Equity Investment Questions

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Behavioral finance theory suggests that investors tend to: A)mimic the actions of better-informed investors. B)underestimate their ability to analyze security information. C)be more risk averse with respect to gains than with respect to losses.

A

The target market for a security market index is best described as the: A)market or segment the index is designed to measure. B)consumers who will purchase the licensing rights for the index. C)securities that are included in the index.

A

Which of the following statements about indexes is CORRECT? A)A price-weighted index assumes an equal number of shares (one of each stock) represented in the index. B)An equal weighted index assumes a proportionate market value investment in each company in the index. C)A market weighted series must adjust the denominator to reflect stock splits in the sample over time.

A

With which of the following types of equity shares does the investor typically have the greatest voting power? A)Common shares. B)Participating preference shares. C)Unsponsored depository receipts.

A

Which of the following limit orders is least likely to be filled? A)Behind-the-market limit buy order. B)Inside-the-market limit sell order. C)Aggressively priced limit buy order.

A "Behind the market" refers to a buy order with a limit price less than the best bid, or a sell order with a limit price higher than the best ask. A limit order that is behind the market (i.e., an order to buy for less than the market price or sell for more than the market price) will not be filled unless the market price moves to the order's limit price. "Inside the market" refers to orders with limit prices between the best bid and best ask. "Aggressively priced" refers to a buy order with limit prices higher than the best ask or a sell order with a limit price lower than the best bid. Aggressively priced limit orders are most likely to be filled immediately.

An investor purchases 100 shares at $75 per share with an initial margin of 50%. Assume there is no interest on the call loan and no transactions fees. If the stock price rises to $112.50, the rate of return to the investor is: A)100%. B)200%. C)50%.

A $75/share × 100 shares = $7,500. 50% margin means investor only pays half of the $7,500 in cash, or $3,750, and borrows the remaining $3,750. Rate of return = (market value - initial investment - margin loan repayment) / initial equity = ($11,250 - $3,750 - $3,750) / $3,750 = 100%.

Mark Ritchie purchased, on margin, 200 shares of TMX Corp. stock at a price of $35 per share. The margin requirement was 50%. The stock price has increased to $42 per share. What is Ritchie's return on investment before commissions and interest if he decides to sell his TMX holdings now? A)20%. B)10%. C)40%.

A 200 * 35 = 7,000 7,000* .50 = 3,500 200*42 = 8,400 sell now 8,400-3500 = 4,900 4,900/3,500 - 1 = 40%

An electronic crossing network is best described as: A)an order-driven market. B)a quote-driven market. C)a price-driven market

A A crossing network is an example of an order-driven market. Orders are batched together and crossed (matched) at specific times during the trading day at prices based on those of another exchange. Price-driven markets and quote-driven markets are other terms for dealer or over-the-counter markets.

Which of the following is least likely required when defining a security market index? The: A)number of securities in the index. B)target market the index will represent. C)weighting method for the index.

A A market index does not necessarily have to consist of a fixed number of securities. For example, some indices are defined to include all the stocks that trade on a certain exchange, a number that can vary over time.

Which of the following statements about a security market index is most accurate? A)An index may reflect dividends paid by its constituent securities. B)If an index increases by 5% in one year, the market return for the year is 5%. C)An index must use actual prices from market transactions.

A An index that is designed to measure total return will include dividends in its calculation. Some security market indices use estimated prices when actual prices are not available. The percent change in a security market index is the return on a portfolio of its constituent securities. Whether this represents an estimate of the market return depends on the nature and purpose of the index (for example, a security market index may be designed to represent a particular industry or asset class).

According to typical commercial industry classification systems, which of the following industries is classified in the consumer discretionary sector? A)Apparel. B)Tobacco. C)Internet services.

A Apparel is classified as consumer discretionary, tobacco as consumer staples, and internet services as technology

Ken Miller, CFA, wants to compare the returns on government agency bonds to the returns on corporate bonds. Peg Egan, CFA, wants to compare the returns on high yield bonds in developed markets to the returns on investment grade bonds in emerging markets. Which of these analysts is most likely able to use bond indexes for their analysis? A)Both of these analysts. B)Neither of these analysts. C)Only one of these analysts.

A Because of the wide universe of bonds that trade in financial markets, indexes are available (or can be constructed) based on virtually any feature or classification of bonds.

For a non-dividend paying firm, an increase in net income must increase: A)book value of equity. B)both book value and market value of equity. C)market value of equity.

