FIN4504 - Exam 1 Multiple Choice
Shane purchased a stock this morning at a cost of $13 per share. He expects to receive an annual dividend of $0.27 per share next year. What will the price of the stock have to be one year from today if Shane is to earn a 8% rate of return on this investment? a) $13.77 b) $12.38 c) $12.60 d) $14.28 e) $12.88
a) $13.77 *0.08 = (P1 - $13 + $0.27) / $13 = $13.77
Ina purchased 800 shares of Detroit Motors stock at a price of $55 per share. The initial margin requirement is 65% and the maintenance margin is 30%. The effective interest rate on the margin loan is 4.69%. How much margin interest will she pay if she repays the loan in seven months? a) $417.29 b) $401.32 c) $647.96 d) $387.29 e) $530.42
a) $417.29 *Margin interest = [(1 + 0.0469)^7/12 - 1] x [800 x $55 x (1 - 0.65)] = $417.29
An asset has an average historical return of 11.6% and a standard deviation of 17.8%. What range of returns would you expect to see 95% of the time? a) -24.0 to +47.2 percent b) -34.4 to +53.6 percent c) -5.4 to +41.0 percent d) -41.8 to +65.0 percent e) -6.2 to +29.4 percent
a) -24.0 to +47.2 percent *Range = 11.6% +/- 2 (17.8%) = -24.0 to +47.2 percent
Eight months ago, you purchased 300 shares of a non-dividend paying stock for $27 per share. Today, you sold those shares for $31.59 per share. What was your annualized rate of return on this investment? a) 26.55% b) 28% c) 17% d) 25.5% e) 21.45%
a) 26.55% *HPR = (31.59 - 27) / 27 = 0.17 Annualized rate of return = (1 + 0.17)^12/8 - 1 = 26.55%
Last week, you sold 400 shares of Hi-Lo stock for $12,400. The sale was a short sale with an initial margin requirement of 70%. The maintenance margin is 40%. Some positive news concerning the company was released last night and the stock price jumped this morning to $38 per share. What is your current margin position in this stock? a) 38.68% b) 61.33% c) 48.33% d) 25.83% e) 56.67%
a) 38.68% *Proceeds from sale = $12,400 Initial margin deposit = 12,400 x 0.70 = $8,680 Short position = 400 x 38 = $15,200 Account equity = 12,400 + 8,680 - 15,200 = $5,880 Margin position = 5,880 / 15,200 = 38.68%
Anita wants to buy $10,000 of securities in her margin account. Her advisor has informed her that she must pay a minimum of $7,000 in cash and maintain a minimum equity position of 30%. The initial margin requirement is _____ percent and the maintenance margin is _____ percent. a) 70; 30 b) 70; 70 c) 70; 50 d) 30; 30 e) 30; 70
a) 70; 30
Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding? a) ask b) primary c) option d) issue e) bid
a) ask
Alexis is an individual investor. She purchases shares at the _____ price and sells at the _____ price. a) ask; bid b) average; ask c) bid; average d) ask; average e) bid; ask
a) ask; bid
When the total return on an investment is expressed on a per-year basis, it is called the: a) effective annual return b) dividend yield c) initial return d) capital gains yield e) holding period return
a) effective annual return
When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting. a) firm commitment b) best efforts c) guaranteed sale d) Dutch auction e) full-fledge
a) firm commitment
When your equity position in a security is less than the required amount, your brokerage firm will issue a : a) margin call b) cash certificate c) limit order d) margin certificate e) leverage call
a) margin call
An investment has an expected return of 11% per year with a standard deviation of 24%. How often do you expect to earn less than -13%? a) one year out of six b) two years out of six c) four years out of six
a) one year out of six *In one year out of three, you will be outside this range, implying that you will be below it one year out of six and above it one year out of six.
