Investment Management - FIN 3400 - Midterm Exam (Chapters 1-8)

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57. Which one of the following trading symbols is associated with the ETF on the S&P 500 index? A. DIA B. QQQQ C. SPY D. SPX E. DIAX See Section 4.8.

C. SPY

61. Over the time period of 1929 to 1932, the stock market lost approximately _____ percent of its value. A. 33 B. 40 C. 50 D. 75 E. 90 See Section 7.11

E. 90

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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.

54. The day-of-the-week effect refers to which trading day? A. Monday B. Tuesday C. Wednesday D. Thursday E. Friday See Section 7.10

A. Monday

29. The average risk premium on large-company stocks for the period 1926-2012 was: A. 6.7 percent. B. 8.0 percent. C. 8.5 percent. D. 12.3 percent. E. 13.6 percent.

B. 8.0 percent.

52. A "block trade" is a trade in excess of how many shares? A. 1,000 B. 5,000 C. 10,000 D. 50,000 E. 100,000 See Section 8.7

C. 10,000

49. Which one of the following types of funds is most apt to invest in preferred stocks? A. income B. balanced C. world D. insured E. index See Section 4.6.

A. income

13. 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. interest.

A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n): A. normal distribution. B. variance distribution. C. expected rate of return. D. average geometric return. E. average arithmetic return.

BLOOM'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.

Based on the period 1926-2006, the risk premium for U.S. Treasury bills was: A. 0.0 percent. B. 1.2 percent. C. 2.0 percent. D. 2.4 percent. E. 2.7 percent.

Shane purchased a stock this morning at a cost of $11 a share. He expects to receive an annual dividend of $.27 a share next year. What will the price of the stock have to be one year from today if Shane is to earn a 15 percent rate of return on this investment? A. $12.38 B. $12.60 C. $12.88 D. $13.14 E. $14.28

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.

The wider the distribution of an investment's returns over time, the _____ the expected average rate of return and the ______ the expected volatility of those returns. A. higher; higher B. higher; lower C. lower; higher D. lower; lower E. The distribution of returns does not affect the expected average rate of return.

Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return? A. arithmetic average return for the period B. geometric average return for the period C. total return for the period divided by N - 1 D. arithmetic average return for the period divided by N - 1 E. geometric average return for the period divided by N - 1

50. A stock sold for $25 at the beginning of the year. The end of year stock price was $25.70. What is the amount of the annual dividend if the total return for the year was 7.7 percent? A. $1.23 B. $1.38 C. $1.60 D. $1.81 E. $2.31

A. $1.23

7. 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. a risky asset minus the risk-free rate.

85. You short sold 500 shares of Jasper stock at $41 a share at an initial margin of 60 percent. What is the highest the stock price can go before you receive a margin call if the maintenance margin is 40 percent? A. $46.86 B. $47.08 C. $55.50 D. $56.90 E. $57.40

A. $46.86

68. The Blue Star Fund has assets with a market value of $10.6 million and liabilities of $607,000. What is the net asset value if there are 185,000 shares outstanding? A. $54.02 B. $55.00 C. $56.67 D. $57.18 E. $58.25 NAV = ($10,600,000 - $607,000)/185,000 = $54.02

A. $54.02

80. An asset had annual returns of 17, -35, -18, 24, and 6 percent, respectively, over the past five years. What is the arithmetic average return? A. -1.2 percent B. 0.8 percent C. 1.2 percent D. 1.6 percent E. 2.3 percent

A. -1.2 percent

27. Based on the period 1926-2012, the risk premium for U.S. Treasury bills was: A. 0.0 percent. B. 1.2 percent. C. 2.0 percent. D. 2.4 percent. E. 2.7 percent.

