Chapter 7 FHCE

Someone who strongly agrees that in terms of investing, safety is more important than returns is likely a person who has: a. A low risk tolerance. b. A moderate risk tolerance. c. A high risk tolerance. d. A very high risk tolerance.

a.

The risks inherent in international investing include: a. All of the responses are true. b. Currency exchange rate risk. c. Less regulatory oversight. d. Lack of marketability.

a.

Over a recent 10-year time period, passively managed large company mutual funds outperformed actively managed mutual funds by a. 0.94 percentage points b. 6.74 percentage points c. 7.68 percentage points d. There was no difference in performance between passively and actively managed mutual funds

a. 0.94 percentage points

Approximately how many individual stocks can an investor choose from within the U.S. market? a. 3,700 b. 9,500 c. 2,000 d. 500

a. 3,700

Match the following definitions with the appropriate fund type: I. Passively managed funds designed to mimic a specific market. II. Mutual funds managed based on a person's anticipated year of retirement. III. Mutual funds managed based on a pre-set ratio of stocks and bonds. IV. Mutual Funds that attempt to earn rates of return that exceed the return of the market. Target Date Funds _____. Active Management Funds _____. Asset Allocation Funds _____. Index Funds _____.

Target Date Funds __II___. Active Management Funds __IV___. Asset Allocation Funds __III___. Index Funds __I___.

A market order is: a. The fastest way to transact a stock market trade. b. Tells the brokerage firm to only buy or sell at a specific price. c. Stays in effect until your specific price is available. d. Instructs a brokerage firm to sell when a set point has been reached.

a.

Which of the following statements is true? a. Diversifying portfolio assets helps reduce portfolio risk. b. Diversification only occurs when investing in foreign companies. c. Diversification is difficult to achieve. d. Diversification, via international investments, is risk free.

a. Diversifying portfolio assets helps reduce portfolio risk

All of the following are true of market capitalization classifications, except? I. Anything less than $2 billion is a small cap company. II. Any stock with a market cap of $8 billion and above is a large cap company. III. Mid cap companies have market capitalizations of between $4 billion and $8 billion. a. I only b. I and III only c. II and III only d. I, II, and III

a. I Only

American Depository Receipts: I. Represent one or more shares in a foreign company. II. Make international investing easy and affordable. III. Are a way to invest in foreign stocks directly. IV. Trade on U.S. exchanges. a. I, II and III. b. I, II and IV. c. I only. d. IV only.

a. I, II, and III

The largest ETFs are: a. Index-based ETFs. b. Actively managed ETFs. c. Bond ETFs. d. International ETFs.

a. Index based ETFs

While ETFs are available to meet the needs of almost every investor, the majority of ETF assets are invested in: a. Large company stock. b. Small company stock. c. Commodities. d. Bonds

a. Large company stock

A great way to find stocks is to: a. Research on the Internet. b. Speak to older people. c. Follow stocks your friends invest in. d. Use the stock pages in the newspaper and a dart board.

a. Research on the internet

Every investor runs the risk of losing money if the markets, in general, go down in value. This risk is cannot be reduced through diversification. This risk is known as: a. Systematic risk. b. Unsystematic risk. c. Investment risk. d. Total risk.

a. Systematic risk

Mikki is currently in a high income tax bracket. She would prefer to own an investment that generate tax free income. If Mikki buys a municipal bond the interest she earns will be: a. Tax free at the federal level. b. Taxable at the federal level but tax free at the state level. c. Taxable at both the state and federal level. d. Considered a dividend and taxed at a maximum rate of 10% at the federal level.

a. Tax free at the federal level

Why might a business owner sell stock to outside investors? a. To raise money for expansion. b. To maximize control over the firm's operations. c. To minimize the need to consistently generate a profit. d. Both a and b.

a. To raise money for expansion I think it is a. either that or d. The only thing that threw me off was saying sell stock to outside investors however the chapter also talks about how business founders will own the most stock in order to gain control. That is not technically to an outsider.

Whether you establish a brokerage account at a full service firm or a "do-it-yourself" brokerage firm, you will pay commission every time you buy or sell stocks. a. True. b. False.

a. True

Duncan would like to buy shares in Chevron, which is an oil and gas company that trades on the New York Stock Exchange. What price will he pay when he makes his purchase? a. The ask price. b. The bid price. c. The spread price. d. The yield price.

a. the ask price

If you open a brokerage account at a "do-it-yourself" online discount brokerage firm, you can expect ___________ than you would at a full service broker. a. To pay lower commission. b. Have limited access to buying and selling stocks. c. To be paired up with a stock broker to help you make decisions. d. Not to receive information about potential investments.

a. to pay lower commission

All of the following are reasons to be a landlord, except: a. Landlords are eligible for certain tax breaks. b. Landlords are responsible for the maintenance and upkeep of the property. c. Landlords can build equity in property over time. d. Both b and c.

b.

