AGEC 438: Investment Planning
One of the problems of ratio analysis is that account relationships can be manipulated. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is low initially, for example, below 1.0. T/F
False
Return on equity (ROE) is computed by dividing net income by the market value of equity. T/F
False
The higher a bond's Moody's or Standard & Poor's rating, the higher its yield. T/F
False
When attempting to reduce my tax liability I would rather have a tax deduction than a tax credit. T/F
False
Yankee bonds are issued by the U.S. government, but sold only to foreign investors. T/F
False
NZMA stock is currently selling for $128. Which of the following options is "in-the-money"? March 130 call February 125 call March 125 put February 100 put
February 125 call
Which of the following is incorrect? 401k plans allow employees to withdraw money in retirement that is taxable 401k plans provide employees with a tax deferred form of investing for retirement Keogh plans use after tax dollars to invest but money withdrawn is tax free It is possible to contribute to an IRA even if you are contributing to an employer plan at work
Keogh plans use after tax dollars to invest but money withdrawn is tax free
Anthony is confident that shares of SolarTech will greatly increase in value, but thinks that it may be a year or more before that happens. He should buy ETF calls. LEAP puts. LEAP calls. Index calls.
LEAP calls.
Indexes specifically for the performance of various types of mutual funds are published by the Wall Street Journal. Standard and Poors. Lipper. Value Line.
Lipper.
Which one of the following statements is true about a $1,000, 6% annual coupon bond that is selling for $1,012? The current yield is less than 6%. The current yield is 6%. The yield-to-maturity is greater than 6%. The yield-to-maturity is 6%.
The current yield is less than 6%.
One method of estimating the dividend growth rate is to calculate the discount rate that equates today's dividend with the dividend paid 5 years ago. T/F
True
A stock's internal rate of return (IRR) is the discount rate that cause the present value of future dividends and the price at which a stock is expected to be sold to equal the current price of the stock. T/F
True
A suitable investment should have an internal rate of return equal to or greater than its required rate of return. T/F
True
An investment should offer an expected return commensurate with the risk involved. T/F
True
As a bond approaches its maturity date, its price necessarily approaches par value. T/F
True
Bonds are typically a good investment choice for an individual who is seeking long-term preservation of capital. T/F
True
High dividend payout ratios are more of a concern to analysts than low payout ratios. T/F
True
If you want to reduce the price volatility of your bond portfolio, you should shorten the time-to-maturity of your portfolio. T/F
True
LYON's or liquid yield option notes are a type of convertible security. T/F
True
Socially responsible funds only hold stocks of companies that meet the fund's ethical guidelines. T/F
True
A bond quoted at a price of 101.2 is a deep discount bond. yields 10.12%. yields 12%. has a coupon rate that exceeds the market rate.
has a coupon rate that exceeds the market rate.
Mutual fund investors delegate all of the following decisions to the fund's managers EXCEPT which companies and industries to invest in. when to buy and sell individual stocks. how to allocate investments among different classes of assets such as stocks, bonds, cash and real estate. how many securities to hold in the portfolio.
how to allocate investments among different classes of assets such as stocks, bonds, cash and real estate.
The net asset value of a mutual fund increased from $12.03 to $13.53, but its price per share increased by only $1.26. This information indicates that the fund paid out $1 in capital gains. paid out $1 in dividends. is a closed-end fund. is an open-end fund.
is a closed-end fund.
If a company's ROA is high, then an investor can assume that the company is in danger of defaulting on its loans. pays a high dividend. is profitable. has more equity than debt in its capital structure.
is profitable.
Which one following will lower required rates of return? higher risk premiums higher rates of inflation lower rates of inflation lower dividend yields
lower rates of inflation
Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be ____ the YTM with it. higher than lower than the same as either higher or lower, depending on the level of call premium, than unrelated to
lower than
Debentures are secured by the issuer's good name. earnings from the project the debentures were issued to finance. financial assets held in trust by a third party. physical assets like real estate.
the issuer's good name.
As applied to bonds, duration refers to the average maturity of a diversified portfolio of corporate bonds. the point in the life of a bond when its price exactly offsets its reinvestment risk. the average price and annual reinvestment rate of return for a bond. the point in the life of a bond when its yield-to-maturity equals its expected yield.
the point in the life of a bond when its price exactly offsets its reinvestment risk.
Sharpe's measure of portfolio performance compares the risk premium on a portfolio to a broad-based market index such as the S&P 500 index. the portfolio's standard deviation of return. the portfolio's beta. the prevailing risk-free rate of return.
the portfolio's standard deviation of return.
