FIL 242 Exam 1

A financial asset has value because it has a claim on A. a real asset and/or cash flow. B. a real asset. C. a future promise to be purchased by another entity. D. cash flow.

A

A short sales means A. shares were borrowed from someone else's account and sold in the expectation that the price has hit a peak. B. stock prices are going to fall. C. an odd lot transaction occurred. D. the broker is under 5 feet two inches tall.

A

Companies having the greatest impact on the computation of the Dow Jones Averages and the Standard & Poor's Indexes have the ____________ and the ____________, respectively. A. highest price; highest total market value B. highest total market value; highest price C. highest price; lowest liquidity D. greatest number of shares outstanding; highest price

A

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be which security? Hint which results in the highest Sharpe ratio? A. security A B. security B C. security C D. security D

A

Duties include helping to stabilize the price of their assigned stocks on the NYSE A. specialist or designated market maker B. SIPC C. OTC D. broker E. both a and d

A

Eurodollars are ________. A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank B. dollar-denominated bonds issued by firms outside their home market C. currency issued by Euro Disney and traded in France D. dollars that wind up in banks as a result of money-laundering activities

A

Financial assets represent this amount of total assets of U.S. households. A. under 70% B. over 90% C. under 10% D. about 30%

A

Helps corporations raise funds in public and private markets A. investment bank B. commercial bank C. SIPC D. specialist

A

Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been A. stocks B. bonds C. money market funds D. Treasury bills

A

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 40%, the amount you borrowed from the broker is ________. A. $20,000 B. $12,000 C. $8,000 D. $15,000

B

Financial institutions that specialize in assisting corporations in primary market transactions are called A. mutual funds B. investment bankers C. pension funds D. globalization specialists

B

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? A. 5.48% B. 8.74% C. 9% D. 12%

B

In a perfectly efficient market the best investment strategy is probably A. an active strategy B. a passive strategy C. asset allocation D. market timing

B

Initial margin requirements on stocks are set by A. the Federal Deposit Insurance Corporation B. the Federal Reserve C. the New York Stock Exchange D. the Securities and Exchange Commission

B

If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A. 5% B. 15% C. 54.5% D. 114.5%

C

Initial public offerings are usually ________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. A. overpriced B. correctly priced C. underpriced D. mispriced, but without any particular bias

C

Joe and XYZ Company enter a financial transaction. After the transaction is completed, Joe owns a financial asset. What must be true for XYZ Company? A. It sold shares of stock B. It sold a financial asset. C. It issued a financial claim.

C

Outlawed insider trading in the US A. Investment Advisors Act B. Sarbanes Oxley C. Securities Exchange Act of 1934 D. Securities Act of 1933.

C

The German stock market is measured by which market index? A. FTSE B. Dow Jones 30 C. DAX D. Nikkei

C

The ________ was established to protect investors from losses if their brokerage firms fail. A. CFTC B. SEC C. SIPC D. AIMR

C

The last change in the stock's price was an increase; this is an example of an A. stop order B. bull market C. uptick D. red herring

C

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year? A. -3.64% B. -6.36% C. -6.44% D. -11.74%

C

The rate of interest on short-term loans among financial institutions is ________. A. bankers' acceptances B. brokers' calls C. federal funds rate D. LIBOR

C

What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%? A. 8% B. 8.33 % C. 8.47% D. 8.5 %

C

You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. All prices are beginning-of-year prices. Year 1: $50; Year 2: $55; Year 3: $51; Year 4: $54. What is the geometric average return for the period? A. 2.87% B. 0.74% C. 2.60% D. 2.21%

C

securities act 1934

Deals with existing securities Addresses filing of periodic reports, regulation of exchanges and brokerage firms, ongoing disclosure requirements Prohibits certain unethical practices, such as market manipulation and insider trading

securities act of 1933

Deals with issuance of securities Addresses the registration process, disclosure requirements, and related matters

A broker A. is another name for a registered representative B. a role played by the specialist (designated market marker) at times. C. needs to pass the Series 7 exam. D. a and c only E. all of the above

E

Series 6 is an exam A. administered by FINRA B. many times taken by those wanting to be registered representatives C. is offered by The American College D. required in order to offer SIPC coverage E. choices a and b

E

Security selection refers to A. choosing specific securities within each asset class B. deciding how much to invest in each asset class C. deciding how much to invest in the market portfolio versus the riskless asset D. deciding how much to hedge

A

The bulk of most initial public offerings of equity securities goes to A. institutional investors B. individual investors C. the firm's current shareholders D. day traders

A

The cost of buying and selling a stock in the secondary market includes: A. Broker's commissions and Dealer's bid-asked spread only B. Dealer's bid-asked spread and Underpricing only C. Broker's commissions and Underpricing only D. Broker's commissions, Dealer's bid-asked spread, and Underpricing

