growth rate of your purchasing power was A. 9.15%. B. 9.90%. C. 9.65%. D. 10.52%.

C. 9.65%

26. Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensation II) Hiring bickering family members as corporate spies III) Boards of directors forcing out underperforming management IV) Security analysts monitoring the firm closely V) Takeover threats A. II and V B. I, III, and IV C. I, III, IV, and V D. III, IV, and V E. I, III, and V

C. I, III, IV, and V

26. Which of the following orders instructs the broker to buy at or below a specified price? A. Limit-loss order B. Discretionary order C. Limit-buy order D. Stop-buy order E. Market order

C. Limit-buy order

28. Which of the following orders instructs the broker to sell at or above a specified price? A. Limit-buy order B. Discretionary order C. Limit-sell order D. Stop-buy order E. Market order

C. Limit-sell order

25. Which of the following factors would not be expected to affect the nominal interest rate? A. The supply of loans B. The demand for loans C. The coupon rate on previously issued government bonds D. The expected rate of inflation E. Government spending and borrowing

C. The coupon rate on previously issued government bonds

39. One outcome from the SEC investigation of the "Flash Crash of 2010" was A. a prohibition of short selling. B. higher margin requirements. C. approval of new circuit breakers. D. establishment of electronic communications networks (ECNs). E. passage of the Sarbanes-Oxley Act.

C. approval of new circuit breakers.

15. The smallest component of domestic net worth in 2016 was A. nonresidential real estate. B. residential real estate. C. inventories. D. consumer durables. E. equipment and software.

C. inventories.

25. A disadvantage of using stock options to compensate managers is that A. it encourages managers to undertake projects that will increase stock price. B. it encourages managers to engage in empire building. C. it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects. D. All of the above.

C. it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.

35. You want to buy 100 shares of Hotstock Inc. at the best possible price as quickly as possible. You would most likely place a A. stop-loss order. B. stop-buy order. C. market order. D. limit-sell order. E. limit-buy order.

C. market order.

41. In 2016, ____________ was(were) the most significant real asset(s) of U.S. nonfinancial businesses in terms of total value. A. equipment and software B. inventory C. real estate D. trade credit E. marketable securities

C. real estate

In 2016, ____________ was the most significant real asset of U.S. households in terms of total value. A. consumer durables B. automobiles C. real estate D. mutual fund shares E. bank loans

C. real estate

70. When a distribution is negatively skewed, A. standard deviation overestimates risk. B. standard deviation correctly estimates risk. C. standard deviation underestimates risk. D. the tails are fatter than in a normal distribution.

C. standard deviation underestimates risk.

10. You sold JCP stock short at $80 per share. Your losses could be minimized by placing a A. limit-sell order. B. limit-buy order. C. stop-buy order. D. day-order. E. None of the options are correct.

C. stop-buy order.

31. Asset allocation refers to A. choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. bottom-up analysis.

C. the allocation of assets into broad asset classes.

38. The finalized registration statement for new securities approved by the SEC is called A. a red herring. B. the preliminary statement. C. the prospectus. D. a best-efforts agreement. E. a firm commitment.

C. the prospectus.

67. Skewness is a measure of A. how fat the tails of a distribution are. B. the downside risk of a distribution. C. the symmetry of a distribution. D. the dividend yield of the distribution. E. None of the options are correct.

C. the symmetry of a distribution.

47. You sold short 150 shares of common stock at $27 per share. The initial margin is 45%. Your initial investment was A. $4,800.60. B. $12,000.25. C. $2,250.75. D. $1,822.50.

D. $1,822.50.

49. You purchased 1000 shares of CSCO common stock on margin at $19 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. A. $12.86 B. $15.75 C. $19.67 D. $13.57

D. $13.57

16. The domestic net worth of the U.S. in 2016 was A. $15.411 trillion. B. $26.431 trillion. C. $42.669 trillion. D. $64.747 trillion. E. $70.983 trillion.

D. $64.747 trillion.

15. You sold short 200 shares of common stock at $60 per share. The initial margin is 60%. Your initial investment was A. $4,800. B. $12,000. C. $5,600. D. $7,200.

D. $7,200.

18. You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin. A. 25.00% B. -33.33% C. 44.31% D. -41.67% E. -54.22%

D. -41.67%

74. If a portfolio had a return of 15%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 30%, the Sharpe measure would be A. 0.20. B. 0.35. C. 0.45. D. 0.33. E. 0.25.