Which of the following signals that a market top or bottom is near? mutual fund cash ratio the relative strength index odd-lot volume on balance volume
the relative strength index
The most common reason for an investor to adopt the quality long-term growth investment strategy is for long-term accumulation of capital. T/F
True
The required rate of return denotes the minimum rate of return an investor should expect. T/F
True
To calculate the interest rate or growth rate using a spreadsheet or financial calculator, the present value and the future value most have opposite signs. True False
True
When the weighted-average duration of an investor's bond portfolio is exactly equal to the investor's desired investment horizon, then the bond portfolio is said to be immunized. T/F
True
Writing covered calls may result in a profit to the writer even if the stock price does not change. T/F
True
The stock listing for a company shows a P/E of 18, a dividend yield of 2.4% and a closing price of $23.76. What is the amount of dividends per share? $0.03 $0.57 $1.03 $1.32
$0.57
Compute the present value of the following cash flow discounted at 6% End of Year 1 2 3 Cash flow $450 $400 $300 $1,032.41 $973.97 $974.58 $1,024.65
$1,032.41
Harness Inc. stock is currently selling for $70 per share. If you had sold short 100 shares of borrowed stock at $70 what would be your total gain/loss ignoring commissions, taxes, and interest costs? $1,000 gain $1,000 loss $1,500 gain $0
$0
Your uncle has $1,135,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account? $98,766.96 $93,675.88 $92,657.67 $101,821.61 $120,149.50
$101,821.61 N 25 I/YR 7.5% PV $1,135,000 FV $0.00 PMT $101,821.61
If Jim and Susan have $87,000 in taxable income, $155,000 in income, and $132,000 in gross income what would be their Federal Income Tax due (assume the rate table below)? 10% $0 to $19,050 12%$19,051 to $77,400 22%$77,401 to $165,000 24%$165,001 to $315,000 32%$315,001 to $400,000 $11,019 $26,360 $21,300 $19,140
$11,019
If you invest $2,000 at the end of each year for five years and you earn 7% interest compounded annually, how much will you have accumulated at the end of the fifth year? $10,700 $11,501 $12,307 $14,026
$11,501
David has purchased an investment that he expects to produce an annual cash flow of $3,000 for five years. He requires an 8% rate of return compounded annually. What is the maximum amount that David can pay and still earn the required rate of return? $19,008 $15,000 $14,764 $11,978
$11,978 Y1 3000 Y2 3000 Y3 3000 Y4 3000 Y5 3000 I/Y 0.08 NPV $11,978.13
Andrea wrote a three-month call on Echo stock. The option cost $200 and the strike price was $10. What does the market price of Echo have to be for Andrea to break-even on this investment if the option is exercised? Ignore transaction construed taxes. $10 $12 $8 cannot be determined from the information provided
$12
What is the future value in 2 years of $10,000 invested today into an account that pays an annual interest rate of 12% compounded monthly? $11,567 $8,943 $10,240 $12,697
$12,697
What is the future value in 2 years of $10,000 invested today into an account that pays an annual interest rate of 12% compounded weekly? $12,709 $8,943 $10,240 $12,697
$12,709 FV $12,708.98 PV -10000 PMT N 2 I/Y 0.12 CP 52 N*CP 104 I/Y/CP 0.00230769
William purchased 1000 shares of stock at a price of $32 a share. He utilized his 50% margin account to make the purchase. What is William's initial equity in this investment? $48,000 -$16,000 $16,000 $32,000
$16,000
Zephyr Inc. sells wind based systems for generating electricity. The company pays no dividends, but you estimate the stock will be worth $50 per share 5 years from now and you require a 15% rate of return for stock investments of this type. What price should you be willing to pay for this stock? $12.50 $24.86 $43.48 $57.50
$24.86
A stock just paid a dividend of D = $1.50. The required rate of return is r = 10.2%, and the constant growth rate is g = 4.0%. What is the current stock price? $20.88 $18.87 $27.93 $23.65 $25.16
$25.16 D0$1.50 rs10.2% g4.0% D 1 = D 0(1 + g) = $1.56 P0 = D1/(rs - g) $25.16
Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much money will be in the account at the end of the second year? $4,161.60 $4,160.00 $4080.00 $1161.60
$4,161.60
Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding. If the company has 250,000 shares of common stock outstanding, its book value per share would be $32.33. $33.60. $43.20. $52.80.
$43.20.
Madison purchased a new car for $23,000. She was allowed $3,000 for her trade in and financed the remainder over 48 months at a rate of 4% per year. How much is her monthly payment? $451.58 $519.32 $384.91 $459.15
$451.58 FV PV 20000 PMT ($451.58) N 4 I/Y 0.04 CP 12 I/y/CP 0.0033333N*CP 48
If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is $40,000,000. $49,000,000. $50,000,000. $60,000,000.
$50,000,000.
Sarah purchased a stock one year ago at a price of $32 a share. In the past year, she has received four quarterly dividends of $0.75 each. Today she sold the stock for $38 a share. Her capital gain per share is $(6.00). $6.00. $9.00. $3.00.
$6.00.
Lindor Inc.'s $100 par value preferred stock pays a dividend fixed at 8% of par. To earn 12% on an investment in this stock, you need to purchase the shares at a per share price of $9.60. $66.67. $96.00. $150.00.
$66.67.
Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? $619 $674 $761 $828 $902
$828 Numerical solution: VB= $40((1− 1 / 1.0540) / 0.05) + $1,000(1 / 1.0540) = $40(17.1591) + $1,000(0.1420) = $828.36 ≈ $828. Financial calculator solution: Inputs: N = 40; I = 5; PMT = 40; FV = 1,000. Output:PV = -$828.41; VB ≈ $828.
Alexis bought a stock for $34 a share two years ago. The stock does not pay any dividends. Today she sold the stock for $27.50 a share. What was her internal rate of return on this investment? 9.22% -10.07% 19.30% -8.44%
-10.07%
A bond has a YTM of 6.5%, a modified duration of 16.9 years, a duration of 18 years and a 30 year maturity. By what percentage will the bond's price change if market interest rates increase by 0.75%? -0.750 percent +0.750 percent +12.675 percent -12.675 percent
-12.675 percent
Listed below are some provisions that are often contained in bond indentures: 1.Fixed assets may be used as security. 2.The bond may be subordinated to other classes of debt. 3.The bond may be made convertible. 4.The bond may have a sinking fund. 5.The bond may have a call provision. 6.The bond may have restrictive covenants in its indenture. Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond? 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 6 1, 3, 4, 5, 6 1, 3, 4, 6 1, 4, 6
1, 3, 4, 6
Bill is in the 25% tax bracket and will earn $48,000 this year. His firm has a 401k and he has decided to contribute $7,000 this year. What will be his tax savings because of making this contribution? 1,750 1,450 0 7,000
1,750
Jonathan has the following portfolio of assets. What is the beta of Jonathan's portfolio? Asset A B C Weight 25% 40% 35% Beta 0.78 0.85 1.56 1.08 1.11 1.13 1.15
1.08 Sum(W*b)
Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Tiffany owned 10,000 shares worth approximately $1.50 per share. 10,000 shares worth approximately $0.15 per share. 100 shares worth approximately $15 per share. 100 shares worth approximately $1.50 per share.
100 shares worth approximately $15 per share.
