Chapter 1, 2, and 3 Investments
The amount of money per share that will be received when a put option on stock is exercised is called the _____ price. A. market B. stock C. strike D. future E. obligated
C
When your equity position in a security is less than the required amount, your brokerage firm will issue a: A. margin call. B. margin certificate. C. cash certificate. D. limit order. E. leverage call.
A
An investor with a long position in a security will make money: A. if the price of the security increases. B. if the price of the security declines. C. if the price of the security remains stable. D. only if the security has been purchased on margin. E. only by shorting the security.
A
At the time a futures contract is written: A. the underlying asset is specifically identified. B. the buyer pays a good faith deposit to the seller. C. the current market price of the underlying asset becomes the contract price. D. the current market price of the underlying asset must be less than the agreed upon futures price. E. the buyer is granted the right, but not the obligation, to exercise the contract.
A
Blume's formula is used to: A. predict future rates of return. B. convert an arithmetic average return into a geometric average return. C. convert a geometric average return into an arithmetic average return. D. measure past performance in a consistent manner. E. compute the historical mean return over a multi-year period of time.
A
The determination of which individual stocks to purchase within a particular asset class is referred to as: A. security selection. B. asset allocation. C. security analysis. D. market timing. E. market selection.
A
The risk premium is defined as the rate of return on: A. a risky asset minus the risk-free rate. B. the overall market. C. a U.S. Treasury bill. D. a risky asset minus the inflation rate. E. a riskless investment.
A
The seller of a naked call is betting that the price of the underlying asset will: A. decrease. B. increase. C. decrease and then increase prior to the expiration date. D. will remain constant for a period of time and then increase prior to the expiration date. E. have no effect on the value of the call.
A
The standard deviation is a measure of: A. volatility. B. total return. C. capital gains. D. changes in dividend yields. E. changes in the capital gains rate.
A
What is the maximum loss you can incur if you have a long position on a stock in a cash account? A. The initial investment B. The initial margin C. The margin loan plus interest D. Zero E. Unlimited
A
Wythe is trying to decide whether he wants to purchase shares in General Motors, Ford, or Honda, all of which are auto manufacturers. Wythe is making a(n) _____ decision. A. security selection B. tax-advantaged C. risk aversion D. active strategy E. asset allocation
A
You open a margin account with a local broker and purchase shares of stock. The house maintenance margin requirement for your account is set by: A. your broker. B. the stock exchange. C. the SEC. D. the SIPC. E. the Federal Reserve.
A
A security originally sold by a business or government to raise money is called a(n): A. derivative. B. primary asset. C. primary debt. D. futures contract. E. option contract.
B
An investor who has a resource constraint: A. pays no income taxes. B. has insufficient funds to purchase a security. C. has a relatively high marginal tax rate. D. has only one source of income. E. will only invest in socially acceptable securities.
B
If you are willing to sell a stock and wish to receive the option premium you should: A. buy a call. B. sell a call. C. buy a put. D. sell a put. E. either sell a call or buy a put.
B
If you opt to purchase shares of stock on margin rather than with cash, you will: A. decrease your maximum potential rate of return. B. increase your maximum potential rate of return. C. guarantee yourself a profit. D. eliminate any potential profit. E. have equal rates of return regardless of how the purchase is made.
B
Money market instruments issued by a corporation: A. are default-free. B. are less liquid than those issued by the government. C. must be held by the original purchaser until maturity. D. can only be resold to the original issuer. E. are risk-free.
B
Riverside Metals recently issued some debt that had an original maturity of nine months. This debt is best classified as a(n): A. option contract. B. money market instrument. C. fixed-income security. D. derivative security. E. futures contract.
B
Stuart purchased 300 shares of Microsoft stock which he has pledged to his broker as collateral for the loan in his margin account. This process of pledging securities is called: A. margin calling. B. hypothecation. C. leveraging. D. maintaining the margin. E. street securitization.
B
The dividend yield is defined as the annual dividend expressed as a percentage of the: A. average stock price. B. initial stock price. C. ending stock price. D. total annual return. E. capital gain.
B
The price paid to purchase an option contract is called the: A. strike price. B. option premium. C. exercise price. D. future premium. E. current yield.