D. 0.33.

31. Block transactions are transactions for more than _______ shares, and they account for about _____ percent of all trading on the NYSE. A. 1,000; 5 B. 500; 10 C. 100,000; 50 D. 10,000; 30 E. 5,000; 23

D. 10,000; 30

59. Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85? A. 40.5% B. 20.5% C. 35.5% D. 23.5%

D. 23.5%

62. If an investment provides a 2% return semi-annually, its effective annual rate is A. 2%. B. 4%. C. 4.02%. D. 4.04%. E. None of the options are correct.

D. 4.04%.

1. Over the past year, you earned a nominal rate of interest of 10% on your money. The inflation rate was 5% over the same period. The exact actual growth rate of your purchasing power was A. 15.5%. B. 10.0%. C. 5.0%. D. 4.8%. E. 15.0%.

D. 4.8%.

53. You purchased 100 shares of common stock on margin for $35 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $42 per share? Ignore interest on margin. A. 28% B. 33% C. 14% D. 40% E. 24%

D. 40%

23. You purchase a share of Boeing stock for $90. One year later, after receiving a dividend of $3, you sell the stock for $92. What was your holding-period return? A. 4.44% B. 2.22% C. 3.33% D. 5.56% E. None of the options are correct.

D. 5.56%

31. You have been given this probability distribution for the holding-period return for Cheese, Inc. stock: Assuming that the expected return on Cheese's stock is 14.35%, what is the standard deviation of these returns? A. 4.72% B. 6.30% C. 4.38% D. 5.74% E. None of the options are correct.

D. 5.74%

65. If an investment provides a 3% return semi-annually, its effective annual rate is A. 3%. B. 6%. C. 6.06%. D. 6.09%.

D. 6.09%.

54. If the annual real rate of interest is 3.5%, and the expected inflation rate is 3.5%, the nominal rate of interest would be approximately A. 0%. B. 3.5%. C. 12.25%. D. 7%.

D. 7%.

66. If an investment provides a 2.1% return quarterly, its effective annual rate is A. 2.1%. B. 8.4%. C. 8.56%. D. 8.67%.

D. 8.67%.

64. If an investment provides a 0.78% return monthly, its effective annual rate is A. 9.36%. B. 9.63%. C. 10.02%. D. 9.77%.

D. 9.77%.

11. Which one of the following statements regarding orders is false? A. A market order is simply an order to buy or sell a stock immediately at the prevailing market price. B. A limit-sell order is where investors specify prices at which they are willing to sell a security. C. If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45. D. A market order is an order to buy or sell a stock on a specific exchange (market).

D. A market order is an order to buy or sell a stock on a specific exchange (market).

12. Restrictions on trading involving insider information apply to the following, except A. corporate officers. B. corporate directors. C. major stockholders. D. All of the individuals. E. None of the options.

D. All of the individuals.

48. Investment bankers perform which of the following role(s)? A. Market new stock and bond issues for firms B. Provide advice to the firms as to market conditions, price, etc. C. Design securities with desirable properties D. All of the options E. None of the options

D. All of the options

_______ are financial assets. A. Bonds B. Machines C. Stocks D. Bonds and stocks E. Bonds, machines, and stocks

D. Bonds and stocks

54. ________ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk. A. Stocks B. Bonds C. Derivatives D. Collateralized debt obligations E. All of the options

D. Collateralized debt obligations

51. Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset. A. GNMA B. FNMA C. FHLMC D. FNMA and FHLMC E. GNMA and FNMA

D. FNMA and FHLMC

9. Which of the following determine(s) the level of real interest rates? I) The supply of savings by households and business firms II) The demand for investment funds III) The government's net supply and/or demand for funds A. I only B. II only C. I and II only D. I, II, and III

D. I, II, and III

11. Which of the following statement(s) is(are) true? A. Inflation has no effect on the nominal rate of interest. B. The realized nominal rate of interest is always greater than the real rate of interest. C. Certificates of deposit offer a guaranteed real rate of interest. D. None of the options are true.

D. None of the options are true.

24. Which of the following orders is most useful to short sellers who want to limit their potential losses? A. Limit order B. Discretionary order C. Limit-loss order D. Stop-buy order

D. Stop-buy order

29. Which of the following orders instructs the broker to buy at or above a specified price? A. Limit-buy order B. Discretionary order C. Limit-sell order D. Stop-buy order E. Market order

D. Stop-buy order

50. The spread between the LIBOR and the Treasury-bill rate is called the A. term spread. B. T-bill spread. C. LIBOR spread. D. TED spread.

D. TED spread.

45. Which of the following is true regarding private placements of primary security offerings? A. Extensive and costly registration statements are required by the SEC. B. For very large issues, they are better suited than public offerings. C. They trade in secondary markets. D. The shares are sold directly to a small group of institutional or wealthy investors. E. They have greater liquidity than public offerings.