Early in 2013, Maria bought shares of MBA Inc. at $27.85 per share. She received the following dividends per share (end of year). 2013 $1,50 2014 $2.00 2015 $2.50 Immediately after receiving the the 2015 dividend, she sold the stock for $32.50 per share. Her internal rate of return on this investment was 9.17%. 10.25%. 11.99%. 13.85%.
11.99%.
Ten years ago, Taylor purchased 444.44 shares in a mutual fund for $22.50 per share. He has never made an additional investment in this fund, but because of reinvested dividends and capital gains, he now owns 1,200 shares with a net asset value of $25.88 per share. Ignoring taxes, his compound average annual rate of return (IRR) is 10.0%. 12%. 21%. 31%.
12%.
The risk-free rate of return is 2.2 percent, the expected market return is 11 percent, and the beta for Solstice, Inc. is 1.12. What is Solstice's required rate of return? 8.80% 12.05% 13.20% 14.30%
12.05%
Newton, Inc. just paid an annual dividend of $0.95. Their dividends are expected to increase by 4% annually. Newton Company stock is selling for $11.54 a share. What is the required rate of return on this stock implied by the dividend-growth model? 8.23% 12.2% 12.6% 13.9%
12.6%
What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk-free rate of 4%? 8.36% 8.72% 12.72% 4.36%
12.72%
The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six-month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes. 150% 200% 250% 300%
150%
Six months ago, Suzanne purchased a stock for $28 a share. Today she sold the stock at a price of $32 a share. During the time she owned the stock, she received a total of $1.30 in dividends per share. What is her holding period return? 33.2% 37.8% 18.9% 16.6%
18.9%
A P/E ratio depends on 1.the firm's dividends 2.the price of the stock 3.the firm's per share earnings 1 and 2 1 and 3 2 and 3 all of these choices
2 and 3
The future value of an annuity will be larger if 1.the annuity is an ordinary annuity 2.the annuity is an annuity due 3.the payments are made at the beginning of the year 4.the payments are made at the end of the year 1 and 3 1 and 4 2 and 3 2 and 4
2 and 3
The present value of a dollar 1.increases as the interest rate increases 2.decreases as the interest rate increases 3.increases as the time period increases 4.decreases as the time period increases 1 and 3 1 and 4 2 and 3 2 and 4
2 and 4
Janice has $5,000 invested in a bank that pays 5.2% annually. How long will it take for her funds to triple? 25.36 years 21.67 years 26.22 years 19.72 years 20.59 years
21.67 years I/YR 5.2% PV $5,000.00 PMT $0 FV $15,000.00 N 21.67
Last year at this time, a mutual fund had an NAV of $13.20 per share. Over the past year the fund paid dividends of $0.70 per share and had a capital gains distribution of $1.20 per share. What is the holding period return assuming that the current NAV is $14.42? 13.2% 14.4% 21.6% 23.6%
23.6%
On January 1, Stacy's portfolio was valued at $96,534. During the year Stacy received $3,285 in interest and $4,100 in dividends. She also sold one stock at a gain of $850. The value of the portfolio on December 31 of the same year was $113,201. At the end of June, Stacy withdrew $5,000 from the portfolio. What is the holding period return for the year? 25.1% 25.8% 26.5% 27.2%
26.5%
An investment produced annual rates of return of 5%, 12%, 8% and 11% respectively over the past four years. What is the (sample) standard deviation of these returns? 3.8% 3.6% 2.7% 3.2%
3.2%
An investment produced annual rates of return of 5%, 12%, 8% and 11% respectively over the past four years. What is the standard deviation of these returns? 2.7% 3.2% 3.6% 3.8%
3.2%
The price of a bond with an 8% coupon rate paid semi-annually, a par value of $1,000, and fifteen years to maturity is the present value of 15 payments of $40 at 6 month intervals plus $1,000 received at the end of the fifteenth year. 15 payments of $80 at 6 month intervals plus $1,000 received at the end of the fifteenth year. 30 payments of $40 at 6 month intervals plus $1,000 received at the end of the fifteenth year. 30 payments of $80 at 1 year intervals plus $1,000 received at the end of the 30th year.
30 payments of $40 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
Pilgrim Corp. stock currently sells for $25 per share? The dividend yield is $1.00 per share and earnings per share are $3.00. The dividend yield is ________ and the dividend payout ratio is ________. 12%, 48% 8.33%, 25% 4%, 33% 33%,4%
4%, 33%
Assume you have the following two stocks (A, B) and that you received the following returns the past three year. If you own 50% in A and 50% in B, what would be the standard deviation of a portfolio combining these two, assuming the correlation of A/B = .9433? Asset A 10% 12% 5% Asset B 1% 8% -4% 10.67 5.33 4.82 4.75
4.75
Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the standard deviation is 13%. Currently, the risk-free rate of return is 4% and the overall market has a total return of 11%. What is the value of Treynor's measure for Phil's portfolio? 2.1% 6.2% 7.1% 8.9%
6.2%
Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the standard deviation is 13%. Currently, the risk-free rate of return is 4% and the overall market has a total return of 11%. What is the value of Treynor's measure for Phil's portfolio? 6.2% 2.1% 8.9% 7.1%
6.2%
Maria purchased $5,000 of no-load mutual fund shares just over a year ago. She received $136 in dividend income and $201 in long-term capital gains distributions. Today she sold her shares for $5,062. Maria is in the 25% marginal tax bracket. Capital gains with holding periods in excess of one year and dividend income are taxed at 15%. What is Maria's after-tax holding period return? 6.8% 8.0% 6.6% 6.0%
6.8%
Assume an investor buys 100 shares of stock at $50 per share after putting up 60% in margin. If the stock rises to $60 per share, what is the new margin position? 66.67% 50% 75% 115%
66.67%
A portfolio consists of three bonds as follows. Bond X: $5000 8.6 years Bond Y: $4000 4.2 years Bond Z: $1000 11.4 years What is the duration of the bond portfolio? 7.12 years 8.07 years 8.69 years 11.4 years
7.12 years
What is the yield-to-maturity of a $1,000, 7% semi-annual coupon bond that matures in 2 years and currently sells for $997.07? 6.87% 7.04% 7.16% 7.31%
7.16%
What is the tax-equivalent yield of a double tax-free 5% municipal bond if the investor is in the 28% federal and 7% state tax brackets? 6.94% 7.14% 7.47% 7.69%
7.47%
Nathan bought a zero coupon bond in 2003 for $485.19. In 2013 he redeemed it for $1,000. His internal rate of return on this investment was 206.1%. 20.6%. 7.5%. 0.00%.