A Book value of equity is the company's assets minus its liabilities. For a non-dividend paying firm, positive net income will increase the book value of equity. An increase in book value of equity may or may not increase the market value of equity. An increase in net income that does not meet investors' prior expectations may decrease the market value of equity.

Peg Fisk, CFA, states that two of the objectives of market regulation which CFA Institute attempts to address are minimum standards of competence among investment professionals and ease of performance evaluation for investors. Fisk is accurate with regard to: A)both of these objectives. B)neither of these objectives. C)only one of these objectives

A CFA Institute attempts to address both of these objectives of market regulation. The CFA Program is part of the effort to encourage minimum standards of competency among finance professionals. Global Investment Performance Standards are part of the effort to make performance evaluation easier for investors.

Commercial index providers typically classify companies by: A)principal business activity. B)sensitivity to business cycles. C)statistical grouping.

A Commercial providers such as Standard and Poor's and MSCI Barra classify companies according to their principal business activity and the products and services they provide

Cheryl Brower and Todd Sutter each own 100 shares of Hills Company stock. In a recent proxy vote, Brower had 100 votes but Sutter had 10 votes. The most likely reason for this difference in voting rights is that: A)Brower and Sutter own different classes of stock. B)Brower is a director of Hills Company. C)Hills Company uses a statutory voting method.

A Companies may issue classes of stock (e.g., Class A and Class B shares) that differ in aspects such as voting rights, dividends, or priority of claims in liquidation.

Which of the following statements about securities exchanges is most accurate? A)Call markets are markets in which the stock is only traded at specific times. B)Continuous markets are markets where trades occur 24 hours per day. C)Setting a negotiated price to clear the market is a method used to set the closing price in major continuous markets.

A Continuous markets are markets where trades occur at any time the market is open (i.e., they do not need to be open 24 hours per day). Setting one negotiated price is a method used in major continuous markets to set the opening price.

Equity securities are least likely issued to finance: A)inventories. B)equipment. C)research and development.

A Equity securities are typically issued to finance a firm's long-lived assets, such as equipment, and long-term projects such as research and development.

Austin Bruno, CFA, places a fill or kill, limit buy order at 92 for a stock. Bruno's order specifies: A)validity and execution instructions. B)execution and clearing instructions. C)clearing and validity instructions

A Fill or kill is a validity instruction as it indicates when the order can be filled (i.e. immediately or cancel the order). A limit buy order is an execution instruction as it indicates how the order should be filled (e.g. buy at $92 or less). Clearing instructions indicate how to settle the trade (i.e., how and when to transfer the cash and the security).

Shares in a publicly traded company that owns gold mines and mining operations are considered: A)financial assets. B)physical assets. C)real assets.

A Financial assets, such as shares of stock in a company, are claims against physical or real assets.

A firm is most likely to have pricing power if it operates in an industry characterized by: A)high concentration, undercapacity, and high market share stability. B)high concentration, undercapacity, and low market share stability. C)low concentration, overcapacity, and high market share stability

A Firms in highly concentrated industries are more likely to have pricing power than firms in fragmented industries. Firms in industries with tight capacity constraints are more likely to have pricing power than firms in industries with excess capacity. High market share stability is indicative of pricing power because competition is likely less intensive.

The type of securities market index that has a bias toward value stocks is an index with weights based on: A)earnings. B)security prices. C)market capitalization.

A Fundamental-weighted indexes, such as those weighted on earnings, dividends, or book values, tend to weight value stocks more heavily than growth stocks.

Under the efficient market hypothesis (EMH), the major effort of the portfolio manager should be to: A)achieve complete diversification of the portfolio. B)follow a strict buy and hold strategy. C)minimize systematic risk in the portfolio.

A In an efficient market, portfolio managers must create and maintain the appropriate mix of assets to meet their client's needs. The portfolio should be diversified to eliminate unsystematic risk. The appropriate systematic risk will depend on the clients risk tolerance and return requirement. Over time the needs of the client and environment will justify changes to the portfolio. The manager should also try to minimize transaction costs and at least try to match the performance of a benchmark.

A)The gains to be earned by information trading can be less than the transaction costs the trading would entail. B)Information is always quickly disseminated and fully embedded in a security's prices. C)There are no limitations to fully efficient markets because the trading actions of fundamental and technical analysts are continuously keeping prices at their intrinsic value.

A Market prices that are not precisely efficient can persist if the gains to be made by information trading are less than the transaction costs such trading would entail.

Which of the following industries is most likely to operate in a fragmented market? A)Oil services. B)Confections. C)Pharmaceuticals.

A Most areas of the oil services industry are characterized by many small competitors. The confections and pharmaceutical industries each have a small number of very large firms.