D. The shares are sold directly to a small group of institutional or wealthy investors.

51. Which of the following measures of risk best highlights the potential loss from extreme negative returns? A. Standard deviation B. Variance C. Upper partial standard deviation D. Value at risk (VaR) E. None of the options are correct.

D. Value at risk (VaR)

76. ________ is a risk measure that indicates vulnerability to extreme negative returns. A. Value at risk B. Lower partial standard deviation C. Standard deviation D. Value at risk and lower partial standard deviation E. None of the options are correct.

D. Value at risk and lower partial standard deviation

20. An example of a derivative security is A. a common share of Microsoft. B. a call option on Intel stock. C. a commodity futures contract. D. a call option on Intel stock and a commodity futures contract. E. a common share of Microsoft and a call option on Intel stock.

D. a call option on Intel stock and a commodity futures contract.

32. A program trade is A. a trade of 10,000 (or more) shares of a stock. B. a trade of many shares of one stock for one other stock. C. a trade of analytic programs between financial analysts. D. a coordinated purchase or sale of an entire portfolio of stocks. E. not feasible with current technology but is expected to be popular in the near future.

D. a coordinated purchase or sale of an entire portfolio of stocks.

18. A debt security pays A. a fixed level of income for the life of the owner. B. a variable level of income for owners on a fixed income. C. a fixed or variable income stream at the option of the owner. D. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

D. a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

5. Investment bankers A. act as intermediaries between issuers of stocks and investors. B. act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities. C. accept deposits from savers and lend them out to companies. D. act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.

D. act as intermediaries between issuers of stocks and investors and act as advisors to companies in helping them analyze their financial needs and find buyers for newly-issued securities.

21. The risk premium for common stocks A. cannot be zero, for investors would be unwilling to invest in common stocks. B. must always be positive, in theory. C. is negative, as common stocks are risky. D. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. E. cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

D. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.

40. In 2016, ____________ was(were) the most significant liability(ies) of U.S. commercial banks in terms of total value. A. loans and leases B. cash C. real estate D. deposits E. investment securities

D. deposits

23. Financial assets permit all of the following except A. consumption timing. B. allocation of risk. C. separation of ownership and control. D. elimination of risk.

D. elimination of risk.

The means by which individuals hold their claims on real assets in a well-developed economy are A. investment assets. B. depository assets. C. derivative assets. D. financial assets. E. exchange-driven assets.

D. financial assets.

22. Although derivatives can be used as speculative instruments, businesses most often use them to A. attract customers. B. appease stockholders. C. offset debt. D. hedge risks. E. enhance their balance sheets.

D. hedge risks.

28. Theoretically, takeovers should result in A. improved management. B. increased stock price. C. increased benefits to existing management of the taken-over firm. D. improved management and increased stock price. E. All of the options.

D. improved management and increased stock price.

30. Shelf registration A. is a way of placing issues in the primary market. B. allows firms to register securities for sale over a two-year period. C. increases transaction costs to the issuing firm. D. is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period. E. is a way of placing issues in the primary market and increases transaction costs to the issuing firm.

D. is a way of placing issues in the primary market and allows firms to register securities for sale over a two-year period.

71. If a distribution has "fat tails," it exhibits A. positive skewness. B. negative skewness. C. a kurtosis of zero. D. kurtosis. E. positive skewness and kurtosis.

D. kurtosis.

In 2016, ____________ was the least significant financial asset of U.S. households in terms of total value. A. real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves

D. life insurance reserves

9. You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a A. stop-buy order. B. limit-buy order. C. market order. D. limit-sell order. E. None of these options are correct.

D. limit-sell order.

80. When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the A. most realistic, as it is the most complete measure of risk. B. most pessimistic, as it is the most complete measure of risk. C. most optimistic, as it is the most complete measure of risk. D. most optimistic, as it takes the highest return (smallest loss) of all the cases.

D. most optimistic, as it takes the highest return (smallest loss) of all the cases.

16. If the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation, A. borrowers gain and savers lose. B. savers gain and borrowers lose. C. both borrowers and savers lose. D. neither borrowers nor savers gain nor lose. E. both borrowers and savers gain.

D. neither borrowers nor savers gain nor lose.

40. All of the following are considered new trading strategies, except A. high frequency trading. B. algorithmic trading. C. dark pools. D. short selling.

D. short selling.

29. "Bracket Creep" happens when A. tax liabilities are based on real income and there is a negative inflation rate. B. tax liabilities are based on real income and there is a positive inflation rate. C. tax liabilities are based on nominal income and there is a negative inflation rate. D. tax liabilities are based on nominal income and there is a positive inflation rate. E. too many peculiar people make their way into the highest tax bracket.