7.5%.
What is the coupon rate of an annual bond that has a yield to maturity of 8.5%, a current price of $942.32, a par value of $1,000 and matures in thirteen years? 7.67% 7.75% 8.33% 8.50%
7.75%
You currently own 300 shares of WalMart stock priced at $25 per share. WalMart decides to undergo a 3-for-1 stock split. How many shares would you now own and at what stock price? 100 shares at $25 900 shares at $75 900 shares at $8.33 100 shares at $75
900 shares at $8.33
The biggest advantage of short selling is. Collecting dividends on borrowed stock Limited risk Unlimited return possibilities A chance to profit on a declining stock
A chance to profit on a declining stock
Last year Thatcher Industries had a current ratio of 1.2, a quick ratio of 0.8, and current liabilities of $500,000. Which of the following statements is most correct? If the company obtained a short-term bank loan for $500,000 and used the proceeds to purchase inventory, its current ratio would fall. Last year Thatcher industries had $200,000 in inventories. Last year Thatcher industries had $416,667 in current assets. All of the answers above are correct. Answers a and b are correct.
Answers a and b are correct. Current assets / Current liabilities= Current ratio (Current assets − Inventory) / Current liabilities = quick ratio
Which of the following is considered a tax favored investment? Treasury bond Municipal bond Corporate bond Both A and B Both A and C
Both A and B
Allison's portfolio has an expected return of 14% and a standard deviation of of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk-free rate is 3%. According to the Sharpe measure, Allison has the better portfolio. Brianna has the better portfolio. The portfolio's are equally desirable. The answer depends on Allison and Brianna's risk tolerance.
Brianna has the better portfolio
Allison's portfolio has an expected return of 14% and a standard deviation of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk-free rate is 3%. According to the Sharpe measure, Allison has the better portfolio. the answer depends on Allison and Brianna's risk tolerance. the portfolio's are equally desirable. Brianna has the better portfolio.
Brianna has the better portfolio.
The expected rate of return and standard deviations, respectively for four stocks are given below: ABC 9% 3% CDE 11% 9% FGH 12% 8% IJK 14% 10% Which stock is clearly least desirable? ABC CDE FGH IJK
CDE
Which one of the following statements about common stock is true? Common stock can provide attractive capital appreciation opportunities. Dividends generally provide the greatest rate of return on common stocks. Common stocks generally have a negative rate of return over a ten-year period. The DJIA is the best indicator of the overall performance of common stocks
Common stock can provide attractive capital appreciation opportunities.
All of the following are true EXCEPT: Dividend income is a source of return for investors Qualified dividends receive preferrential tax treatment Dividends are typically taxed as ordinary income Dividends ordinarily increase over time
Dividends are typically taxed as ordinary income
Which of the following statements about bond rating agencies is true? Bonds are rated by an agency of the federal government. Bonds rated AAA are guaranteed by the company that issues the rating. During the financial crisis of 2007-2009 it became clear that rating agencies severely underestimated the risks of some issues. Bond rating agencies are paid by investors and receive no compensation from the bonds' issuer.
During the financial crisis of 2007-2009 it became clear that rating agencies severely underestimated the risks of some issues.
EBITDA is an acronym for Earnings Based Information, Total Development Approach. Ernst, Bostwick, Davenport, Innes Approach. Earnings Before Interest, Taxes, Depreciation, and Amortization. Earnings Before Interest, Taxes, Dividends, and Asset replacement.
Earnings Before Interest, Taxes, Depreciation, and Amortization.
The stock of Plomb Co. falls sharply on news that its CEO has drowned in a boating accident while on vacation. This is an example of accidental risk. event risk. flotation risk. liquidity risk.
Event risk
Which of the following statements best describes the legal organization of mutual funds? Funds are organized as a single entity that handles all functions such as custody and investment decisions. Funds split their basic functions such as record keeping and investment decisions among two or more companies. Funds are owned by the company that manages them. A distributor keeps track of investment and redemption requests from shareholders and maintains other shareholder records.
Funds split their basic functions such as record keeping and investment decisions among two or more companies.
Which of the following best fits the description "blue chip stock"? Facebook Under Armour General Electric Chipotle Mexican Grill
General Electric
All of the following are correct EXCEPT: Governments tend to be net suppliers of funds Individuals tend to be net suppliers of funds Businesses tend to be net demanders of funds Businesses tend to use funds to invest in production of goods and services
Governments tend to be net suppliers of funds
Which of the following is true? Historically, high P/E or growth stocks have outperformed low P/E or value stocks. Historically, low P/E or value stocks have outperformed high P/E or growth stocks. After adjusting for risk, high P/E or growth stocks and low P/E or value stocks have performed about the same over time. the P/E effect is limited to U.S. stocks.
Historically, low P/E or value stocks have outperformed high P/E or growth stocks.