Compared to publicly traded firms, privately held firms have which of the following characteristics? A)More limited financial disclosure. B)Higher reporting costs. C)Less ability to focus on long-term prospects.

A Private firms have fewer financial disclosure requirements, and therefore lower reporting costs, because they are not listed on an exchange.

Which of the following statements regarding secondary markets is least accurate? Secondary markets are important because they provide: A)regulators with information about market participants. B)investors with liquidity. C)firms with greater access to external capital.

A Secondary markets are important because they provide liquidity and continuous information to investors. The liquidity of the secondary markets adds value to both the investor and firm because more investors are willing to buy issues in the primary market, when they know these issues will later become liquid in the secondary market. Therefore, the secondary market makes it easier for firms to raise external capital.

Johnson Company shuts down and is liquidated. Bob Smith owns 100 common shares of Johnson, but has a lower priority of claims than Al Jones, who also owns 100 common shares. Smith most likely owns: A)Class B shares. B)non-cumulative shares. C)non-participating shares.

A Some firms have different classes of common stock (e.g., Class A and Class B shares). These classes may be distinguished by factors such as voting rights and priority in the event of liquidation. Participating and non-participating, cumulative and non-cumulative refer to characteristics of preferred stock

Which of the following option positions is said to be a long position? A)Buyer of a put option. B)Writer of a call option. C)Writer of a put option.

A The buyer of an option (either a call or put) is said to be long the option and the writer of an option is said to be short the option. Note that with put options, the long (put option holder) benefits when the price of the underlying asset decreases, while the short (put option writer) benefits when the price of the underlying asset increases. We say that a put buyer is long the option but has short exposure to the underlying asset price.

Which of the following industries is best described as non-cyclical and defensive? A)Consumer staples. B)Technology. C)Energy.

A The consumer staples industry is best classified as non-cyclical and defensive. Energy and technology are best classified as cyclical industries.

Declining prices that result from the development of substitute products are most likely to characterize an industry in the: A)decline stage. B)mature stage. C)shakeout stage.

A The decline stage of the industry life cycle is often characterized by declining prices as substitute products or global competition emerge, or as a result of decreasing demand due to societal changes.

A securities exchange where traders buy and sell long-term government bonds from and to other traders would best be described as part of the: A)capital market. B)money market. C)primary market.

A The exchange can be described as part of the secondary capital markets. A security is first issued in the primary market, and then it trades among investors in the secondary market. The money market refers to the market for short-term debt instruments (usually with maturities of less than one year) such as T-bills.

An analyst using the capital asset pricing model is most likely to use a security market index as a proxy for: A)the market return. B)beta. C)the risk-free rate.

A The return on a security market index can be used as a proxy for the market return in a pricing model such as the CAPM.

Over the past few years, the companies in an industry have experienced positive but decreasing profitability and growth rates. The companies have begun to compete intensely with each other and customers switch frequently among brands. This industry's life-cycle stage is most accurately described as: A)shakeout. B)growth. C)maturity.

A The shakeout industry life-cycle stage is characterized by slowing (but still positive) growth, intense competition, and declining profitability, as demand begins to approach market saturation. In contrast, the decline industry stage is characterized by negative growth. The lack of brand loyalty among customers suggests the industry has not yet reached the mature stage.

A short seller: A)does not receive the dividends. B)loses if the price of the stock sold short decreases. C)often also places a stop loss sell order.

A The short seller pays all dividends to the lender, loses if stock prices rise, and is required to post a margin account. A short seller often places a stop buy order to protect the short sale position from a rising market.

A trader enters a limit order to buy 10,000 shares as a day order. The "day order" instruction is most accurately referred to as: A)a validity instruction. B)a clearing instruction. C)an execution instruction.

A Validity instructions specify when a trade is to be executed. Specification of a day order (as opposed to a good-til-canceled order) is a validity instruction.

Auto manufacturers and home builders would most likely be grouped together in an industry classification system based on: A)dividend yields. B)sensitivity to business cycles. C)type of business activity.

B

Commercial industry classification systems such as the Global Industry Classification Standard (GICS) typically classify firms according to their: A)correlations of historical returns. B)principal business activities. C)sensitivity to business cycles.

B

If stock markets are semistrong-form efficient, a portfolio manager is least likely to create value for investors by: A)allocating invested funds among asset classes. B)monitoring clients' needs and circumstances. C)analyzing financial statements to select undervalued stocks.