A. 0.0 percent.

78. Over the past four years, Hi-Tech Development stock returned 35.2, 38.8, 18.4, and -32.2 percent annually. What is the arithmetic average return? A. 15.05 percent B. 17.67 percent C. 20.53 percent D. 24.20 percent E. 32.25 percent

A. 15.05 percent

56. You purchased a stock eight months ago for $36 a share. Today, you sold that stock for $41.50 a share. The stock pays no dividends. What was your annualized rate of return? A. 23.32 percent B. 24.77 percent C. 25.70 percent D. 26.03 percent E. 27.67 percent

A. 23.32 percent

91. Recently, you sold 1,000 shares of stock for $21,400. The sale was a short sale with an initial margin requirement of 60 percent. The maintenance margin is 30 percent. The stock is currently trading at $27.50 a share. What is your current margin position in this stock? A. 24.51 percent B. 28.11 percent C. 32.09 percent D. 43.98 percent E. 46.69 percent

A. 24.51 percent

44. One year ago, you purchased 100 shares of Southern Foods common stock for $42.20 a share. Today, you sold your shares for $39.70 a share. During this past year, the stock paid $1.40 in dividends per share. What is your dividend yield on this investment? A. 3.32 percent B. 3.37 percent C. 3.44 percent D. 3.53 percent E. 3.61 percent

A. 3.32 percent

73. Today, you are purchasing 100 shares of stock on margin. The purchase price per share is $35. The initial margin requirement is 70 percent and the maintenance margin is 30 percent. The call money rate is 4.5 percent and you are charged 1.6 percent over that rate. What will your rate of return be if you sell your shares one year from now for $37 a share? Ignore dividends. A. 5.55 percent B. 6.42 percent C. 7.18 percent D. 7.49 percent E. 8.03 percent

A. 5.55 percent

82. RedStone Mines stock returned 7.5, 15.3, -9.2, and 11.5 percent over the past four years, respectively. What is the geometric average return? A. 5.84 percent B. 6.36 percent C. 7.75 percent D. 9.94 percent E. 10.33 percent

A. 5.84 percent

87. 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. 7.02 percent B. 7.47 percent C. 7.59 percent D. 7.67 percent E. 7.88 percent

A. 7.02 percent

61. Last year, ABC stock returned 11.4 percent, the risk-free rate was 3.2 percent, and the inflation rate was 2.8 percent. What was the risk premium on ABC stock? A. 8.20 percent B. 8.43 percent C. 8.60 percent D. 8.88 percent E. 8.97 percent

A. 8.20 percent

90. The geometric return on a stock over the past 10 years was 7.9 percent. The arithmetic return over the same period was 8.8 percent. What is the best estimate of the average return on this stock over the next 5 years? A. 8.40 percent B. 9.05 percent C. 9.08 percent D. 9.13 percent E. 9.47 percent

A. 8.40 percent

14. When the price of newly issued shares is determined by competitive bidding the underwriting is known as a _____ underwriting. A. Dutch auction B. market-priced C. seasoned D. best efforts E. rights See Section 5.1

A. Dutch auction

56. Which one of the following statements related to the NYSE Hybrid market is correct? A. Floor brokers operate both electronically and in person. B. The Hybrid system replaces the market specialists. C. The automated system works better than the specialist for stocks with minimal liquidity. D. The automated system will only replace the specialist in times of market duress. E. Investors can automatically trade an unlimited number of shares. See Section 5.2

A. Floor brokers operate both electronically and in person.

15. Dow theory is a method of predicting future market movements based on which of the following Dow Jones averages? I. industrial II. transportation III. utilities IV. commodities A. I and II only B. II and III only C. III and IV only D. I and IV only E. I, II, and III only See Section 8.7

A. I and II only

59. The duties of a specialist include which of the following? I. maintain an orderly market II. offer a higher bid price than the floor brokers III. provide liquidity to the market IV. purchase all shares offered as limit sells A. I and III only B. II and III only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV See Section 5.3

A. I and III only

2. Which one of the following is the basis for prospect theory? A. Investors react differently to prospective gains and losses. B. Investors make cognitive errors. C. Some investors are irrational. D. Investors react differently depending on the day of the week. E. Investors suffer from money illusion. See Section 8.2

A. Investors react differently to prospective gains and losses.

9. Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns? A. January effect B. March effect C. September effect D. October effect E. December effect See Section 7.10

A. January effect

60. Which one of the following statements concerning the stock market is correct? A. Leverage was one of the contributing factors of the Crash of 1929. B. "Black Monday" refers to October 29, 1929. C. Program trading is cited as the sole cause of the Crash of 1987. D. Generally speaking, market crashes tend to last longer than market bubbles. E. It took the market 10 years to recover from the Crash of 1987. See Section 7.11

A. Leverage was one of the contributing factors of the Crash of 1929.

55. Over the past 50 years, which day of the week, on average, has the lowest average rate of return? A. Monday B. Tuesday C. Wednesday D. Thursday E. Friday See Section 7.10

A. Monday

8. The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return? A. Monday B. Tuesday C. Wednesday D. Thursday E. Friday See Section 7.10

A. Monday

12. Which one of the following statements is correct concerning mutual funds? A. Mutual funds generally pay no taxes. B. Mutual funds are risk-free. C. Profits on the sale of mutual fund shares are tax-free. D. All mutual funds are diversified. E. Investments in mutual funds are guaranteed from loss by a private agency of the federal government. See Section 4.1.

