Personal Finance Chapter 11

The Securities Investor Protection Corporation insures brokerage firm accounts up to

$500,000 per account and $100,000 in cash

Investment vehicles include

-Common stock -Bonds -preferred and convertible securities -real estate

Securities markets include

-Primary and secondary markets -Capital and money markets -stock exchanges

Stockbrokers are also known as

-account executives -Financial consultants

In addition to a description of any investments owned, the worksheet listing your investment holdings should include

-the type of investment. -the original amount of the investment. -the cumulative return. -the latest market value.

The margin requirement on the purchase of common stock is currently set at

50%

The SEC requires corporations to issue ____ describing the firm and the security issue it wishes to sell.

A prospectus

The smallest round lot of stocks quoted at 23.25 would cost you (ignoring commissions)

$2,325.00.

Assume that the price of ABC common stock fell in a short period of time from $105 to $84. Which of the following investors probably made the most money?

Darren shorted 2,000 shares of ABC using a margin loan.

____ is a portfolio characteristic which leads to reduced risk with good return.

Diversification

The most widely followed stock average is the

Dow Jones Industrial Average.

The ____ Index reflects the total market value of over 98% of all publicly traded stock in the United States.

Dow Jones Wilshire 5000

Which of the following is not a securities market?

Dow jones

The first step in asset allocation is selecting the specific securities that should go into your portfolio.

False

The major reason most people invest is to shelter current income from taxes.

False

The most widely followed measure of stock market performance is the New York Stock Exchange Index.

False

The term "investment' refers to money placed in some medium where value and level of return are totally unpredictable.

False

The total return of a portfolio is influenced far more by specific security selection than asset allocation.

False

There are 50 shares in a round lot.

False

You are covered through the SIPC for losses you incur due to the inept advice you receive from a brokerage firm.

False

Minimum margin requirements that brokers must observe are set by the

Federal Reserve Board

An unmarried investor with few responsibilities should be able to accept ____ better than two people who are married with young children.

Risk

The federal government regulates securities markets through the

Securities and Exchange Commission.

In investment terminology, selling stock that you have borrowed is known as a

Short sale

____ is a short-term investment activity.

Speculating in common stock

Which of the following is an order to sell a stock when the market price drops to or below a specified level?

Stop-loss order

The margin requirement for common stock is 50%.

TRUE

Which of the following securities/investment acts regulates the sale of mutual fund shares?

The Investment Company Act of 1940

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is designed to improve accountability and transparency in the U.S. financial system.

True

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the most significant change in financial regulation since the Great Depression.

True

The Federal Reserve Board sets the margin requirements on security purchases.

True

The NYSE index includes all stocks listed on the "big board."

True

The federal government regulates securities markets through the Securities and Exchange Commission.

True

There is generally a trade-off between earning a high current income from an investment and obtaining significant capital appreciation from it.

True

When a brokerage house gives a margin call, you need to provide more collateral or your investment will be liquidated.

True

Your goals tend to set the tone for your investment program, and they play a major role in determining how conservative or aggressive you're likely to be in making investment decisions.

True

A market order would be transacted at the

best price when the order is entered

The SIPC provides protection to the investor from

brokerage firm failure.

During a bear market, security prices generally

decline in value

A diversified securities portfolio is characterized by

dissimilar risk and return characteristics of the securities.

The most common reason given for investing is

saving for retirement

Which of the following terms best describes a day trader?

speculator

Buying on margin is buying

with a mix of your own and borrowed funds.

A stock portfolio containing 80% common stocks is most likely to be appropriate for a

young newlywed couple putting money aside for retirement.

Owning common stock represents a debt investment.

False

Preferred stocks are the common stocks of ultra blue-chip companies.

False

Prices are rising in bear markets, indicating economic optimism.

False

The Maloney Act contains the so-called Volcker Rule, which prohibits depository banks from proprietary trading.

False

The NASDAQ is now the second-largest broker market in the United States. *NASDAQ is a dealers market.

False

The SEC has the power to raise and lower the margin requirements for stock purchases.

False

The Securities Investor Protection Corporation insurance guarantees the dollar value of your securities will not dip below a certain level.

False

The Standard and Poor's Index is based on 30 industrial stocks.

False

The bid price is the price paid by an investor for a stock.

False

A portfolio is a collection of investment vehicles assembled to meet an investment goal.

True

A prospectus describes the firm and the issue of a new security.

True

A round lot consists of multiples of 100 shares of stock.

True

A sale of 450 shares of stock would involve the trade of an odd lot.

True

A short sale transaction will be profitable when prices are falling.

True

A stockbroker buys and sells securities on behalf of clients.

True

A systematic investment routine involves investing similar sums in regular intervals.

True

Brokers charge a commission on security purchases as well as on security sales.

True

Exchange-traded notes (ETNs) face both market risk and the risk of the issuing bank defaulting.

True

In terms of market capitalization, Apple is the largest company in the world.

True

Investing and speculating are two entirely different activities.

True

Mutual funds often sell directly to investors.

True

Mutual funds provide professional management and diversification that individual investors - especially those with limited resources - can rarely obtain on their own.

True

Once you meet the conditions of ample insurance and liquidity, you're ready to start investing.

True

Securities may be traded in the primary market only once.

True

Discount brokers will

Execute orders

A retired couple can probably bear more risk in their portfolio than a young investor with a secure job.

False

A statement specifying how investment capital will be invested in order to reach targeted goals is called a marketing plan.

False

According to recent legislation, under the FDIC each brokerage account is insured up to $250,000.

False

All OTC stocks are listed on the NASDAQ.

False

Based on a retired person's needs, one should choose investments offering high current income with high risk.

False

Buying on margin allows you to purchase securities using 100 percent borrowed funds.

False

Common stock pays interest payments on a quarterly basis.

False

Diversification increases risk.

False

Newly issued securities are sold to the public in the secondary market.

False

Once one's asset allocation plan is developed and securities are selected, these decisions do not have to be made again until there is a major life change.

False

Which of the following is a true statement about the Dow Jones Industrial Average?

It is based on 30 industrial stocks.

Instructing your broker to buy a stock at a specified or lower price is a

Limit order

____ is not a normal brokerage service.

Managing your portfolio

You have been offered an opportunity to buy shares of a diversified collection of securities. You will be investing in

Mutual funds

The ____ is not an organized security exchange.

OTC Exchange

Unlisted securities are traded on the

OTC market

Which of the following was not an intention of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

Recapitalize banks

Which of the following is characteristic of a limit order?

The order is executed as soon as the specified price is reached.

A corporation's annual stockholders' report provides financial data and other information related to both past and planned activities.

True

A diversified portfolio is less risky than putting your money into a single security.

True

Selling equities you don't own and buying them back to cover the sale is

`short selling in anticipation of a bear market in that security

When you buy 300 shares of a company you have purchased

a round lot

The most important investment prerequisites are

adequate insurance and liquidity

An essential ingredient of an effective investment strategy is

enough money to diversify

Securities sold in the primary markets are usually handled by a(n)

investment banking firm.

A bull market is characterized by

investor optimism

If a company's common stock is traded on an exchange, the company is said to be

listed on the exchange

An immediate order to buy or sell common stock at the best price is a

market order.

Portfolio management involves making decisions in order to

meet your investment needs and objectives.

Which of the following is least likely to be an investment objective?

pay monthly bills

A collection of investments is called

portfolio