B

Which of the following equity indexes is an example of a market capitalization weighted index? A)Dow Jones Industrial Average. B)MSCI All Country World Index. C)Nikkei Stock Average.

B

Which of the following sets of indexes are price-weighted? A)Dow Jones World Stock Index and Russell Index. B)Dow Jones Industrial Average and Nikkei Dow Jones Stock Market Average. C)S&P 500 Index and Dow Jones Industrial Average.

B

Which of the following statements regarding primary and secondary markets is least accurate? A)New issues of government securities can be sold on the primary market. B)Prevailing market prices are determined by primary market transactions and are used in pricing new issues. C)Secondary market transactions occur between two investors and do not involve the firm that originally issued the security.

B

he industry experience curve illustrates the relationship between: A)company age and profitability. B)cumulative output and cost per unit. C)productivity and average years of employment.

B

Lynne Hampton purchased 100 shares of $75 stock on margin. The margin requirement set by the Federal Reserve Board was 40%, but Hampton's brokerage firm requires a total margin of 50%. Currently the stock is selling at $62 per share. What is Hampton's return on investment before commission and interest if she sells the stock now? A)-17%. B)-35%. C)-40%.

B 100*75=$7,500 $7,500 * .5 = $3,750 100*62=$6,200 if sell then 6,200-3,750=2,450 then 2,450/3750 - 1 = -.35%

Which of the following types of industries is typically characterized by stable performance during both expansions and contractions of the business cycle? A)Cyclical. B)Defensive. C)Growth.

B A defensive industry is typically characterized by stable performance during both expansions and contractions of the business cycle.

The Top Banking Index contains stocks in the finance industry that represent more than 90% of the total market capitalization for the finance industry. The index is best described as a: A)broad market index. B)sector index. C)style index.

B A sector index measures the returns for an industry sector such as financials. Style indexes measure the returns to strategies that are differentiated by market capitalization and by value or growth. A broad market index typically consists of constituent securities that represent 90% or more of the total market capitalization for a given market.

Which of the following statements best describes the investment assumption used to calculate an equal weighted price indicator series? A)A proportionate market value investment is made for each stock in the index. B)An equal dollar investment is made in each stock in the index. C)An equal number of shares of each stock are used in the index.

B An equal weighted price indicator series assumes that an equal dollar investment is made in each stock in the index. All stocks carry equal weight regardless of their price or market value.

Compared to a value-weighted index, the type of index most likely to have a value tilt is a(n): A)equal-weighted index. B)fundamental-weighted index. C)price-weighted index.

B An index based on company fundamentals, for example on earnings or book value, will assign more weight to stocks with low P/E or price-to-book ratios compared to a value-weighted index. This is similar to managing an equity portfolio using a value strategy.

The most appropriate benchmark for measuring the relative performance of an investment manager is: A)a broad market index. B)an index that closely matches the manager's investment approach. C)the risk-adjusted return on the market portfolio

B An index chosen as a benchmark for an investment manager's performance should include securities in the manager's investment universe. For example, the performance of an emerging market bond fund manager should be measured relative to the performance of an emerging market bond index.

The implication of efficient capital markets and a lack of superior analysts have led to the introduction of: A)balanced funds. B)index funds. C)futures options.

B An index fund is designed to duplicate the composition of a specific index series or market segment. There is a strong argument suggesting that portfolio managers cannot beat the market after fees, therefore an index fund should be used to try to match the market.

If an investor buys 100 shares of a $50 stock on margin when the initial margin requirement is 40%, how much money must she borrow from her broker? A)$2,000. B)$3,000. C)$4,000

B An initial margin requirement of 40% would mean that the investor must put up 40% of the funds and brokerage firm may lend the 60% balance. Therefore, for this example (100 shares) * ($50) = $5,000 total cost. $5,000 * 0.60 = $3,000.

With respect to a well-functioning securities market, a market that exhibits operational efficiency will have: A)price continuity. B)low transaction costs. C)rapid price reactions to new information.

B An operationally efficient market is a market in which the cost of each transaction is minimal. Informational efficiency means prices in the market reflect all information currently available to participants. Price continuity means that prices do not adjust much from one transaction to the next unless new information about firm value becomes available.

When classifying companies into peer groups for analysis, an analyst should: A)disregard industry classifications from commercial providers. B)examine firms' annual reports to see if they identify competitors. C)include each company in only one peer group.

B Annual reports are a good source of information when identifying peer groups because companies may identify their key competitors. It is often appropriate to include a company in more than one peer group. An analyst forming peer groups can use commercially available industry classification systems to identify which companies are in the same industry.