Main Supplies is a publicly traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n): a) seasoned equity offering b) market expansion offer c) supplemental offering d) initial public offer e) after-market underwriting
a) seasoned equity offering
An asset has an average historical rate of return of 13.2% and a variance of 0.00972196. What range of returns would you expect to see approximately two-thirds of the time? a) +13.1 to +13.3 percent b) +3.34 to +23.06 percent c) -6.52 to +32.92 percent d) -9.58 to +38.8 percent e) -2.28 to +24.48 percent
b) +3.34 to +23.06 percent *Range = 0.132 +/- Square Root (0.00972196) = +3.34 to +23.06 percent
Rudolfo purchased 900 shares of stock for $62.20 per share and sold them ten months later for $64.60 per share. The initial margin requirement on this stock is 75% and the maintenance margin is 40%. Ignoring dividends and costs, what is his holding period return? a) 3.72% b) 5.14% c) 4.95% d) 4.54% e) 3.86%
b) 5.14% *HPR = (64.60 - 62.20) / (62.20 x 0.75) = 5.14%
You purchased 1,000 shares of stock at $42 per share. The stock is currently selling for $45 per share. The initial margin was 70% and the maintenance margin is 30%. What is your current margin position? a) 63.59% b) 72% c) 28.36% d) 75% e) 25%
b) 72% *Margin loan = 1,000 x 42 x (1 - 0.70) = $12,600 Current equity = (1,000 x 44) - 12,600 = $32,400 Margin position = 32,400 / (1,000 x 44) = 72%
Which one of the following should be used to compare the overall performance of three different investments? a) dividend yield b) effective annual return c) holding period dollar return d) holding period percentage return e) capital gains yield
b) effective annual return
The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market. a) home b) fourth c) independent d) third e) SuperDOT
b) fourth
The minimum equity that must be maintained at all times in a margin account is called the: a) margin call b) maintenance margin c) initial equity position d) call requirement e) initial margin
b) maintenance margin
Which one of the following had the greatest volatility of returns for the period 1926-2012? a) long-term gov. bonds b) small-company stocks c) U.S. Treasury bills d) long-term corporate stocks e) large-company stocks
b) small-company stocks
The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the: a) underwriting capital b) spread c) firm commitment d) offer differential e) margin
b) spread
The profit a dealer makes on a purchase and resale of shares of stock is called the: a) margin b) spread c) float d) offer e) bid
b) spread
Which one of the following statements is correct? a) large-company stocks are historically riskier than small-company stocks b) the variance is a means of measuring the volatility of returns on an investment c) a risky asset will always have a higher annual rate of return than a riskless asset d) there is an indirect relationship between risk and return e) the standard deviation of the returns on Treasury bills is zero
b) the variance is a means of measuring the volatility of returns on an investment
An investment has an expected return of 11% per year with a standard deviation of 24%. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to earn between -13% and 35%? a) one year out of three b) two years out of three c) three years out of three
b) two years out of three *Plus or minus one standard deviation, so about two-thirds of the time, or two years out of three.
Christine owns a stock that dropped in price from $38.70 to $34.10 over the past year. The dividend yield on that stock is 1.4%. What is her total return on this investment for the year? a) -9.91% b) -9.59% c) -10.49% d) -11.31% e) -8.51%
c) -10.49% *[(34.10 - 38.70) / 38.70] + 0.014 = -10.49%
Scott purchased 200 shares of Frozen Foods stock for $48 per share. Four months later, he received a dividend of $0.22 per share and also sold the shares for $42 each. What was his annualized rate of return on this investment? a) -33% b) -28.07% c) -31.95% d) -44.69% e) -40.14%
c) -31.95% *HPR = (42 - 48 + 0.22) / 48 = -0.120417 Annualized return = (1 - 0.120417)^12/4 - 1 = -31.95%
A stock has an average historical return of 11.3% and a standard deviation of 20.2%. Which range of returns would you expect to see approximately two-thirds of the time? a) -23.8 to +53.0 percent b) +4.6 to +33.8 percent c) -8.9 to +31.5 percent d) -3.9 to +32.5 percent e) +5.8 to +31.6 percent
c) -8.9 to +31.5 percent *Range = 11.3% +/- 20.2% = -8.9 to +31.5 percent
You recently purchased 100 shares of stock at a cost per share of $24.80. The initial margin requirement on this stock is 80% and the maintenance margin is 50%. The stock is currently valued at $19.80 per share. What is your current margin position? Ignore margin interest. a) 73.01% b) 76.80% c) 74.95% d) 73.83% e) 75.69%
c) 74.95% *Margin loan = 100 x 24.80 x (1 - 0.80) = $496 Current stock value = 100 x 19.80 = $1,980 Current equity = 1,980 - 496 = $1,484 Current margin = 1,484 / 1,980 = 74.95%
Sam placed a limit order to sell 500 shares of stock at $14 per share. Which of the following does Sam know for sure? I. His order will execute but the time of execution is unknown. II. His order may never execute. III. He will receive exactly $7,000 if his order executes. IV. He could receive more, but not less, than $14 per share. a) I only b) I and III only c) II and IV only d) I and IV only e) II and III only
c) II and IV only
Which one of the following is the federal agency that regulates the financial markets in the U.S.? a) Federal Reserve b) Treasury Department c) Securities and Exchange Commission d) Over the Counter Commission e) National Association of Securities Dealers
c) Securities and Exchange Commission
When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting. a) Dutch auction b) firm commitment c) best efforts d) pro-rata e) partial