Diversification refers to: a. Allocating your money among stocks and bonds from firms operating in a single industry. b. Spreading your money among various investments to reduce the impact of losses on a few investments. c. Spreading your money among a small number of investments in hopes of maximizing the returns of those with high returns. d. Allocating your money among stocks, bonds, and commodities in a strategic way to anticipate changes in the markets.

b.

How are most shares in stock held today? a. Physically in paper form. b. In certificate form. c. In certificate form. d. In "street name."

b.

What is the earliest time of day that an ETF that is traded on the NYSE can be purchased? a. 8:00 am Eastern Time. b. 9:30 am Eastern time. c. 4:00 pm Eastern time. d. 4:30 pm Eastern time.

b. 9:30 am Eastern time

A person who lends money to a corporation is known as: a. A bondholder. b. A shareholder. c. A contractual interest holder. d. A municipal bondholder.

b. A shareholder

Given a high tolerance for risk and a desire to invest internationally, investment in which countries could represent opportunities to outpace U.S. market returns? a. Brazil and Mexico. b. China and Ireland. c. Nigeria and Mexico d. United Kingdom and Germany

b. China and Ireland

When you own stock in a company you are: a. Entitled to earn interest on your investment. b. Entitled to a share of the firm's profits. c. Liable for any losses the firm may incur. d. All of the above.

b. Entitled to a share of the firm's profits

All of the following are true regarding a mutual fund, except: a. Funds provide investors with immediate diversification. b. Funds can be traded throughout the day. c. Funds can be purchased that match a market index. d. Funds are often actively managed.

b. Funds can be traded throughout the day

Four types of mutual funds are listed below. Which of these invests in both U.S. and foreign stocks? a. International Fund. b. Global Fund. c. Regional Fund. d. Country Fund.

b. Global fund

IF earnings growth is expected to be average or below average, then the stock will generally: a. Have a high P/E ratio. b. Have a lower P/E ratio. c. Be considered a relative value in the market. d. Be expected to grow earnings at higher rates in the future.

b. Have a lower P/E ratio

Volatility refers to: a. How liquid an investment becomes over time. b. How wildly returns fluctuate over time. c. The maximum expected loss someone can expect over time. d. The degree to which purchasing power is lost due to inflation.

b. How wildly returns fluctuate over time

What is true of different economies? I. The U.S. economy, as measured by its GDP, is the always the fastest growing economy in the world. II. GDP grows at different rates for different countries. III. Some countries exhibit negative GDP. IV. GDP always grows and never shrinks. a. I and IV only b. II and III only c. I, II and III only d. I, and II only

b. II and III only

Which of the following investment would someone with a very high risk tolerance be comfortable investing in? I. Stocks II. Bonds III. Commodities a. I only b. III only c. I and II only d. I, II, and III

b. III only

You can gain access to the stock market: a. By visiting Wall Street in New York City. b. Opening a brokerage account. c. Obtaining a seat at the New York Stock Exchange. d. Establishing your own stock exchange.

b. Opening a brokerage account

Who makes more money over time? a. Someone who lends money to a business. b. Someone who owns assets that generate a profit. c. Someone who buys stock with a low spread price. d. Someone who obtains the highest dividend yield.

b. Someone who owns assets that generate profit

Lyle considers himself a gambler. He likes to do research on stocks. Once he finds one or two stocks he likes, he invests the majority of his portfolio in shares. He rarely buys mutual funds or ETFs because he believes these investments dilute his investment performance. Lyle is taking on a lot of risk. What specific type of risk is Lyle taking that could be reduced through diversification? a. Systematic risk. b. Unsystematic risk. c. Investment risk. d. Total risk.

b. Unsystematic risk

Once a stock trades as an IPO it moves to: a. The NLSY. b. The public market. c. The private market. d. The NASDAQ.

b. the public market

Land, buildings, and other structures permanently attached to the land is known as: a. A use asset. b. REIT. c. Real estate. d. Rental property.

c.