Which of the following conditions is most likely necessary for capital to be allocated to its most valuable uses? A)Financial markets are frictionless (i.e., free of taxes or transactions costs). B)Investors are well informed about the risk and return of various investments. C)There are no barriers to the flow of complete information to the financial markets.

B Capital will flow to its most valuable uses if markets function well and investors are well informed about the risk and return characteristics of various investments. Allocation of capital to its most valuable uses does not require that all investors have complete information or that financial markets are frictionless.

An equity security that requires the firm to pay any scheduled dividends that have been missed, before paying any dividends to common equity holders, is a: A)participating preference share. B)cumulative preference share. C)convertible preference share.

B Cumulative preference shares (cumulative preferred stock) must receive any dividends in arrears before the firm may pay any dividends to common shareholders.

Assume a stock index consists of many firms who have recently split their stock. Which of the following weighting schemes will see a bias due to the impact of stock splits? A)Market value-weighted series. B)Price-weighted series. C)Unweighted price series.

B Firms that split their stock price will have the identical weight before and after the split in both the unweighted and the market value-weighted series. However, in the price-weighted series, large successful firms will lose weight within the index due to simply splitting their stock. This creates a downward bias in a price-weighted series. Standard and Poor's 500 Index is a market value-weighted index.

Evelyn Stram, CFA, places a good-till-cancelled limit buy order at 86 for a stock. Stram's order specifies: A)clearing and validity instructions. B)validity and execution instructions. C)execution and clearing instructions.

B Good-till-cancelled is a validity instruction, which indicates when an order may be filled. Execution instructions include limit orders and market orders, as well as instructions regarding trade size and visibility. A clearing instruction indicates how to arrange final settlement of the trade.

In a market-capitalization weighted index firms with: A)larger market caps have lesser impacts on the index. B)greater market caps have greater impacts on the index. C)higher stock prices have greater impacts on the index.

B In a value weighted index, firms with greater market caps have a greater impact on the index than firms with lower market caps. A higher stock price does not necessarily mean a higher market cap.

Which of the following statements about securities exchanges is NOT correct? A)In call markets, there is only one negotiated price set to clear the market for a given stock. B)In continuous markets, prices are set only by the auction process. C)Securities exchanges may be structured as call markets or continuous markets.

B In continuous markets, the price is set by either the auction process or by dealer bid-ask quotes.

Which of the following statements about the industry life cycle is most accurate? A)Industry growth rates are highest in the embryonic stage. B)The growth stage is typically characterized by decreasing prices. C)The mature stage is followed by a shakeout stage and a decline stage.

B Prices tend to decrease in the growth stage as firms begin to realize economies of scale in production. The stages of the industry life cycle, in order, are embryonic, growth, shakeout, mature, and decline. Industry growth is slow during the embryonic stage as firms develop products and attempt to gain customer acceptance.

Securities that can be sold back to the issuing firm at a specific price are best described as: A)convertible. B)putable. C)callable.

B Putable securities give the investor the right to sell the securities back to the firm at a predetermined price. Callable securities give the issuer the right to buy the securities back at a predetermined price. Convertible securities give the investor the right to exchange the securities for a predetermined number of the firm's common shares.

In one year, a security market index has the following quarterly price returns: First quarter = 3% Second quarter = 4% Third quarter = -2% Fourth quarter = 5% The price return for the year is closest to: A)10.00% B)10.2%. C)9.9%.

B Return for the year = (1.03)(1.04)(0.98)(1.05) − 1 = 10.23%.

An investor can profit from a stock price decline by: A)placing a stop buy order. B)selling short. C)purchasing a call option.

B Short selling provides a way for an investor to profit from a stock price decline. In order to sell short, the broker borrows the security and then sells it for the short seller. Later, if the investor can replace the borrowed securities by repurchasing them at a lower price, then the investor will profit from the transaction.

Which of the following statements about switching costs is most accurate? A)Low switching costs contribute to market share stability. B)Switching costs include the time needed to learn to use a competitor's product. C)Switching costs tend to be lower for specialized products.

B Switching costs include the time and expense of learning to use a competitor's product and tend to be higher for specialized or differentiated products. High switching costs contribute to market share stability and pricing power.

Commodity price indexes are based on the prices of: A)commodities. B)futures contracts. C)real assets such as grains, oil, and precious metals.

B The constituent securities of commodity price indexes are commodity futures contracts. As a result, the return on a commodity index can be different than the returns from holding the constituent commodities themselves.

The experience curve, which illustrates the cost per unit relative to output: A)slopes upward. B)slopes downward. C)slopes upward in the early years and downward in the later years.