Advantages of index funds include which of the following? I. low management fees II. they outperform most actively managed funds III. they have a balanced mix of stocks and bonds IV. securities in the portfolio are selected by professional analysts I and IV only I and II only I, III, and IV only I, II, III and IV
I and II only
Returns on exchange traded funds may come from I. capital gains II. dividends III. increases in the fund's premium IV. decreases in the fund's discount I and II only III and IV only I, II and III only I, II, III and IV
I and II only
An asset allocation plan should consider which of the following investor characteristics? I. income and employment security II. marital status III. age and proximity to retirement IV. social relationships and peer groups II only I, II and III only I, III and IV only I, II, III and IV
I, II and III only
Which of the following are required to measure the performance of a diversified stock portfolio? I. price changes II. dividend payments III. an appropriate index to use as a benchmark IV. the risk-free interest rate I, III and IV only I, II and IV only I, II and III only I, II, III and IV
I, II and III only
Which of the following are advantages offered by mutual funds? I. professional portfolio management II. dividend reinvestment III. consistent returns in excess of the overall market rate of return IV. modest capital outlay for investors I and II only I and IV only II, III and IV only I, II and IV only
I, II and IV only
Which of the following are characteristics of stop-loss orders? I. the risk of whipsawing II. the ability to limit downside losses III. the guaranteed execution within the order period IV. the conversion to a market order I and II only III and IV only I, II and IV only II, III and IV only
I, II and IV only
Which of the following tend to signal that stock prices are likely to rise in the future? I. Employment increases after several months of recession II. interest rates low compared to the recent past III. Major market indexes have just reached record highs IV. housing starts increase after several months of declines I and II only II and III only I, II and IV only I, II, III and IV
I, II and IV only
A technical analyst might have an interest in which of the following? I. level of short interest II. relative price level III. point-and-figure charts IV. odd-lot transactions I and III only I, II and IV only I, II and III only I, II, III and IV
I, II, III and IV
Investors use mutual funds for which of the following reasons? I. to accumulate wealth II. to minimize risk III. as a speculative vehicle IV. as a storehouse of value I and II only II, III and IV only I, II and IV only I, II, III and IV
I, II, III and IV
Mutual funds can be used in which of the following tax exempt or tax deferred plans? I. self-directed retirement plans (SEPS) II. traditional IRAs III. roth IRAs IV. 401k accounts I, II, and IV only I and IV only II and III only I, II, III and IV
I, II, III and IV
Traditional portfolio managers prefer well-known companies because I. stocks of well-known firms tend to be less risky than stocks of lesser known firms. II. individuals are more apt to purchase a mutual fund if it contains stocks of well-known firms. III. window dressing encourages the purchase of well-known stocks. IV. institutional investors tend to exhibit "herd-like" behavior I only I and II only II and III only I, II, III and IV
I, II, III and IV
Open end mutual funds may charge which of the following fees? I. a front-end load at the time of purchase II. a back-end load when shares are sold III. annual fees based on marketing and distribution costs IV. annual performance fees up to 20% of increases in net asset value I, II and IV only I, II, and III only I, III and IV only I, II, III and IV
I, II, and III only
Short-term investments I. Provide liquidity II. Fill an important part of most investment programs III. Provide a high rate of return with low risk IV. Provide resources for emergencies I and IV only II and IV only I, II and IV only I, II, III and IV
I, II, and IV only
Which of the following are advantages of owning bonds? I. diversification properties II. higher long-term returns than equity holdings III. current income IV. relatively low risk I and II only I, III and IV only I, II and III only I, II, III and IV
I, III and IV only
Which of the following are sources of return for an open-end mutual fund? I. dividend and interest income II. change in the discount or premium III. capital gains IV. change in NAV I and III only I, II and III only I, III and IV only II, III and IV only
I, III and IV only
Which of the following would be found on a company's balance sheet? I. Accounts Receivable II. Interest Expense III. property plant and equipment IV. Total Stockholders' Equity I an IV only I, II and III only I, II and IV only I, III and IV only
I, III and IV only
Value funds seek stocks I. with low dividend yields II. with potential for growth III. with ow P/E ratios IV. of newly discovered firms I and III only II and III only II, III and IV only I, II, III and IV
II and III only
Value funds seek stocks I. with low dividend yields II. with potential for growth III. with low P/E ratios IV. of newly discovered firms I and III only II and III only II, III and IV only I, II, III and IV
II and III only
Which of the following are characteristics of small cap stocks? I. strong balance sheets II. annual revenues less than $250 million III. potential for high returns along with high risk IV. potentially dramatic changes in their earnings III and IV only II and III only I, III and IV only II, III and IV only
II, III and IV only
Which of the following will always lower a portfolio's beta? I. diversity among different types of securities and across industry and geographic lines II. add investments with low betas to the portfolio III. hold more cash or Treasury Bills in the portfolio IV. reduce the percentage of the portfolio invested in high beta securities I, II and IV only II, III and IV only I, II and III only I, II, III and IV
II, III and IV only
Which one of the following statements about margin trading is correct? Margin traders are pessimistic about the future price of the stock. If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $600 in cash to make the purchase. The Securities Exchange Commission sets the minimum margin requirement for margin trading. Margin traders are willing to accept lower return to reduce their risk.
If Fred buys $1,000 worth of stock using 60% margin, he will need to pay $600 in cash to make the purchase.
Mathew's 401-K plan offers a choice between and S&P 500 Index Fund, a large-cap stock fund, a blue chip stock fund that seeks high dividend income and modest growth, a fund that invests only in investment grade corporate bonds and a fund that that invests only in government bonds. Mathew allocates 20% of his money to each fund. Which of the following statements offers the best critique of Mathew's "1/N" allocation? He should have allocated on 1/3 to stocks and 1/3 to each of the remaining funds. His plan does not provide sufficient liquidity. Mathew may not be as well diversified as he thinks because the three stock funds probably own many of the same stocks. There is nothing wrong with Mathew's plan.
Mathew may not be as well diversified as he thinks because the three stock funds probably own many of the same stocks.
Which one of the following best describes the term "efficient market"? The commissions on large transactions are smaller than the commissions on small transactions. New information is quickly reflected in security prices. Little time and effort are spent on marketing securities to the public. The cost of receiving, processing, executing, and reporting securities orders is small.
New information is quickly reflected in security prices.