Approximately how many individual stocks must someone own in order to develop a diversified portfolio? a. 10 from different industries. b. 15 from the same industry. c. 15 from different industries. d. 50 from multiple industries.

c. 15 from different industries

If the city of Akron need to raise money to build a new school they might issue a new bond. This bond is called: a. A Treasury note. b. A municipal bond. c. A T-bill. d. A AAA Corporate bond.

c. A municipal bond

When can investors begin to buy and sell shares in a new company? a. When the company employs an underwriter. b. After the initial public offering. c. At the initial public offering. d. During the equity conversion offering.

c. At the initial public offering

Portfolio management and investment valuation: a. Is relatively simple and uncomplicated. b. Is not for new investors. c. Can be done in many ways. d. Helps classify different companies.

c. Can be done in many ways

As a novice investor, Laura is concerned about the volatility of the stock market. She has heard stories of investors who have lost thousands of dollars because they were either unable or incapable of selling shares during a market downturn. She wants to make sure that this never happens to her. Given her desire, Laura should focus on purchasing: a. Actively managed mutual funds. b. Index mutual funds. c. Exchange traded funds. d. Both a and b.

c. Exchange traded funds

Which of the following is true if a company goes bankrupt? The bondholders are paid back first. The stockholders are paid back last. The stockholders must pool assets to pay back all bondholders. a. I only b. III only c. I and II only d. I and III only

c. I and II Only (I think III is wrong because it says the "company" needs to do that rather than saying share holders, not sure if that is just poor wording and they include shareholders as part of the company)

The primary way investors make money is through: I. Capital Gains II. Dividends III. Interest a. I only b. III only c. I and II only d. I and III only

c. I and II only

What helps explain why few investors buy individual stocks and bonds? I. It takes a lot of money to build a diversified portfolio. II. It is difficult to select the appropriate securities. III. ETFs do better than the markets over time. a. II only b. III only c. I and II only d. I, II, and III only

c. I and II only

Mutual Funds can be broadly classified into two categories: I. Passive management. II. Strategic management. III. Active management. IV. Tactical management. a. I and IV only b. II and III only c. I and III only d. I, and II only

c. I and III only

A bond rated BBB or below is called: a. A T-bill. b. Marginal security. c. Junk bond. d. Low probability bond.

c. Junk bond

If all of the following mutual funds are designed to passively mimic the S&P 500 stock index, then which mutual fund would be the best choice? a. Mutual Fund A with an expense ratio of .28% b. Mutual Fund B with an expense ratio of .59% c. Mutual Fund C with an expense ratio of .07% d. Mutual Fund D with an expense ratio of .12%

c. Mutual Fund C with an expense ratio of .07%

All of the following are advantages of typical ETFs, except: a. Diversification. b. Low Expenses. c. Professional Management. d. Wide Variety of Investment Alternatives.

c. Professional Management

Imagine a period of time in the future when general prices in the economy begin to move up rapidly. The increase in prices results in inflation, which, in turn, causes interest rates to rise. When this happens, bond investors can expect: a. The value of their bonds to increase. b. The coupon rate of existing bonds to readjust upward. c. The value of their bonds to decrease. d. The par value of existing bonds to increase.

c. The value of their bonds to decrease

Systematic risk is best defined as: a. Portfolio risk. b. The risk that always remains in a portfolio. c. Total risk. d. Diversifiable risk.

c. Total risk

What are the two largest economies in the world? a. United Kingdom and Germany b. China and India c. United States of America and China d. Mexico and Ireland

c. USA and China

Lindsey is what some people call a gold bug. She loves the allure of owning gold. What are some of the investment characteristics of gold? a. High liquidity. b. High marketability. c. High risk. d. Both a and b.

c. high risk

Which of the following is not an example of a use asset? a. Furniture. b. Clothing. c. Mutual Fund. d. Electronics.

c. mutual fund

A margin accounts are typically used by high net worth clients who have high risk tolerances, because they allow investors to: a. Buy and sell securities faster than they can with cash accounts. b. Pay, in advance, for all securities purchased. c. Place buy stop orders or sell stop orders. d. Borrow money from their brokerage firm to buy stocks, bonds, and mutual funds.

d.

Americans can gain access to foreign investments using: a. Exchange Traded Funds. b. American Depository Receipts. c. Mutual Funds. d. All of the above.

d.

An investor who wants and needs to earn a higher rate of return must be willing to: a. Take more financial risk. b. Increase the liquidity of the asset. c. Require a high degree of marketability. d. Both a and b.

d.

If you, as an investor, wanted to guarantee purchasing a stock at a specific price, or better, which type of order would you use? a. A market order. b. A buy stop order. c. A sell limit order. d. A limit order.

d.

Risk tolerance can refer to: a. Your willingness to make a risky investment. b. Your willingness to forego liquidity when making an investment. c. Your willingness to buy an investment asset with low marketability. d. All of the above.

d.

SIPC Insurance covers: a. Cash in customer accounts up to $250,000. b. Securities in customer accounts up to $500,000. c. Neither a or b d. Both a & b

d.

Stock brokers are often also known as: a. Investment Representatives. b. Account Managers. c. Registered Representatives. d. All of the above.

d.

What is the most liquid asset the average saver or investor owns? a. Real estate. b. S&P ETF. c. Certificate of deposit. d. Savings account.

d.

When a homeowner owes more on their property than what the property will sell for she is: a. In foreclosure. b. Involved in a short sale. c. In default. d. Underwater.

d.