B The experience curve, which shows the cost per unit relative to output, slopes downward because of increases in productivity and economies of scale, especially in industries with high fixed costs.

The first step in developing a security market index is choosing the index's: A)constituent securities. B)target market. C)weighting method.

B The first decision that must be made is choosing the target market the index will represent. Only then can the index provider determine which constituent securities should be included and which weighting scheme is most appropriate to measure the target market's returns.

The main functions of the financial system most likely include: A)allocating capital to its most productive uses and determining the supply of money. B)determining equilibrium interest rates and allocating capital to its most productive uses. C)determining the supply of money and determining equilibrium interest rates.

B The main functions of the financial system are to allow individuals and organizations to save, borrow, raise capital, and manage risks; to determine equilibrium rates of return that equate the amounts of lending and borrowing; and to allocate capital to its most productive uses. The money supply is typically controlled by countries' central banks.

An analyst with Guffman Investments has developed a stock selection model based on earnings announcements made by companies with high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk-adjusted returns using this strategy, which form of the efficient market hypothesis has been violated? A)Strong, semistrong, and weak forms. B)Semistrong and strong forms only. C)Weak form only.

B The semistrong form of EMH states that security prices rapidly adjust to reflect all publicly available information. If the analyst can use his model, which is based on publicly available information, to earn above average returns, the semistrong form of the EMH has been violated. If the semistrong form of EMH is violated, the strong form of EMH is also violated.

The strong-form efficient market hypothesis (EMH) asserts that stock prices fully reflect which of the following types of information? A)Market. B)Public and private. C)Public, private, and future

B The strong-form EMH assumes that stock prices fully reflect all information from public and private sources.

Which of the following forms of the EMH assumes that no group of investors has monopolistic access to relevant information? A)Weak-form. B)Strong-form. C)Both weak and semistrong form.

B The strong-form EMH assumes that stock prices fully reflect all information from public and private sources. In addition, no group of investors has monopolistic access to information relevant to the formation of prices.

The value of a total return index: A)may increase at either a faster or slower rate than the value of a price return index with the same constituent securities and weights. B)can be calculated by multiplying the beginning value by the geometrically linked series of periodic total returns. C)is determined by the price changes of the securities that constitute the index.

B The value of a total return index can be calculated by multiplying the beginning value by the geometrically linked series of index total returns. The value of a total return index includes both the price changes of the securities that constitute the index and any cash flows from the securities (dividends, interest, and other distributions). A total return index cannot increase at a slower rate (or decrease at a faster rate) than an otherwise identical price return index because cash flows from the securities cannot be negative.

Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50% and the maintenance margin is 25%. CSC stock price has fallen dramatically in recent months and it closed today with a sharp decline bringing the closing price to $40 per share. Will Jensen receive a margin call? A)No, he meets the minimum initial margin requirement. B)No, he meets the minimum maintenance margin requirement. C)Yes, he does not meet the minimum maintenance margin requirement.

B Total original value held by Jensen is 400 × $60 = $24,000. Amount of equity is 50% ($24,000) = $12,000. Current total value is 400 × $40 = $16,000. So Jensen's equity is $16,000 - $12,000 = $4,000 which is 4,000/16,000 = 25% of the total market value.

Which type of equity market index is most likely to be adjusted for free float? A)Price weighted. B)Value weighted. C)Fundamental weighted.

B Value-weighted (market-capitalization weighted) index weights may be based on the total value of shares available for investment (the market float) rather than on all the outstanding shares of a firm.

When analyzing an industry characterized by increasing book values of equity, return on equity for a period is most appropriately calculated based on: A)beginning book value. B)average book value. C)ending book value.

B When book values are not stable, analysts should calculate ROE based on the average book value for the period. When book values are more stable, beginning book value is appropriate.

Financial intermediaries that issue securities which represent interests in a pool of similar financial assets are best characterized as: A)arbitrageurs. B)block brokers. C)securitizers.

C

High return on invested capital and high pricing power are most likely to be associated with an industry that has: A)low barriers to entry. B)high capacity. C)high concentration

C

An investor purchases 200 shares of Rubble, Inc. on margin. The shares are trading at $40. Initial and maintenance margins are 50% and 25%. If the company pays a dividend of $0.75 and the investor sells the stock at year-end for $50 per share, the return on the investment would be closest to: A)15.75% B)39.55% C)53.75%

C .75 * 200 = 150 dividend income (50)(200) - (40)(200) +150 = 2,150 2,150/4,000 = 53.75%

An investor purchased 725 shares of stock at $40 per share and posted initial margin of 60%. He subsequently sold the shares at $50 per share. Based only on this information, the investor's holding period return is closest to: A)20%. B)25%. C)40%.