B
What is the purpose of a margin call? A. to inform you that your margin loan is due and payable B. to demand funds to increase your margin position C. to let you know the amount of funds that are now available for you to borrow D. to advise you that the interest rate on your loan has changed E. to remind you of the upcoming monthly payment due on your margin loan
B
Which one of the following best describes the term "initial margin"? A. Amount of money that must be deposited to open a margin account with a broker B. Amount of cash that must be paid to purchase a security on margin C. Amount of cash that must be paid when a broker issues a margin call D. Amount of money borrowed when a security is purchased E. Total loan amount offered to a customer by a brokerage firm to cover future purchases
B
Which one of the following sentences is correct concerning fixed-income securities? A. The coupon rate on a fixed-income security is equal to the current yield. B. The price of a fixed-income security is inversely related to the current yield. C. Fixed-income securities are default free. D. Fixed-income securities tend to be more liquid than money market securities. E. Fixed-income securities include all debt instruments issued by the U.S. government.
B
Which one of the following statements is correct concerning the dividend yield and the total return? A. The dividend yield can be zero while the total return must be a positive value. B. The total return can be negative but the dividend yield cannot be negative. C. The total return must be greater than the dividend yield. D. The total return plus the capital gains yield is equal to the dividend yield. E. The dividend yield exceeds the total return when a stock increases in value.
B
Which one of the following statements related to common stock is correct? A. Corporations are required to pay annual dividends to its common stockholders. B. Corporations have the right to discontinue paying dividends. C. Corporations pay dividends at the discretion of the firm's president. D. Common stock is a form of corporate debt. E. Common stock has a pre-defined liquidation value.
B
A European put option grants the holder the right to: A. buy the underlying security at a stated price at any time up to and including the expiration date. B. sell the underlying security at the strike price on or before the expiration date. C. sell the underlying asset at the strike price only on the expiration date. D. buy the underlying asset at or below the exercise price on or before the expiration date. E. buy the underlying asset at the exercise price on the expiration date.
C
A call option is an agreement that: A. obligates both the buyer and seller to a future transaction. B. grants the seller the right to buy a security at a predetermined price. C. gives the buyer the right to purchase an asset at some point in the future. D. grants the seller the right, but not the obligation, to sell an asset. E. presets a price but not a time period.
C
A fixed-income security is defined as: A. a debt obligation that pays a fixed rate of return for a one-year period of time. B. common or preferred stock that pays a fixed annual dividend. C. a long-term debt obligation that pays scheduled fixed payments. D. long-term debt issued solely by a federal or state government. E. any security originally issued as either debt or equity that pays a fixed, pre-set payment.
C
Great Lakes Farm agreed this morning to sell General Mills 25,000 bushels of wheat six months from now at a price per bushel of $9.75. This is an example of a: A. call option. B. put option. C. futures contract. D. money market security. E. fixed-income security.
C
If you benefit when a security decreases in value, you have a _____ position in the security. A. long B. margined C. short D. covered E. wrapped
C
Market timing is the: A. placing of an order within the last half-hour of trading for a day. B. period of time between the placement of a short sale and the covering of that sale. C. buying and selling of securities in anticipation of the overall direction of the market. D. staggering of either buy or sell orders to mask the total size of a large transaction. E. placing of trades within the last half-hour prior to the commencement of daily trading.
C
Staci owns 1,000 shares of stock in a margin account. Those shares are most likely held in: A. transit. B. her registered name. C. street name. D. a wrap account. E. a discretionary account.
C
Ted recently inherited a large sum of money that he wants to invest in the stock market. Since he has no investment experience, he has decided that he would like to work with a professional who can explain the market to him and also manage his funds for him. Ted most likely needs the services offered by a(n): A. deep-discount broker. B. discount broker. C. full-service broker. D. online broker. E. cyberbroker.
C
The absolute minimum initial margin requirement is set by the: A. individual investor. B. brokerage firm. C. Federal Reserve. D. Security Investors Protection Corporation. E. Securities and Exchange Commission.
C
The average compound return earned per year over a multi-year period when inflows and outflows are considered is called the: A. totalreturn. B. average capital gains yield. C. dollar-weighted average return. D. arithmetic average return. E. geometric average return.