c) best efforts
The dividend yield is defined as the annual dividend expressed as a percentage of the: a) average stock price b) ending stock price c) initial stock price d) capital gain e) total annual return
c) initial stock price
An order to buy shares of stock at a stated price or less is called a _____ order. a) short b) bid c) limit d) stop e) market
c) limit
A brokerage account in which purchases can be made using credit is referred to as which type of account? a) call b) funds available c) margin d) clearing e) cash
c) margin
You want to sell shares of stock at the current price. Which type of order should you place? a) limit b) post c) market d) stop e) short
c) market
The document that must be prepared in order to receive approval for a stock offering is called a(n): a) regulatory report b) tombstone c) prospectus d) offering paper e) offering agreement
c) prospectus
Which one of the following had the highest risk premium for the period 1926-2012? a) U.S. Treasury bills b) large-company stocks c) small-company stocks d) intermediate-term gov. bonds e) long-term gov. bonds
c) small-company stocks
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 incurs a loss in value or is sold c) whether or not the investment is sold d) whenever dividends are paid e) only if the investment is sold and the capital gain is realized
c) whether or not the investment is sold
A stock sold for $25 at the beginning of the year. The end of the year stock price was $25.70. What is the amount of the annual dividend if the total return for the year was 7.7%? a) $1.60 b) $2.31 c) $1.38 d) $1.23 e) $1.81
d) $1.23 *(25.70 - 25 + D) / 25 = 0.077; D = $1.23
Rosita purchased 300 shares of a stock for $37 per share. Today, the stock is selling for $41 per share. The initial margin requirement is 70% and the maintenance margin is 30%. Rosita had to pay _____ in cash to purchase the stock and must have at least _____ in equity today. a) $8,610; $3,690 b) $7,770; $3,330 c) $3,690; $3,330 d) $7,770; $3,690 e) $3,690; $3,690
d) $7,770; $3,690 *Initial cash requirement = 300 x 37 x 0.70 = $7,770 Current equity requirement = 300 x 41 x 0.30 = $3,690
Stacy purchased 400 shares of stock for $38 per share. She sold those shares six months later for $34 per share. The initial margin requirement is 80% and the maintenance margin is 40%. Ignore margin interest and trading costs. If she purchased the shares for cash, her holding period return would be _____ percent as compared to _____ percent if she had used margin. a) -11.63; -14.54 b) -11.63; -14.30 c) -10.12; -12.84 d) -10.53; -13.16 e) -12.27; -15.82
d) -10.53; -13.16 *HPR without margin = (34 - 38) / 38 = -10.53% HPR with margin = (34 - 38) / (38 x 0.80) = -13.16%
Seven months ago, Freda purchased 400 shares of stock on margin at a price per share of $36. The initial margin requirement on her account is 70% and the maintenance margin is 40%. The call money rate is 4.4% and she pays 2% above that rate. Today, she sold these shares for $37.50 each. What is her annualized rate of return? a) 14.37% b) 17.42% c) 16.90% d) 7.61% e) 7.50%
d) 7.61% *Initial investment = 400 x 36 x 0.70 = $10,080 Loan repayment = [400 x 36 x (1 - 0.70)] x [1 + (0.044 + 0.02)]^7/12 = $4,479.19 HPR = [(400 x 37.50) - 4,479.19 - 10,080 / 10,080 = 0.04373 EAR = (1 + 0.04373)^12/7 - 1 = 7.61%
Which one of the following prices will an individual investor receive if he or she sells shares of Intel? a) ask b) offer c) issue d) bid e) Dutch
d) bid
Trey currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 per share. He is also willing to purchase additional shares for $17.07 per share. Trey is a securities: a) broker b) representative c) underwriter d) dealer e) floor broker
d) dealer
The average compound return earned per year over a multi-year period is called the: a) variance b) arithmetic average return c) total return d) geometric average return e) average capital gains yield
d) geometric average return
A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n): a) expected rate of return b) average arithmetic return c) variance distribution d) normal distribution e) average geometric return
d) normal distribution
You purchased a stock for $18.45 per share using 70% margin. You sold the stock seven months later for $19.85 per share. You did not receive any dividend income. What was your holding period percentage return on this investment? Ignore trading costs and margin interest. a) 9.12% b) 11.75% c) 8.77% d) 12.13% e) 10.84%
e) 10.84% *HPR = (19.85 - 18.45) / (18.45 x 0.70) = 10.84%
Elise just sold a stock and realized a 6.2% return for a 4-month holding period. What was her annualized rate of return? a) 21.29% b) 14.78% c) 27.20% d) 11.98% e) 19.78%
e) 19.78% *1 + EAR = (1 + 0.062)^12/4 - 1 = 19.78%
A portfolio had an original value of $7,400 seven years ago. The current value of the portfolio is $11,898. What is the average geometric return on this portfolio? a) 7.88% b) 7.67% c) 7.47% d) 7.59% e) 7.02%
e) 7.02% *7,400 (1 + R)^7 = $11,898; R = 7.02%
When the price of newly issued shares is determined by competitive bidding, the underwriting is known as a _____ underwriting. a) rights b) market-priced c) best efforts d) seasoned e) Dutch auction
e) Dutch auction
An investor with a long position in a security will make money: a) if the price of the security declines b) only by shorting the security c) only if the security has been purchased on margin d) if the price of the security remains stable e) if the price of the security increases
e) if the price of the security increases
Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets? a) third b) fifth c) fourth d) primary e) secondary
e) secondary
The off-exchange market in which exchange-listed securities trade is referred to as the _____ market. a) independent b) fourth c) primary d) secondary e) third
e) third