A

The most marketable money market security is A. Treasury bills B. bankers' acceptances C. certificates of deposit D. common stock

A

The value of a derivative security A. depends on the value of another related security B. affects the value of a related security C. is unrelated to the value of a related security D. can be integrated only by calculus professors

A

Trades securities from own inventory using own capital; this is an example of a A. dealer B. broker C. OTC trade D. street name execution

A

What is the nominal after-tax rate on an investment that returned 6% if your marginal tax rate is 20% and inflation was 4%? A. 4.80% B. 6.00 C. 7.50% D. 0.77%

A

When the market is more optimistic about a firm, its share price will ________; as a result, it will need to issue ________ shares to raise funds that are needed. A. rise; fewer B. fall; fewer C. rise; more D. fall; more

A

You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? A. $6,000 B. $4,000 C. $7,000 D. $3,000

A

Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? A. 5.14% B. 7.59% C. 9.29% D. 8.43%

A

ou invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? A. $6,000 B. $4,000 C. $7,000 D. $3,000

A

Aggregate measures of stock prices adjust for federal income taxes on dividends. A. True B. False

B

An entrepreneur takes his/her cash and invests it in the business they are creating. Which of the following is false? A. Their net worth does not change after this transaction is completed. B. They have exchanged a real asset for a financial asset. C. A financial claim has been created by the firm. D. If they have invested in the firm's equity, a new financial claim has been created. E. The firm will have offsetting changes on both sides of its balance sheet.

B

An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was closest to which value? A. 41.68% B. 11.32% C. 3.64% D. 13%

B

An order to buy or sell a security at the current price is a A. limit order B. market order C. stop-loss order D. stop-buy order

B

A market order A. is any stock order executed in a public market B. is executed immediately at the best price possible C. to buy is executed immediately at the bid price D. to sell is executed immediately at the ask price

B

Security A has a higher standard deviation of returns than security B. We would expect that Statement I Security A would have a risk premium equal to security B; Statement II The likely range of returns for security A in any given year would be higher than the likely range of returns for security B; Statement III The Sharpe ratio of A will be higher than B's Sharpe ratio. A. I only B. II only C. II and III only D. I, II, and III

B

Shelf registration A. is a means for a firm to gain approval for an IPO before the funds are needed. B. is a means for a public firm to gain SEC approval for future issues before the funds are needed. C. is a type of secondary market offering D. choices a and b only E. choices a and c only

B

Specialists try to maintain a narrow bid-ask spread because: Statement I If the spread is too large, they will not participate in as many trades, losing commission income. Statement II The exchange requires specialists to maintain price continuity. Statement III Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit. A. Statement I only B. Statements I and II only C. Statements II and III only D. Statements I, II, and III

B

The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the ________. A. market spread B. bid-ask spread C. bid-ask gap D. market variation

B

The efficient market hypothesis suggests that A. active portfolio management strategies are the most appropriate investment strategies B. passive portfolio management strategies are the most appropriate investment strategies C. either active or passive strategies may be appropriate, depending on the expected direction of the market D. a bottom-up approach is the most appropriate investment strategy

B

The holding period return on a stock is equal to: A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium

B

The primary market where new security issues are offered to the public is a good example of A. an auction market B. a brokered market C. a dealer market D. a direct search market

B

The process of polling potential investors regarding their interest in a forthcoming initial public offering or IPO is called ________. A. interest building B. book building C. market analysis D. customer identification

B

The rate of return on this is known at the beginning of the holding period, while the rate of return on this other investment is not known until the end of the holding period. A. risky assets; Treasury bills B. Treasury bills; risky assets C. excess returns; risky assets D. index assets; bonds

B

The term latency refers to A. the lag between when an order is placed on the NYSE and when it is executed. B. the amount of time it takes to accept, process, and deliver a trading order. C. the time it takes to implement new rules and procedures for stock exchanges and computer trading systems. D. the lag between when an order is executed and when the investor takes possession of the securities.

B

This act's purposes was to make accounting fraud more difficult A. Investment Advisors Act B. Sarbanes Oxley C. Securities Exchange Act of 1934 D. Securities Act of 1933.

B

This measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted

B

What kind of asset is a lease obligation, which allows a corporation to use a piece of machinery for a stated period of time and cost? A. It is both a real and financial asset. B. Financial asset C. It is none of these. D. Real asset

B

Which of the following is not a true statement regarding municipal bonds? A. A municipal bond is a debt obligation issued by state or local governments. B. A municipal bond is a debt obligation issued by the federal government. C. The interest income from a municipal bond is exempt from federal income taxation. D. The interest income from a municipal bond is typically exempt from state and local taxation in the issuing state.

B

Year after year, the largest source of financing for corporations is A. stock issues. B. bond issues. C. retained earnings. D. cash. E. profits.