C
The minimum equity that must be maintained at all times in a margin account is called the: A. initial margin. B. initial equity position. C. maintenance margin. D. call requirement. E. margin call.
C
The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the: A. risk premium. B. deflated rate of return. C. risk-free rate. D. expected rate of return. E. market rate of return.
C
The total dollar return on a share of stock is defined as the: A. change in the prices of the stock over a period of time. B. dividend income divided by the beginning price per share C. Capital gain or loss plus any dividend income D. Change in the stock price dividend by the original stock price E. Annual dividend income received
C
When we refer to the rate of return on an investment, we are generally referring to the: A. capital gains yield. B. effective annual rate of return. C. total percentage return. D. dividend yield. E. annualized dividend yield.
C
Which one of the following statements is correct? A. The standard deviation of the returns on Treasury bills is zero. B. Large-company stocks are historically riskier than small-company stocks. C. The variance is a means of measuring the volatility of returns on an investment. D. A risky asset will always have a higher annual rate of return than a riskless asset. E. There is an indirect relationship between risk and return.
C
You currently have $5,000 in cash in your brokerage account. You decide to spend $8,000 to purchase shares of stock and borrow $3,000 from your broker to do so. Which type of brokerage account do you have? A. Cash B. Wrap C. Margin D. Short E. Asset allocation
C
A contract that grants its buyer the right, but not the obligation, to sell an asset at a specified price is called a: A. futures contract. B. call option. C. preset contract. D. put option. E. primary contract.
D
A financial asset that represents a claim on another financial asset is classified as a _____ asset. A. secondary B. optioned C. contracted D. derivative E. primary
D
An annualized return: A. is less than a holding period return when the holding period is less than one year. B. is expressed as the summation of the capital gains yield and the dividend yield on an investment. C. is expressed as the capital gains yield that would have been realized if an investment had been held for a twelve-month period. D. is computed as (1 + holding period percentage return)^m, where m is the number of holding periods in a year. E. is computed as (1 + holding period percentage return)^m, where m is the number of months in the holding period.
D
Asset allocation is the: A. selection of specific securities within a particular class or industry. B. division of a purchase price between a cash payment and a margin loan. C. division of a portfolio into short and long positions. D. distribution of investment funds among various broad asset classes. E. dividing of assets into those that are hypothecated and those that are not.
D
Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could: A. decrease the investment in stocks and increase the investment in bonds. B. replace the corporate bonds with intermediate-term government bonds. C. replace the corporate bonds with Treasury bills. D. increase the standard deviation of the portfolio. E. reduce the expected volatility of the portfolio.
D
Capital gains are included in the return on an investment: A. when either the investment is sold or the investment has been owned for at least one year. B. only if the investment is sold and the capital gain is realized. C. whenever dividends are paid. D. whether or not the investment is sold. E. only if the investment incurs a loss in value or is sold.
D
If you ignore a margin call, your broker: A. will seize all the assets in your account. B. will close your account. C. may place a short sale on your behalf to cover the amount of the call. D. may sell some of your securities to repay the margin loan. E. will increase both your margin loan and the rate of interest on that loan.
D
If you multiply the number of shares of outstanding stock for a firm by the price per share, you are computing the firm's: A. equity ratio. B. total book value. C. market share. D. market capitalization. E. time value.
D
Options expire on the _____ of the expiration month. A. last trading day B. 3rd Friday C. last Friday D. Saturday following the 3rd Friday E. Saturday following the last Friday
D
The capital gains yield is equal to: A. (Pt - Pt + 1 + Dt + 1)/Pt + 1. B. (Pt + 1 - Pt + Dt)/Pt. C. Dt + 1/Pt. D. (Pt + 1 - Pt)/Pt. E. (Pt + 1 - Pt)/Pt + 1.
D
When the total return on an investment is expressed on a per-year basis it is called the: A. capital gains yield. B. dividend yield. C. holding period return. D. effective annual return. E. initial return.
D
Which one of the following is considered the best method of comparing the returns on various- sized investments? A. total dollar return B. real dollar return C. absolute dollar return D. percentage return E. variance return
D
A brokerage account in which purchases can be made using credit is referred to as which type of account? A. clearing B. funds available C. cash D. call E. margin
E
A futures contract is an agreement: A. that obligates a corporation to issue additional securities at a specified date in the future. B. to exchange financial assets on a specified date in the future with the price determined on that date. C. to deliver goods today in exchange for an agreed upon payment to be paid on a specified date in the future. D. to exchange a specified quantity of goods on a specified date in the future at the current market price. E. to exchange goods on a specified date in the future at a price that is agreed upon today.