D. tax liabilities are based on nominal income and there is a positive inflation rate.

27. Corporate shareholders are best protected from incompetent management decisions by A. the ability to engage in proxy fights. B. management's control of pecuniary rewards. C. the ability to call shareholder meetings. D. the threat of takeover by other firms. E. one-share/one-vote election rules.

D. the threat of takeover by other firms.

7. The secondary market consists of A. transactions on the AMEX. B. transactions in the OTC market. C. transactions through the investment banker. D. transactions on the AMEX and in the OTC market. E. transactions on the AMEX, through the investment banker, and in the OTC market.

D. transactions on the AMEX and in the OTC market.

14. Assume you purchased 200 shares of GE common stock on margin at $70 per share from your broker. If the initial margin is 55%, how much did you borrow from the broker? A. $6,000 B. $4,000 C. $7,700 D. $7,000 E. $6,300

E. $6,300

17. You purchased 100 shares of common stock on margin at $45 per share. Assume the initial margin is 50%, and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $30? Ignore interest on margin. A. 0.33 B. 0.55 C. 0.43 D. 0.23 E. 0.25

E. 0.25

72. If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be A. 0.08. B. 0.03. C. 0.20. D. 0.11. E. 0.25.

E. 0.25.

56. You have been given this probability distribution for the holding-period return for GM stock: What is the expected holding-period return for GM stock? A. 10.4% B. 11.4% C. 12.4% D. 13.4% E. 14.4%

E. 14.4%

57. You have been given this probability distribution for the holding-period return for GM stock: What is the expected standard deviation for GM stock? A. 16.91% B. 16.13% C. 13.79% D. 15.25% E. 14.87%

E. 14.87%

52. You purchased 100 shares of common stock on margin for $50 per share. The initial margin is 50%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $56 per share? Ignore interest on margin. A. 28% B. 33% C. 14% D. 42% E. 24%

E. 24%

26. If a portfolio had a return of 11%, the risk-free asset return was 6%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be A. 14%. B. 6%. C. 35%. D. 21%. E. 5%.

E. 5%.

22. Specialists on stock exchanges perform which of the following functions? A. Act as dealers in their own accounts B. Analyze the securities in which they specialize C. Provide liquidity to the market D. Act as dealers in their own accounts and analyze the securities in which they specialize E. Act as dealers in their own accounts and provide liquidity to the market

E. Act as dealers in their own accounts and provide liquidity to the market

30. The Sarbanes-Oxley Act A. requires corporations to have more independent directors. B. requires the firm's CFO to personally vouch for the firm's accounting statements. C. prohibits auditing firms from providing other services to clients. D. requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements. E. All of the above.

E. All of the above.

35. _______ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. Credit unions E. All of the options

E. All of the options

19. Money market securities A. are short term. B. are highly marketable. C. are generally very low risk. D. are highly marketable and are generally very low risk. E. All of the options.

E. All of the options.

36. Financial intermediaries exist because small investors cannot efficiently A. diversify their portfolios. B. assess credit risk of borrowers. C. advertise for needed investments. D. diversify their portfolios and assess credit risk of borrowers. E. All of the options.

E. All of the options.

_________ financial asset(s). A. Buildings are B. Land is a C. Derivatives are D. U.S. agency bonds are E. Derivatives and U.S. agency bonds are

E. Derivatives and U.S. agency bonds are

29. During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to I) manipulation of financial data to misrepresent the actual condition of the firm.II) misleading and overly optimistic research reports produced by analysts.III) allocating IPOs to executives as a quid pro quo for personal favors. IV) greenmail. A. II, III, and IV B. I, II, and IV C. II and IV D. I, III, and IV E. I, II, and III

E. I, II, and III

64. The Securities Act of 1934 I) requires full disclosure of relevant information relating to the issue of new securities.II) requires registration of new securities.III) requires issuance of a prospectus detailing financial prospects of the firm.IV) established the SEC.V) requires periodic disclosure of relevant financial information.VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers. A. I, II, and III B. I, II, III, IV, V, and VI C. I, II, and V D. I, II, and IV E. IV, V, and VI

E. IV, V, and VI

_______ are real assets. A. Land B. Machines C. Stocks and bonds D. Knowledge E. Land, machines, and knowledge

E. Land, machines, and knowledge

25. Which of the following orders instructs the broker to buy at the current market price? A. Limit order B. Discretionary order C. Limit-loss order D. Stop-buy order E. Market order

E. Market order

42. If the annual real rate of interest is 3.5%, and the expected inflation rate is 2.5%, the nominal rate of interest would be approximately A. 3.5%. B. 2.5%. C. 1%. D. 6.8%. E. None of the options are correct.