Test 2

Which statement is true regarding the Capital Market Line (CML)? a. The CML is the line from the risk-free rate through the market portfolio. b. The CML is a capital allocation line, but it is not necessarily the best capital allocation line. c. The CML is also called the security market line. d. The CML could have a negative slope. e. The risk measure for the CML is beta.

a. The CML is the line from the risk-free rate through the market portfolio.

The individual investor's optimal complete portfolio is designated by: a. The point of tangency with the indifference curve and the capital allocation line. b. The point of highest reward to variability ratio in the opportunity set. c. The point of tangency with the opportunity set and the capital allocation line. d. The point of the highest reward to variability ratio in the indifference curve. e. None of these is correct.

a. The point of tangency with the indifference curve and the capital allocation line.

Small investors are likely to invest in the money market through ____. a. directly; investment banks b. locally; credit unions c. indirectly; negotiable CDs d. indirectly; money market mutual funds

a. directly; investment banks

Everything else being equal, a bond will sell at a higher yield if it a. has a call provision. b. has low default risk. c. can be converted to stock. d. is listed on an exchange. e. None of the above.

a. has a call provision.

Issuers of commercial paper tend to be a. large financial and nonfinancial firms b. firms with high credit risk c. small banks d. wealthy individuals e. both a and b

a. large financial and nonfinancial firms

You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible gain is a. $45 b. $4,500 c. $9,000 d. unlimited e. cannot tell from the given information

b. $4,500

Which of the following statements is TRUE? a. A market order will be executed at a specific exchange even if the price in that exchange is not the best available price across all exchanges. b. A large market order may be filled at multiple prices. c. A stop-loss order is typically used to stop further loss in a short position. d. Buying on margin is a relatively safe trading strategy. e. None of the above choices.

b. A large market order may be filled at multiple prices.

Which of the following statements is true? a. All fixed-rate mortgages have interest rate caps. b. All adjustable-rate-mortgages have interest rate caps. c. An interest rate cap on a mortgage reduces the lender's interest rate risk exposure. d. Usually, an annual interest rate cap on a mortgage is 5%, and a lifetime cap is 1-2%. e. None of the above.

b. All adjustable-rate-mortgages have interest rate caps.

You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is a. $4500 b. unlimited c. zero d. $9000 e. None of the above.

b. unlimited

Which of the following statements is FALSE? a. For risk-averse investors, lower expected return and/or higher risk leads to lower utility. b. For risk lovers, lower expected return and/or lower risk leads to lower utility. c. For risk-neutral investors, expected return and risk do not affect utility. d. A rational investor should maximize his/her utility from the investments. e. None of the above option is correct.

c. For risk-neutral investors, expected return and risk do not affect utility.

Which of the following are characteristics of preferred stock? I) It pays its holder a fixed amount of income each year, at the discretion of its managers. II) It gives its holder voting power in the firm. III) Its dividends are usually cumulative. IV) Failure to pay dividends may result in bankruptcy proceedings. a. I, III, and IV b. I, II, and III c. I and III d. I, II, and IV e. I, II, III, and IV

c. I and III

Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is FALSE? a. The DJIA is not very representative of the market as a whole. b. The DJIA consists of 30 blue chip stocks. c. The DJIA is affected equally by changes in low and high priced stocks. d. Constituents of the DJIA could change over time. e. The value of the DJIA is much higher than individual stock prices.

c. The DJIA is affected equally by changes in low and high priced stocks.

Which of the following statements is CORRECT? a. The decimalization in 2001 required by the SEC significantly increased the bid-ask spread. b. Currently the typical goal of algorithmic trading is to trade faster for large profits from a relatively small number of block trades. c. The New York Stock Exchange now has less market dominance than it did 20 years ago. d. Growth of algorithmic trading was slowed by the SEC's Regulation National Market System in 2007. e. None of the above choices.

c. The New York Stock Exchange now has less market dominance than it did 20 years ago.

The market prices of Apple are: bid = $162.00, ask = $162.50. Investor A has put a market-buy order on Apple, while investor B has put a limit-sell order (limit price = $162.30). Which of the following statements is correct? a. The market order will be executed at $162.00 and the limit order will not be executed immediately. b. The market order will be executed at $162.00 and the limit order will be executed at $162.30. c. The market order will be executed at $162.50 and the limit order will not be executed immediately. d. The market order will be executed at $162.50 and the limit order will be executed at $162.30. e. None of the above choices is correct.

c. The market order will be executed at $162.50 and the limit order will not be executed immediately.