E
An American call option grants the holder the right to: A. sell the underlying security at the strike price on or before the expiration date. B. sell the underlying asset at the strike price only on the expiration date. C. buy the underlying asset at or below the exercise price on or before the expiration date. D. buy the underlying asset at the exercise price only on the expiration date. E. buy the underlying security at a stated price on or before the expiration date.
E
An agreement that grants the owner the right, but not the obligation, to buy or sell a specific asset at a specified price during a specified time period is called a(n) _____ contract. A. futures B. obligatory C. quoted D. fixed E. option
E
Brooke has decided to invest 55 percent of her money in large company stocks, 40 percent in small company stocks, and 5 percent in cash. This is a(n) _____ decision. A. market timing B. security selection C. tax-advantaged D. active strategy E. asset allocation
E
Harvest Fields sold ten September futures contracts on oats. Harvest Fields will: A. pay for the oats in September. B. take delivery of the oats in September. C. pay for the oats now and take delivery in September. D. receive payment now and deliver in September. E. both receive payment and deliver in September.
E
Preferred stock: A. is a type of corporate debt. B. is treated like debt for tax purposes. C. is listed in the liabilities section of a balance sheet. D. has a stated dividend but no stated liquidation value. E. is treated like equity for both tax and accounting purposes.
E
The SIPC: A. guarantees investors against any loss related to an investment account held at a brokerage firm. B. guarantees cash balances held in brokerage accounts up to $500,000. C. is an agency of the federal government. D. protects private brokerage firms from bankruptcy. E. protects investors from missing assets when a brokerage firm closes.
E
The additional return earned for accepting risk is called the: A. inflated return. B. capital gains yield. C. real return. D. riskless rate. E. risk premium.
E
The amount of common stock held in short positions is referred to as the short: A. margin. B. shares. C. proceeds. D. sale. E. interest.
E
The risk-free rate is: A. another term for the dividend yield. B. defined as the increase in the value of a share of stock over time. C. the rate of return earned on an investment in a firm that you personally own. D. defined as the total of the capital gains yield plus the dividend yield. E. the rate of return on a riskless investment.
E
This morning, Josh sold 800 shares of stock that he did not own. This sale is referred to as a: A. margin sale. B. long position. C. wrap trade. D. hypothecated sale. E. short sale.
E
To be considered liquid, a security must: A. be held in a cash account. B. pay dividends. C. be able to be sold on short notice. D. be held for less than one year. E. be able to be sold quickly with little, if any, price concession.
E
When a put option is exercised, the: A. seller of the option receives the strike price. B. seller of the option receives the option premium. C. buyer of the option sells the underlying asset and receives the option premium. D. buyer of the option pays the option premium and receives the underlying asset. E. seller of the option must buy the underlying asset and pay the strike price.
E
Which of the following are generally included in a standardized futures contract? I. delivery date II. quantity to be delivered III. specific item to be delivered IV. delivery location A. I and II only B. I, II, and III only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV
E
Which one of the following is the best definition of a money market instrument? A. corporate debt that matures in 90 days or less B. bank savings account C. investment issued by a financial institution that matures in 30 days or less D. investment issued by a financial institution that matures in one year or less E. debt issued by the government or a corporation that matures in one year or less
E
Which one of the following should be used to compare the overall performance of three different investments? A. holding period dollar return B. capital gains yield C. dividend yield D. holding period percentage return E. effective annual return
E
Which one of the following statements is correct? A. Most brokerage agreements require disputes be settled in a court of law. B. Arbitration is a formal legal process for settling disputes related to brokerage accounts. C. Churning is the preferred method of providing deep-discount brokerage services. D. Discount brokers only provide order execution services. E. Full service brokers frequently provide financial planning services to clients.
E
You will earn a profit as the owner of a call option if the price of the underlying asset: A. decreases. B. remains constant or decreases. C. remains constant. D. remains constant or increases. E. increases.
E