Which of the following is an example of a tangible asset? mutual funds real estate stocks bonds
Real Estate
Which of the following is not traded in the securities markets? bonds real estate derivatives stocks
Real Estate
The governmental agency that oversees the capital markets is the Fair Trade and Banking Agency. Securities and Exchange Commission. Federal Trade Commission. Federal Reserve.
Securities and Exchange Commission.
You own a stock that has appreciated in value over the last year and you feel that the stock is likely to vary over the next three months but not by much. If it is currently November and you would like to defer the tax liability into next year you would likely? Sell a call option on the stock Buy a call option on the stock purchase a put do nothing
Sell a call option on the stock
Jennifer expects the price of a stock to decrease over the next month. Which one of the following strategies would allow Jennifer to earn a profit if the expected decrease actually occurs? Take a long position in the stock today. Sell the stock short today. Buy the stock on margin today. Take a long position in the stock one month from today.
Sell the stock short today.
Suppose you are trying to determine which of two stocks to purchase. Stock A has a standard deviation of 15% and an expected return of 12%, while Stock B has a standard deviation of 15% and an expected return of 11%. Which one would you choose? Stock A because of the higher return Stock B because of it's lower coefficient of variation Stock A because of the lower risk Stock B because of the higher return
Stock A because of the higher return
Which of the following is a good reason to invest in convertible bonds? They often have higher than normal coupon rates. They offer protection against rising interest rates. They tend to be issued by stable, low-risk companies. They offer predictable income and a chance to profit from an increase in the stock price.
They offer predictable income and a chance to profit from an increase in the stock price.
A bond has a coupon rate of 6%, matures in 6 years, and currently sells for $1,000 (par value). Therefore the yield to maturity is also 6%. T/F
True
A low inventory turnover is not good for a company unless they have a high profit margin T/F
True
Ashley believes that the price of gas and oil is about to rise and energy company profits will follow. She should invest in an asset allocation fund. an emerging market fund. a sector fund. an aggressive growth fund.
a sector fund.
Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. At what average annual rate did the price of the stock increase over the 5 year period? about 10.61% about 2.12% about 2.03% about 1.64%
about 2.03% FV 84.76 PV -76.63 PMT N 5 I/Y 2.04% CP I/y/CP N*CP
Generally, the market price of a stock is below its book value. above its book value. equal to its par value. equal to its book value.
above its book value.
The par or stated value of common stock is important for accounting purposes only. helping the investor determine the stock's intrinsic value. helping the board of directors determine the dividend payout. helping the market determine the trading price of the stock.
accounting purposes only.
Debt securities issued by the Federal Home Loan Bank, the Student Loan Marketing Association and the Government National Mortgage Association are known as agency bonds. organizational bonds. municipal bonds. Treasury bonds.
agency bonds.
A stocks intrinsic value depends on the discount rate the amount of risk estimates of future cash flows all of the above
all of the above
An American Depository Receipt (ADR) are euro denominated receipts for stocks of U.S. companies are dollar denominated receipts for stock of foreign companies are U.S. based multinational firms wit substantial foreign operations will not help diversify a portfolio
are dollar denominated receipts for stock of foreign companies
Since 2003, most of the time dividends are taxed at a higher rate than capital gains. at a lower rate than capital gains. at the same rate as ordinary income. at the same rate as capital gains.
at the same rate as capital gains.
The great majority of transactions on the NYSE are executed on the trading floor by brokers known as specialists. by auction in trading areas known as pits. by dealers known as market makers. automatically through electronic technology.
automatically through electronic technology.
A high TRIN value is considered good for the market when the number of advancing stocks is declining. good for the market when the volume of advancing stocks is declining. bad for the market when the trading volume in the declining stocks is rising. bad for the market when the number of declining stocks is stable.
bad for the market when the trading volume in the declining stocks is rising.
The conversion privilege provided by mutual fund families allows investors to move from one fund family to another once every six months. be more aggressive since they can re-allocate their funds when market conditions change. move from one fund to another without incurring any capital gains tax liability. re-allocate their funds at any time as long as they pay an additional sales load on the transferred funds.
be more aggressive since they can re-allocate their funds when market conditions change.
One could temporarily protect profits on a highly diversified portfolio of large company stocks by selling S&P 500 Index put options. buying S&P 500 Index put options. buying S&P 500 Index call options. selling S&P 500 Index call options.
buying S&P 500 Index put options.
Stocks and bonds are traded in money markets. capital markets. securities and exchange commissions. federal trade commissions.
capital markets.
In general, foreign-pay bonds provide ________ rates of return and ________ diversification effects for U.S. investors. non-competitive; positive competitive; positive non-competitive; negative competitive; negative
competitive; positive
The writer of a covered call has taken a(n) conservative investment position with unlimited potential profits. conservative investment position with limited profits. aggressive position with limited losses and unlimited potential profits. aggressive position with potentially unlimited profits or losses.
conservative investment position with limited profits.
If a constant-dollar plan portfolio is profitable over the long run, the ________ in value over time. entire portfolio will remain constant aggressive portion will decrease conservative portion will increase conservative portion will remain constant
conservative portion will increase
Investors are generally well advised to avoid mutual funds with highly rated fund managers. low fees and high tax efficiency. good performance in both up and down markets. consistently poor historical performance.
consistently poor historical performance.
Rising interest rates tend to contract the level of economic activity. increase the level of business investment. indicate governmental expansion of the economy. signal the trough of a recessionary market.
contract the level of economic activity.
To compute the holding period return on a bond investment, the investor should divide the purchase price of the bond into any increase or decrease in the bond's price. the annual coupon payment. the bond's yield to maturity. coupon payments received plus or minus any change in the bond's price.
coupon payments received plus or minus any change in the bond's price.
OKAY stock has a beta of 0.8. The market as a whole is expected to decline by 12% thereby causing OKAY stock to decline by 9.6%. decline by 12.5%. increase by 9.6%. increase by 12%.
decline by 9.6%.
