Investment Quizzes 1

What describes an investor's position in purchasing a put and a call on the same security, at the same exercise price, for the same period of time?

A straddle

Which of the following is not an appropriate match? A. Classification by time: Spot markets B. Classification by type of claim: Equity markets C. Classification by participants: Mortgage markets D. Classification by products: Money markets

Classification by products: Money markets **Money market securities are short-term instruments categorized by time considerations, not product

Short-term debt securities issued by corporations in the open market usually less than 270 days maturity to avoid the necessity of SEC registration, are known as:

Commercial paper **Banker's acceptance are paper traded between banks **Repurchase agreements are money market securities sold at a discount with an agreement to purchase them bat at a higher price later on

Which of the following option strategies would be considered the most risk? A. Buying a call B. Buying a put C. Selling a covered call D. Selling a put

D. Selling a put **Buying a put or call option limits the investor's loss to the premium paid ** With a covered call, the investor owns the underlying stock, which offsets any loss associated with selling the call **Selling a put is the most risky of the strategies because the stock could fall to zero

Which of the following is NOT a premium factor that would be considered part of the nominal rate of interest? A. Economic premium B. Default premium C. Liquidity premium D. Risk free rate of interest

Economic premium **There is no such thing as an economic premium

An airline is considering issuing bonds to finance eight new airplanes that will be delivered in six months. Which type of bond will the airline issue?

Equipment trust certificate

As your client, Joe Stockhill has built an impressive portfolio of aggressive growth stocks. Recently, he expressed an interest in purchasing gold for his portfolio, but he does not fully understand the concepts surrounding its relationship to the stock market. How would you explain it to him?

Gold has a negative correlation to the market and can be used when interest rates are rising as a hedge against inflation **It is best purchased at the onset inflationary times, but a portfolio will not necessarily lose value by its purchase. Rising stock prices generally have meant stationary or decreasing gold prices

John Risotto has a cash need at the end of nine years. Which of the following investments best meets this need and serves to immunize the portfolio initially? I. An 11-year maturity coupon bond II. A 9-year maturity coupon Treasury note III. A series of Treasury bills

I only **The process of portfolio immunization entails not maturity of a security, but its duration **Duration is based on coupon rate. The LARGER the coupon payment, the shorter the duration

Mortgage-backed securities may contain which of the following risks: I. Purchasing power risk II. Interest rate risk III. Prepayment risk

I, II and III

Jocelyn Jane has come to you asking about investments that will produce steady income, provide relative safety of principal, and give her a tax advantage. What will you recommend that she consider adding to her portfolio?

MBIA-backed municipal bonds **The Municipal Bond Insurance Assocaiton provides protection against bond default (safe). Munis will provide steady income and they are tax advantaged

Often, municipal bonds are insured. One group which insures them is the:

Municipal Bond Insurance Association (MBIA) **Another group that insures municipal bonds is the American Municipal Bond Assurance Corporation (AMBAC)

Your client, Bill Brown, is an investor in ONLY dividend paying stocks. He buys them in time to catch the dividend and then sells them. You have a stock that you have researched, Gamma Globe, and it generally pays very high dividends relative to its price. What will you advise Bill to do in regard to this stock?

Purchase the stock by holder-of-record date, and sell when the price has rebounded

Municipal bonds that are backed by the income from specific projects are known as:

Revenue bonds **Revenue generated from the project, such as a toll to pay the bridge, that is used to repay such municipal obligations are known as revenue bonds

With the same dollar investment, what strategy can cause an investor to experience the greatest loss?

Selling a naked call option **If the market price of a stock moves against a put writer, it can fall to zero and that's the end of it. ** If it moves against a call writer, the sky is the limit as to how high the price could go

"Stock prices adjust rapidly to the release of all new public information." This statement is an expression of which one of the following ideas?

Semi-strong form of the Efficient Market Hypothesis

Jim and Anne Taylor are baby boomers who would like to add an equity investment to their portfolio. They require a 12% rate of return and are considering the purchase of one of the following common stocks: Stock 1: Dividends currently are $1.50 annually and are expected to increase 8% annually; market price = $35. Stock 2: Dividends currently are $2.25 annually and are expected to increase 7% annually; market price = $50. Using the dividend growth model determine which stock would be more appropriate for the Taylors' to purchase at this time:

Stock 1, because the expected return on investment is greater than the Taylor required rate of return **Use the intrinsic value formula to determine whether the stock is over valued or under valued. **Then, use the expected rate of return formula to determine whether the stock meets the investor's required rate of return

Which method of portfolio evaluation allows the comparison of a portfolio manager's performance to that of the over-all market using just one calculation?

The Jensen Model

If one of your clients has a profitable long position in an oranges futures contract and does nothing as the contract expires, what should she expect to occur?

The oranges will be delivered to her **Positions in futures contracts are closed by taking an equal and opposite position ** One who is long a contract at the expiration should expect delivery of the commodities at the stated contract price ** It is the buyers responsibility, but in this case, we could say the broker was remiss in his or her duties!

Your client has asked you to assist her in examining possible additions to her bond portfolio. She has expressed a desire to minimize risk at this stage in her planning process, and to assure income beginning at the point of her retirement, and lasting throughout. She has a tentative retirement date in seven years at age 65. She will then have an eighteen year life expectancy. Which of the following is an appropriate addition to her current portfolio? I. 25-year AAA-rated corporate bonds with a seven-year maturity II. 20-year AAA-rated municipal bonds with a seven-year duration III. 25-year AAA-rated corporate zeroes with a seven-year duration IV. 20-year US Treasury zeroes with a seven-year maturity V. 25-year AAA-rated corporate bonds with a seven-year duration

V only **The client is looking for income to begin in 7 years. Therefore, anything maturing in 7 years will not provide that income. ** Zeroes provide no income ** She wants something out 25 years, not 20 years