C 50-40/(40*.6) = 41.67

Which type of security market index provides a measure of a market's overall performance and usually contains a significant portion of the market's total value? A)Sector indexes. B)Style indexes. C)Broad market indexes.

C A broad market index typically consists of securities that represent 90% or more of the total market capitalization for a given market. The object of a broad market index is to provide a measure for the performance of the total market. A sector index measures the returns for an industry sector such as financials. Style indexes measure the returns to strategies that are differentiated by market capitalization and by value or growth.

Which of the following orders is said to be "behind the market"? A)Limit sell order at 38 when the best ask is 39. B)Market sell order when the best bid is 38 and the best ask is 39. C)Limit buy order at 38 when the best bid is 39.

C A limit buy order is behind the market if its limit price is below the best bid. A limit sell order is behind the market if its limit price is above the best ask. Market orders are never said to be behind the market.

Which of the following statements least likely describes the role of a portfolio manager in perfectly efficient markets? Portfolio managers should: A)construct a portfolio that includes financial and real assets. B)construct diversified portfolios that include international securities to eliminate unsystematic risk. C)quantify client's risk tolerance, communicate portfolio policies and strategies, and maintain a strict buy and hold policy avoiding any changes in the portfolio to minimize transaction costs.

C A portfolio manager should quantify each client's risk tolerance and communicate portfolio policies and strategies. However, portfolio managers should monitor client's needs and changing circumstances and make appropriate changes to the portfolio. Adhering to a strict buy and hold policy would not be in the client's best interest. Portfolios need to be rebalanced and changed to meet client's changing needs.

An order placed to protect a short position is called a: A)protective call. B)stop loss sell. C)stop loss buy.

C A short position profits from declines in stock price and experiences losses as the price rises. A stop loss buy is a limit order that is placed above the market price. When the stock price reaches the stop price, the limit order is executed curtailing further loses

An efficient capital market: A)does not fully reflect all of the information currently available about a given security, including risk. B)fully reflects all of the information currently available about a given security, excluding risk. C)fully reflects all of the information currently available about a given security, including risk.

C An efficient capital market fully reflects all of the information currently available about a given security, including risk.

Starr Company is an asset management firm. Thomas Company is a manufacturer of apparel. Assuming these firms are representative of their industry groups, how are they best classified with regard to their sensitivity to the business cycle? A) both non cyclical B) cyclical and non cyclical C) both cyclical

C Asset management firms are classified in the financial services industry group. Apparel manufacturers are classified in the consumer discretionary industry group. Financial services and consumer discretionary are cyclical industry groups.

A conglomerate is in the following lines of business, with segment revenue as a percentage of total revenue: 30% banking, 30% automobiles, 25% apparel, and 15% heavy machinery. Based on the Global Industry Classification Standard, the sector classification for this company is most likely: A)industrials. B)financial services. C)consumer discretionary.

C Automobiles and apparel are classified as consumer discretionary; banking is classified as financial services; and heavy machinery is classified as industrials. Based on revenues, a majority of the firm's sales (55%) are derived from the consumer discretionary sector.

ther things equal, preference shares have the most risk for the investor when they are: A)putable and cumulative. B)non-callable and non-cumulative. C)callable and non-cumulative.

C Callable shares have more risk than otherwise equivalent non-callable shares. Putable shares have less risk than otherwise equivalent non-putable shares. Cumulative preference shares have less risk than otherwise equivalent non-cumulative preference shares.

Industry analysis is most likely to provide an analyst with insight about a company's : A)competitive strategy. B)financial performance. C)pricing power.

C Industry analysis provides a framework for an analyst to understand a firm in relation to its competitive environment, which determines how much pricing power a firm has. Competitive strategy and financial performance are aspects of company analysis

An objective of financial market regulation is to: A)ensure that inside information is made public in a timely manner. B)prevent uninformed investors from participating in financial markets. C)reduce information gathering costs by requiring common financial reporting standards.

C One of the objectives of market regulation is to require firms to report their financial performance according to a single set of standards, such as those of the IASB or FASB, thereby reducing market participants' cost of gathering information. Market regulation is not designed to prevent uninformed investors from trading, but to protect unsophisticated investors and thereby preserve trust in the financial markets. An objective of market regulation is to prevent those with non-public information from profiting at the expense of other investors, but not necessarily to make all inside information public.