Combining uncorrelated assets will increase the overall risk level of a portfolio. decrease the overall risk level of a portfolio. not change the overall risk level of a portfolio. cause the other assets in the portfolio to become positively related.
decrease the overall risk level of a portfolio.
Government securities money funds are structured to eliminate market risk. inflation risk. default risk. interest rate risk.
default risk.
One advantage gained by investing in a bond fund rather than in individual bonds is the immunity from interest rate changes. guarantee that the bonds will be held to maturity to avoid market fluctuations. most bond funds outperform their benchmarks. diversification among issuers.
diversification among issuers.
The S & P 500 Index is an appropriate benchmark for diversified portfolios of large company stocks. portfolios diversified among several asset classes such as stocks, bonds, and real estate. diversified portfolios with a mix of large, small, and mid-cap stocks. diversified portfolios of mid-cap and small company stocks.
diversified portfolios of large company stocks.
For a stock investment, the dividend yield is calculated by dividing a stock's annual cash dividend by its price. dividing a stock's price by its annual cash dividend. multiplying a stock's semi-annual dividend by two. dividing the annual change in the stock's price plus its annual dividend amount by the beginning of the year price.
dividing a stock's annual cash dividend by its price.
One characteristic of 12(b)-1 charges is that they are payable only during the first year the fund is owned. each year regardless of the performance of the mutual fund. only in years that the mutual fund shows an increase in net asset value. only when shares in the fund are sold.
each year regardless of the performance of the mutual fund.
Writers of option contracts have a limited liability specified in the contract. hope to exercise the option on favorable terms. earn a commission no matter what subsequently happens to the contract. earn a profit when the option expires without being exercised.
earn a profit when the option expires without being exercised.
P/E ratios could rise even as earnings fall if earnings fall at a faster rate than stock prices. earnings fall at a slower rate than stock prices. investors expect lower stock prices to be permanent. investors expect lower earnings to be permanent.
earnings fall at a faster rate than stock prices.
A petroleum refinery in the Gulf region is forced to shut down for several months because of hurricane damage. This is an example of business risk. event risk. market risk. speculation.
event risk.
The single most important issue in the stock valuation process is a company's past earnings record. historic dividend growth rate. expected future returns. capital structure.
expected future returns.
Which of the following business es will be negatively impacted by a strong dollar? retailing imports exports automotive
exports
The value of an interest rate call option varies directly with the price of the underlying corporate bond. increases when the yield on the underlying Treasury security rises. is based on the market price of U. S. Treasury securities. decreases when the price of U.S. Treasuries decreases.
increases when the yield on the underlying Treasury security rises.
The random walk hypothesis implies that security analysis is unable to predict future market behavior. suggests that random patterns appear but only over long periods of time. has been disproved based on recent computer simulations. accounts for market anomalies such as calendar effects.
implies that security analysis is unable to predict future market behavior.
On a net basis, funds in the financial markets are generally supplied by individuals. both individuals and business firms. business firms. the government.
individuals.
Which one of the following types of risk cannot be effectively eliminated through portfolio diversification? product recalls labor problems inflation risk materials shortages
inflation risk
Debt represents funds loaned in exchange for dividend income and the repayment of the loan principal. interest income and the repayment of the loan principal. interest income and a partial ownership interest in the firm. dividend income and an ownership interest in the firm.
interest income and the repayment of the loan principal.
Investors in hedge funds have the legal status of general partners. trustees. shareholders. limited partners.
limited partners.
In some markets it may take many months to sell a residential property. This is an example of market risk. liquidity risk. credit risk. business risk.
liquidity risk.
The tendency of investors to take greater risks after a large loss and fewer risks after a large gain can be attributed to overconfidence. the "house money" effect. loss aversion. representativeness
loss aversion.
Which stage of an industry's growth cycle is most influenced by economic events? initial development stability or decline mature growth rapid expansion
mature growth
One market anomaly that offers some evidence in support of charting or other forms of technical analysis is momentum. the January effect. the small firm effect. the value effect.
momentum.
The two primary media for warehousing liquidity are certificates of deposit and short-term bond funds. money market mutual funds and money market deposit accounts. certificates of deposit and long-term bond funds. short-term bond funds and asset allocation funds.
money market mutual funds and money market deposit accounts.
If inflation is expected to increase significantly, cautious bondholders should expect interest rates to rise. expect a flat yield curve for the intermediate-term. buy long-term bonds today. move to the short-end of the yield curve.
move to the short-end of the yield curve.
Investors seeking tax-exempt income should invest in index funds. government bond funds. municipal bond funds. money market funds.
municipal bond funds.
Investors seeking tax-exempt income should invest in money market funds. index funds. municipal bond funds. government bond funds.
municipal bond funds.
Investors seeking a diversified, professionally managed portfolio of securities can purchase shares of preferred stock. convertible securities. insurance policies. mutual funds.
mutual funds.
Which of the following is a contrary indicator? odd-lot trading breadth of market and market volume short-interest and the advance/decline line new highs-new lows indicator and the TRIN measure
odd-lot trading
Investor overconfidence leads to too little trading. an overestimation of risk. overly optimistic predictions. narrow framing
overly optimistic predictions.
The maker of a put or call is the company which issued the underlying security. person who facilitates the trade on the floor of the exchange. party who writes the option. party who decides whether or not the option is exercised.
party who writes the option.
The weak form of the efficient market theory contends that past price performance is useless in predicting future price movements. past performance can help determine the general direction of future price movements. any publicly available information is useless in predicting future price movements. price movements are not random but follow a general trend over a period of time.
past price performance is useless in predicting future price movements.
The United States has a __________ tax structure. regressive flat progressive modified
progressive
One of the key feature of EGTRRA 2001 was to to reduce dividend and capital gain rates to 15% or 0% to reduce contributions to a IRA down to $2,000 provide marriage penalty relief eliminate the pension protection act
provide marriage penalty relief
Eurodollar bonds are purchased with dollars but redeemed in euros. purchased with euros but redeemed in dollars. purchased with dollars, but redeemable in either euros or dollars. purchased and redeemed in dollars but issued by entities outside the U.S.
purchased and redeemed in dollars but issued by entities outside the U.S.