When purchasing stocks, an investor can: a. Purchase shares directly from firms using a dividend reinvestment plan (DRIP). b. Place a stop order. c. Utilize the guidance and support of a registered representative. d. All of the above.

d.

Which of the following assets has the highest level of marketability? a. Stocks traded on the New York Stock Exchange. b. Rental real estate. c. Gold held as collectible coins. d. Municipal bonds.

d.

Why do most people purchase real estate? a. As a place to live. b. As a way to generate capital gains. c. As rental property. d. Both b and c.

d.

Which of the following statements is true? a. A sales load is a measure of the total management fees and expenses charged to a mutual fund. b. No-load mutual funds do not charge an up front sales load, but do charge a back end sales load. c. A mutual fund's expense ratio is a commission paid to the mutual fund company. d. A sales load is a one-time commission paid to an investment salesperson when the mutual fund is bought or sold.

d. A sales load is a one-time commission paid to an investment salesperson when the mutual fund is bought or sold.

American investors: a. Often overlook foreign investments. b. Are at ease purchasing foreign products. c. Often drive foreign automobiles. d. All of the above.

d. All of the above

Common stock market indexes include the: a. Dow Jones Industrial Average. b. Standard & Poor's 500 Composite Stock Price Index. c. Russell 2000 Index. d. All of the above.

d. All of the above

The discounted dividend valuation model uses: a. An investor's required return. b. A company's current dividend. c. A company's dividend growth rate. d. All of the above.

d. All of the above

Which firms would be considered full service brokers? a. Merrill Lynch. b. Morgan Stanley. c. UBS. d. All of the above.

d. All of the above

Which of the following is/are reasons why investors might choose to invest in mutual funds? a. Diversification. b. Professional management. c. To pool capital with other investors. d. All of the above.

d. All of the above

When a bond is newly issued it is typically sold for $1,000. The $1,000 is known as the: a. Face value. b. Par value. c. Coupon value. d. Both a and b.

d. Both a and b

Ramos is an aggressive investor. He hates to be average. With everything he does he likes to win. He knows that it is impossible to win or beat the averages all of the time but he wants to try. Given his attitude, Ramos should select what type of investment if his number one goal is to beat the market? a. Buy an index mutual fund. b. Buy a bond index ETF c. Buy an index-based ETF. d. Buy an actively managed mutual fund.

d. Buy an actively managed mutual fund.

All of the following firms are "do-it-yourself" online brokerage firms, except: a. Fidelity. b. TD-Ameritrade. c. E-Trade. d. Edward Jones.

d. Edward Jones

Risk refers to: I. The possibility of financial loss. II. Volatility of returns. III. The loss of purchasing power. a. I only b. I and III c. II and III d. I, II, and III

d. I, II, and III

Three major stock exchanges in the United States are: I. AMEX. II. NASDAQ. III. NYSE. IV. OTC a. II, III, and IV b. I, III and IV c. I, II and IV d. I, II and III

d. I, II, and III

What helps explains the popularity of mutual funds? I. Mutual funds require a smaller initial investment than stocks or bonds. II. Mutual funds are a primary investment choice in retirement plans. III. Mutual funds frequently outperform market indexes. a. II only b. I and II only c. II and III only d. I, II, and III

d. I, II, and III

Which of the following is an example of commercial real estate? I. Warehouse II. Shopping Mall III. Apartment Building a. III only b. I and II only c. II and III only d. I, II, and III

d. I, II, and III

To have equity in a company means that: I. You have lent money to the firm. II. Receive dividends when distributed by the firm. III. You have an ownership interest in the firm. a. I only b. III only c. I and II only d. II and III only

d. II and III only

A market index is an unmanaged grouping of stocks that has been identified as representative of some aspect of the stock market. What is true of the Dow Jones Industrial Average? a. The index is market weighted based on market capitalization. b. It is designed to follow the broad bond market. c. It is an actively managed index designed to outperform the market. d. It consists of a small number of the most highly regarded U.S. stocks from a variety of sectors of the economy.

d. It consists of a small number of the most highly regarded U.S. stocks from a variety of sectors of the economy

Miguel is interested in a simple and easy to understand investment. He would like to buy an index-based investment that tracks the S&P 500. Which ETF should he choose? a. QQQ b. IVV c. EFA d. SPY

d. SPY

Which of the following statements is true? a. Sometimes the best investment strategies and the best investments are made by combining basic analysis with luck. b. Sometimes the best investment strategies and the best investments are made by combining intuition with luck. c. Sometimes basic stock analysis is not as good as combining intuition with luck. d. Sometimes the best investment strategies and the best investments are made by combining basic analysis with intuition.

d. Sometimes the best investment strategies and the best investments are made by combining basic analysis with intuition.