Which of the following statements about selling a stock short is least likely accurate? A)The seller must return the securities at the request of the lender. B)The seller must inform their broker that the order is a short sale before completing the transaction. C)The short seller may withdraw the proceeds of the short sale.

C Proceeds from the short sale must remain in the brokerage account along with the required margin deposit.

Common equity share types ranked from least risky to most risky are: A)callable, putable, option-free. B)option-free, putable, callable. C)putable, option-free, callable.

C Putable shares are the least risky because the investor can sell the shares back to the issuer at a predetermined price. Callable shares are the most risky because the issuer can buy the securities back at a predetermined price, which limits the upside for the investor.

The prospectus for the Horizon Fund states that it invests only in real assets. Which of the following would the Horizon Fund most likely include in its portfolio? A)Holdings of foreign currencies. B)Common stock of a technology company. C)An investment in an apartment complex.

C Real assets are assets with a physical presence such as real estate, equipment, and commodities. Financial assets include stocks, bonds, derivatives, and currencies. An investment in an apartment complex is a real estate investment and therefore would be considered a real asset.

A market's efficiency is most likely to negatively affected by: A)substantial analyst coverage of the exchange listed companies B)a high amount of trading activity. C)a ban on short selling.

C Research supports the conclusion that short selling helps to prevent market prices from becoming overvalued, while limiting short selling has the opposite effect. More analyst coverage and more liquidity contribute to market efficiency.

An investor purchases stock on 25% initial margin, posting $10 of the original stock price of $40 as equity. The position has a required maintenance margin of 20%. The investor later sells the stock for $45. Ignoring transaction costs and margin loan interest, which of the following statements is most accurate? A)Leverage ratio is 3:1. B)Margin call price is $36. C)Return on investment is 50%.

C Return on invested equity is ($45 - $40) / $10 = 50%. The leverage ratio is purchase price / equity = $40 / $10 = 4. Margin call price is $40 × [(1 - 0.25) / (1 - 0.20)] = $37.50.

Stop loss sell orders are: A)executed on an uptick only. B)placed to protect a short position. C)placed to protect the gains on a long position.

C Stop loss sell orders are limit sell orders that are placed below market price. When the share price drops to the designated price, a sell order is executed protecting the investor from further declines.

Which of the following statements about the maintenance margin requirement is leastaccurate? A)The purpose of the maintenance margin requirement is to protect the broker in the event of a large stock decline. B)Generally the maintenance margin requirement is lower than the initial margin requirement. C)The Federal Reserve sets the maximum maintenance margin.

C The Federal Reserve sets the minimum maintenance margin and individual investment companies may set higher margins if they wish.

A firm's cost of equity capital is least accurately described as the: A)expected total return on the firm's equity shares in equilibrium. B)minimum rate of return investors require to invest in the firm's equity securities. C)ratio of the firm's net income to its average book value

C The ratio of the firm's net income to its average book value is the firm's return on equity, which can be greater than, equal to, or less than the firm's cost of equity. Cost of equity for a firm can be defined as the expected equilibrium total return in the market on its equity shares, or as minimum rate of return that investors require as compensation for the risk of the firm's equity securities.

The threat of substitutes is most likely to be low for a firm that: A)produces a commodity product in an industry with significant unused capacity. B)operates in a fragmented market with little unused capacity. C)produces a differentiated product with high switching costs.

C The threat of competition from substitute products is likely to be low for a firm that produces a differentiated product with high switching costs. Unused capacity and low industry concentration (a fragmented market) tend to intensify rivalry among industry competitors but are not directly related to the threat of substitutes.

The weak form of the efficient market hypothesis (EMH) implies that: A)insiders, such as specialists and corporate board members, cannot achieve abnormal returns on average. B)no one can achieve abnormal returns using market information. C)investors cannot achieve abnormal returns, on average, using technical analysis, after adjusting for transaction costs and taxes.

C The weak form of the EMH implies that an investor cannot earn positive abnormal returns on average using technical analysis (market information), after adjusting for transaction costs and taxes. Evidence has shown that insiders can achieve positive abnormal returns on average, but this relates to the strong form of the EMH.

A trader pays $100 per share to buy 500 shares of a non-dividend-paying firm. The purchase is done on margin, and the leverage ratio at purchase is 3.0X. Three months later, the trader sells the shares for $90 per share. Ignoring transaction costs and interest paid on the margin loan, the trader's 3-month return was closest to: A)-10%. B)-40%. C)-30%.

C With a leverage ratio of 3 and a 10% decrease in share value, the investor's return is 3 × -10% = -30%.


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