The yield curve shows at any point in time: a. The relationship between the yield on a bond and the duration of the bond. b. The relationship between the coupon rate on a bond and time to maturity of the bond. c. The relationship between yield on a bond and the time to maturity on the bond. d. All of these are correct. e. None of the above.

c. The relationship between yield on a bond and the time to maturity on the bond.

Which of the following is not a difference between municipal bonds (munis) and corporate bonds? a. Interest paid on munis is tax-exempt, while interest paid on corporate bonds is not. b. Munis often have a range of maturities (are serial issues) but corporate bonds do not. c. Unlike corporate bonds, munis are rated by bond-rating agencies such as Moody's. d. All of the above are differences between munis and corporate bonds.

c. Unlike corporate bonds, munis are rated by bond-rating agencies such as Moody's.

An order to the New York Stock Exchange to buy or sell immediately is called a. a limit order. b. a stop order. c. a market order. d. none of the above. e. None of the above.

c. a market order.

According to the expectation hypothesis, an upward sloping yield curve implies that a. interest rates are expected to remain stable in the future. b. interest rates are expected to decline in the future. c. interest rates are expected to increase in the future. d. interest rates are expected to decline first, then increase. e. None of the above.

c. interest rates are expected to increase in the future.

The expected return of a portfolio of risky securities a. could be higher than the weighted average of the securities' returns if the securities do not have perfect positive correlations. b. could be lower than the weighted average of the securities' returns if the securities do not have perfect positive correlations. c. is the weighted average of the securities' returns. d. is the weighted average of the securities' returns only

c. is the weighted average of the securities' returns.

Private mortgage insurance protects the a. seller of the home. b. borrower. c. lender. d. government. e. None of the above.

c. lender.

The over-the-counter market trades ______ stocks than exchanges, and exchanges tend to list ________ companies. a. less; smaller b. less; larger c. more; larger d. more; smaller e. None of the above.

c. more; larger

6. The money market security represented by the largest dollar amount outstanding is a. commercial paper. b. federal agency issues. c. negotiable CDs. d. Treasury bills. e. None of the above.

c. negotiable CDs.

Correlations between security returns generally tend to be a. positive because market is not complete efficient. b. positive because of investors' irrationality. c. positive because of economic forces that affect many firms. d. negative because of arbitrage activities. e. negative because of economic forces that affect many firms.

c. positive because of economic forces that affect many firms.

Unlike noncallable corporate bonds, mortgages have _______ risk. a. default b. interest rate c. prepayment d. both a and c e. None of the above.

c. prepayment

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, even if better prices are available on other exchanges. e. None of the above.

d. A market order is an order to buy or sell a stock on a specific exchange, even if better prices are available on other exchanges.

The slope of the yield curve is affected by a. inflationary expectations. b. liquidity preferences. c. the comparative equilibrium of supply and demand in the short-term and long-term market segments. d. All of the above. e. None of the above

d. All of the above.

Which of the following statements is (are) true regarding municipal bonds? I) A municipal bond is a debt obligation issued by state or local governments. II) A municipal bond is a debt obligation issued by the federal government. III) The interest income from a municipal bond is exempt from federal income taxation. IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. a. I and II only b. I and III only c. I, II, and III only d. I, III, and IV only e. I and IV only

d. I, III, and IV only

Which of the followings is NOT a typical trading cost? a. Brokerage commission. b. Bid-ask spread. c. Market impact. d. Interest for margin loan. e. None of the above choices.

d. Interest for margin loan.

Which statement about portfolio diversification is correct? a. Proper diversification can partially eliminate systematic risk. b. The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased. c. Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return. d. Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate. e. None of the above.

d. Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate.

A bond that can be retired prior to maturity by the issuer is a ____________ bond. a. convertible b. municipal c. treasury d. callable e. international

d. callable

Which of the following would be least likely to purchase a tax-exempt municipal bond? a. commercial bank b. casualty insurance company c. mutual fund d. individuals in low tax brackets e. None of the above

d. individuals in low tax brackets

The cost of buying and selling a stock consists of __________. a. broker's commissions b. dealer's bid-asked spread c. a price concession an investor may be forced to make. d. A and B. e. A, B, and C.

e. A, B, and C.