B

You have the following rates of return for a risky portfolio for several recent years: Year 1: 35.23%; Year 2: 18.67%; Year 3: −9.87%; Year 4 23.45%. If you invested $1,000 at the beginning of year 1, how much would your investment at the end of Year 4? A. $2,176.60 B. $1,785.56 C. $1,645.53 D. $1,247.87

B

he bid price of a Treasury bill is ________. A. the price at which the dealer in Treasury bills is willing to sell the bill B. the price at which the dealer in Treasury bills is willing to buy the bill C. greater than the ask price of the Treasury bill expressed in dollar terms D. the price at which the investor can buy the Treasury bill

B

An IPO sold on a best efforts basis A. has the investment banker acting as a dealer B. has the broker acting as a dealer C. has the investment banker acting as a broker D. occurs after a shelf registration.

C

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return is: A. 10% B. 15.7% C. 12% D. none of the above

C

Commercial paper is a short-term security issued by ________ to raise funds. A. the Federal Reserve B. the New York Stock Exchange C. large well-known companies D. all of these options

C

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. What is the approximate slope of the capital allocation line? A. 1.04 B. 0.80 C. 0.50 D. 0.25

C

A US investor who invests only in stocks of US companies is missing out on approximately what percentage of the world equity market? A. 33% B. 67% C. 75% D. 50% E. 25%

D

A typical bond price quote includes all but which one of the following? A. coupon B. closing bond price C. yield to maturity D. dividend yield

D

An investor in a 25% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (MBY) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by A. r =MBY × (1 - 25%) B. r = MBY / (1 - 75%) C. r =MBY × (1 - 75%) D. r = MBY / (1 - 25%)

D

Illinois is the "Land of Lincoln." If you still use cash (as opposed to a debit card or checks) you may have a $5 bill in your wallet with Honest Abe's picture on it. What type of asset is this $5 bill? A. It is neither real or financial. B. It is both real and financial. C. Real asset D. Financial asset

D

Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called ________. A. certificates of deposit B. repurchase agreements C. bankers' acceptances D. commercial paper

D

Market signals will help to allocate capital efficiently only if investors are acting A. on the basis of their individual hunches B. as directed by financial experts C. as dominant forces in the economy D. on accurate information

D

Methods of encouraging managers to act in shareholders' best interest include: Statement I Threat of takeover. Statement II Proxy fights for control of the board of directors. Statement III Tying managers' compensation to stock price performance. A. I only B. I and II only C. II and III only D. I, II, and III

D

OTC stands for A. a type of market order B. a special limit order C. a quick "on the cuff" trade D. over the counter market

D

Secondary market generally means: A. the AMEX B. the NASDAQ C. the best efforts offering market D. investors trade with investors E. choices a and b

D

The SIPC was established by the ________. A. Insider Trading Act of 1931 B. Securities Act of 1933 C. Securities Exchange Act of 1934 D. none of these options

D

This means to carry the risk: A. insure B. hedge C. specialist D. underwrite

D

What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001? A. The effective spread increased in 1997 but decreased in 2001. B. The effective spread increased in both cases. C. The effective spread decreased in 1997 but increased in 2001. D. The effective spread decreased in both cases.

D

Which of the following are examples of financial intermediaries? A. Commercial banks B. Insurance companies C. Investment companies D. All of the above

D

Which of the following indexes are market value-weighted? A. The NYSE Composite and S&P 500 only B. S&P 500 and Wilshire 5000 only C. The NYSE Composite and Wilshire 5000 only D. The NYSE Composite, S&P 500 and Wilshire 5000

D

Which of the following is an example of an agency problem? A. Managers engage in empire building. B. Managers protect their jobs by avoiding risky projects. C. Managers overconsume luxuries such as corporate jets. D. All of the options are examples of agency problems.

D

Which of the following is not a characteristic of a money market instrument? A. liquidity B. marketability C. low risk D. maturity greater than 1 year

D

You have the following rates of return for a risky portfolio for several recent years: Year 1: 35.23%; Year 2: 18.67%; Year 3: −9.87%; Year 4: 23.45%. What is the annualized (geometric) average return on this investment? A. 16.15% B. 16.87% C. 21.32% D. 15.60%

D

You short-sell 400 shares of Minot Trading Co., now selling for $40 per share. What is your maximum possible loss? A. $40 B. $160 C. $16,000 D. unlimited

D

Aggregate measures of stock prices adjust for federal income taxes on dividends. A. True B. False

F

The borrowed funds in a trade is called the margin A. True B. False

F

Every security is a financial asset to one party and a financial claim on another party. TrueFalse

T

An IPO sold on a best efforts basis A. has the investment banker acting as a dealer B. has the broker acting as a dealer C. has the investment banker acting as a broker D. occurs after a shelf registration.

c