Investments Exam 1

Money market instruments generally have the following two properties:

(1) they are essentially IOUs sold by large corporations or governments to borrow money (2) they mature in less than one year from the time they are sold, meaning that the loan must be repaid within one year.

regarding exchange-traded funds (ETFs

-ETF shares can be sold short. -ETF shares can be bought on margin. -ETFs are funds that can be traded on a stock market.

Mutual funds are

-corporations -owned by shareholders -Although mutual funds often belong to a larger "family" of funds, every fund is a separate company owned by its shareholders.

What are advantages of mutual fund investing?

1. Diversification 2. Professional management 3. Convenience

Brokers are traditionally divided into three groups:

1. Full-service brokers 2. discount brokers 3. deep-discount brokers. *What distinguishes the three groups is the level of service they provide and the resulting commissions they charge.

The implications of investor overconfidence and misperceptions of randomness.

1. One key to becoming a wise investor is to avoid certain types of behavior. 2. Investors probably make mistakes. A much more difficult question, and one where the evidence is not at all clear, is whether risks stemming from errors in judgment by investors can influence market prices and lead to market inefficiencies. An important point is that market efficiency does not require that all investors behave in a rational fashion.

We draw two key lessons from historical risk:

1. Risky assets, on average, earn a risk premium. 2. The greater the potential reward from a risky investment, the greater is the risk.

What is part of the expense statement?

1. Shareholder transactions expenses 2. Annual operating expenses

In order of their historical return from lowest to highest

1. US Treasury Bills 2.Long-term US Government Bonds 3. Large-Company Stocks 4. Small-Company Stocks

Fixed-income securities are securities that

1. promise to make fixed payments according to some preset schedule. 2. it begins life as a loan of some sort. (debt obligations)

Researchers have identified other befuddling examples of investor behavior. Three of them are:

1.Frame dependence. 2.Mental accounting. 3.House money.

Which of the following mutual fund fees will most likely be the biggest expense for a long-term fund investor?

12b-1 fees

Which of the following statements typically does not characterize the structure of an investment company?

An investment company receives an annual management fee ranging from 3 to 5 percent of the total value of the fund

A corporation with common stock issued to the public pays dividends

At the discretion of the company's board of directors, who are elected by shareholders.

Which of the following is most true of a closed-end investment company?

Fund shares outstanding are fixed at the issue date.

Which of the following best reflects the importance of the asset allocation decision to the investment process? The asset allocation decision:

Helps the investor decide on realistic investment goals.

Overconfidence tends to cause investors to:

I. invest too heavily in local firms. II. earn lower returns due to excess trading. III. invest too much in their employer's stock. IV. trade too frequently.

One of the main advantages to investing in a fund of funds (FOF) is that FOFs provide:

Improved diversification of assets

Which of the following investment constraints is expected to have the most fundamental impact on the investment decision process for a typical investor?

Investor's attitude toward risk

A closed-end fund is owned by which of the following?

Its shareholders

An open-end mutual fund is owned by

Its shareholders

Which mutual fund type will most likely incur the smallest tax liability for its investors?

Municipal bond fund

A European option can be exercised

Only on the day before the expiration date.

Prospect theory

Prospect theory is a collection of ideas that provides an alternative to classical, rational economic decision making. rests on the idea that investors are much more distressed by prospective losses than they are happy about prospective gains.

Which of the following investment factors, strategies, or tactics is most associated with an active investment policy?

Security selection

Closed-end funds and exchange-traded funds (ETFs) have which of the following characteristics in common?

Shares of both closed-end funds and ETFs trade in the secondary market

Which mutual fund type will most likely incur the greatest overall risk levels for its investors?

Small-cap growth fund

Growth, value, large-cap, and small-cap investing are all examples of:

Style investment strategies

Preferred stock differs from common stock in several important ways

The reason preferred stock is called "preferred" is that a company must pay the fixed dividend on its preferred stock before any dividends can be paid to common shareholders. In other words, preferred shareholders must be paid first.

Which of the following mutual fund fees and expenses is the most difficult for investors to assess?

Trading costs

Investors are generally loss averse.

True

Investment company

a company that pools funds obtained from individual investors and invests ex. Mutual funds

common characteristic of money market securities

a.Sold on a discount basis. b.Mature in less than one year. c.Most important risk is default risk.

An option contract is an agreement

an agreement that gives the owner the right, but not the obligation, to buy or sell (depending on the type of option) a specific asset at a specific price for a specific period of time.

An exchange-traded fund (ETF) is

basically an index fund that seeks to achieve the same return as a particular market index. Most well known- S&P 500, NASDAQ 100, Dow Jones Industrial Average

Investors tend to:

be affected by frame dependence.

The two major equity types are

common stock and preferred stock

A futures contract is

just an agreement made today regarding the terms of a trade that will take place later

An investor who buys and owns shares of stock is said to be

long in the stock, or to have a long position

Short-sellers may be subject to

margin calls if the stock price increases

The investment policy statement (IPS) identifies the

objectives (risk and return) of an investor, as well as the constraints the investor faces in achieving these objectives.

There are two fundamental types of investment companies

open-end funds and closed-end funds

Common stock represents

ownership in a corporation

f you have a "margin account," you can

purchase securities on credit using money loaned to you by your broker.

f you have a "cash account," you can

purchase securities only to the extent that you can pay for them in full.

The IPS provides an investing "road map" and will influence the

strategies, type of account, and holdings an investor chooses.

When an investor wishes to buy open-end fund shares

the fund simply issues them and then invests the money received

In a closed-end fund

the number of shares is fixed and never changes

When you first purchase securities on credit

you must supply a specified minimum amount of money *minimum amount of money called INITIAL MARGIN