Which stage of an industry's growth cycle offers the greatest opportunity for an investor who is seeking capital gains? initial development mature growth stability or decline rapid expansion
rapid expansion
American Depositary Receipts represent receipts for dollar deposits in foreign banks. receipts for shares of foreign companies held by U.S. broker-dealers. receipts for the stocks of foreign companies held by banks in the companies' home country. receipts from foreign broker-dealers establishing ownership of foreign stocks.
receipts for the stocks of foreign companies held by banks in the companies' home country.
From a behavioral perspective, the anomaly known as post-earnings announcement drift or momentum is best explained by representativeness. loss aversion. self attribution bias. familiarity bias.
representativeness.
The expectations hypothesis states that investors require higher long-term interest rates today if they expect higher inflation rates in the future. expect higher long-term interest rates because of the lack of liquidity for long-term bonds. require the real rate of return to rise in direct proportion to the length of time to maturity. normally expect the yield curve to be downsloping.
require higher long-term interest rates today if they expect higher inflation rates in the future.
The constant-ratio plan utilizes a predetermined ratio between desired current yield and expected capital gains. requires the establishment of trigger points for portfolio rebalancing. is an attempt to time the cyclical movements of the market. strictly adheres to a buy-and-hold strategy.
requires the establishment of trigger points for portfolio rebalancing.
American depositary shares (ADS) are shares of foreign companies traded on the U.S. markets. shares of American companies traded on foreign markets. foreign currency deposits in American banks. American currency deposits in foreign banks.
shares of foreign companies traded on the U.S. markets.
Investors who wish to minimize the effect of taxes on their investment returns should try to avoid dividend paying stocks. short-term capital gains. municipal bonds. long-term capital gains.
short-term capital gains.
Under which bond provision is the issuer required to retire portions of the bond issue prior to maturity? call feature refunding provision subordination clause sinking fund feature
sinking fund feature
Market anomalies are caused by investors' efforts to avoid or postpone taxes. different levels of risk. statistical quirks. some poorly understood combination of factors.
some poorly understood combination of factors.
The Federal Reserve through monetary policy can help expand the economy by lowering income taxes on individuals. reducing tariffs such that foreign exports can increase. supporting a moderate growth of the money supply. increasing government spending on the national infrastructure.
supporting a moderate growth of the money supply.
Investors interested in predictable cash flow from their investments should consider funds that offer automatic investment plans. automatic reinvestment plans. systematic withdrawal plans. conversion privileges.
systematic withdrawal plans.
In the real world, most of the assets available to investors tend to be either perfectly positively or perfectly negatively correlated. tend to be somewhat positively correlated. tend to be uncorrelated. tend to be somewhat negatively correlated.
tend to be somewhat positively correlated.
The odd-lot trading theory advocates that small investors tend to buy high and sell low. react in a manner which generally forecasts the future direction of the market. are the first to react to market changes. tend to be the first to speculate on a bull market.
tend to buy high and sell low.
A tax favored investment is one in which the tax rate is higher than similar investments that trades current income for capital gain income that creates ordinary income none of the above
that trades current income for capital gain income
An investor should purchase a stock when the market price exceeds the intrinsic value. the expected rate of return equals or exceeds the required return. the capital gains rate is less than the required return and no dividends are paid. the market price is greater than the justified price.
the expected rate of return equals or exceeds the required return.
The closest approximation to the real, risk-free rate of interest is the short-term Treasury bill rate minus the inflation rate. the 10 year Treasury bond rate minus the 1 year Treasury bill rate. the 10 year Treasury bond rate minus the inflation rate. the short-term Treasury bill rate plus the inflation rate.
the short-term Treasury bill rate minus the inflation rate.
The market segmentation theory holds that an increase in demand for long-term borrowings leads to an inverted yield curve. expectations about the future level of interest rates is the major determinant of the shape of the yield curve. the yield curve reflects the maturity preferences of financial institutions and investors. the shape of the yield curve is always downsloping.
the yield curve reflects the maturity preferences of financial institutions and investors.
The general theory of dollar cost averaging is to time the market to take advantage of low stock prices. to buy more stock when prices are low and less when prices are high. to equal the performance of market averages at the lowest dollar cost. to sell as markets decline and buy as they begin to rise.
to buy more stock when prices are low and less when prices are high.
In which of the following circumstances would it be most appropriate to use the holding period return? to compare the capital gains on a house held for 8 years and a mutual fund held for 6 years to compare the calendar year performance of stocks purchased in March to stocks purchased in September to compare the dividend yield of stocks to the interest rate on bonds to compare the performance of several stocks, each of which was held throughout an entire year
to compare the performance of several stocks, each of which was held throughout an entire year
The price-to-cash-flow method of stock valuation generally uses either EBITDA or operating cash flow from the cash flow statement as a measure of cash flow. relies on historical cash flows. produces a cash flow multiple that is greater than the P/E multiple. applies the P/E multiple to the cash flow per share value.
uses either EBITDA or operating cash flow from the cash flow statement as a measure of cash flow.
Dealer markets are facilitated by brokers who work to bring a buyer and seller together are markets like the NYSE and Regional Exchanges utilize a market maker All of the above
utilize a market maker
An investor adopts a policy of investing in both an aggressive mutual fund and a short-term bond fund. When the value of the aggressive fund exceeds 65% of the portfolio value, shares of that fund are sold such that the aggressive fund represents only 45% of the portfolio. This is an example of a ________ plan. constant-dollar dollar-cost averaging constant-ratio variable-ratio
variable-ratio
Because of the tax deferral associated with IRA accounts you would typically want to put municipal bonds in these accounts want to put stocks in these accounts want to put corporate bonds in these accounts want only short term assets in these accounts
want to put corporate bonds in these accounts