A. Mutual funds generally pay no taxes.

27. If the market is semistrong-form efficient, then which one of the following statements is true? A. Neither technical nor fundamental analysis leads to abnormal profits. B. Technical analysts have the ability to earn excess profits but fundamental analysts cannot. C. Fundamental analysts can earn excess profits but technical analysts cannot. D. Both technical and fundamental analysts earn excess profits based on their research. E. No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns. See Section 7.4

A. Neither technical nor fundamental analysis leads to abnormal profits.

14. A company that owns income-producing real estate such as an apartment complex or a retail shopping center is called a(n): A. REIT. B. SIPC. C. REEF. D. EAR. E. SPIC.

A. REIT.

27. The sustainable growth rate is equal to: A. ROE × (1 - Payout ratio). B. ROA × (1 - Payout ratio). C. ROE × (1 - Retention ratio). D. ROA × (1 - Retention ratio). E. ROE × ROA. See Section 6.2

A. ROE × (1 - Payout ratio).

36. Which one of the following correctly expresses the clean surplus relationship? A. The change in book value per share is equal to earnings per share minus dividends. B. The change in retained earnings is equal to net income. C. The change in market value per share is equal to the change in book value per share. D. The change in market value per share is equal to earnings per share minus dividends. E. The rate of change in book value per share is equal to the firm's discount rate. See Section 6.4

A. The change in book value per share is equal to earnings per share minus dividends.

37. Which one of the following statements related to the price-earnings (P/E) ratio is correct? A. The earnings yield is the inverse of the P/E ratio. B. The P/E ratio is equal to the market price per share divided by total net income. C. The P/E ratio shown in The Wall Street Journal is based on next year's estimated earnings per share. D. The P/E ratio varies directly with earnings per share. E. The earnings for the past twelve months is the method analysts prefer for computing earnings for the P/E ratio. See Section 6.6

A. The earnings yield is the inverse of the P/E ratio.

47. 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. The initial investment

46. You recently heard a news announcer state that the market is approaching its support level. Which one of the following is the best interpretation of that statement? A. The market is approaching the lowest level that is reasonably expected. B. The federal government will step in to help the market retain its value should the market slip much further. C. The market is almost at a peak and is expected to start declining in the near future. D. The market is almost to the point where trading will be suspended temporarily. E. The market is almost equivalent in value to the international markets so price stabilization is expected. See Section 8.7

A. The market is approaching the lowest level that is reasonably expected.

37. 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.

A. The standard deviation of the returns on Treasury bills is zero.

45. Which one of the following statements concerning venture capital is correct? A. Venture capital is frequently provided in stages with each stage financed by a different venture capitalist. B. Most venture capitalists are passive investors. C. The founders of a firm generally realize substantial payoffs as soon as the firm receives venture financing. D. Venture capitalists generally compete with banks to find projects to finance. E. Well established firms tend to absorb most of the available venture capital. See Section 5.1

A. Venture capital is frequently provided in stages with each stage financed by a different venture capitalist.

36. Which one of the following describes an ECN? A. Web site used by investors to trade directly with other investors B. Web site limited to use by professional brokers and dealers C. computerized trading floor D. communications network used by specialists E. cellular trading network See Section 5.4

A. Web site used by investors to trade directly with other investors

45. According to technical analysis, which one of the following is best seen as a buying opportunity? A. a breakout of a resistance level B. an MSI value of 0.1 or less C. a downward sloping advance/decline line D. a flat advance/decline line E. top of Elliott wave 5 See Section 8.7

A. a breakout of a resistance level

37. The primary difference between an international fund and a global fund is the fact that: A. a global fund invests in U.S. stocks while an international fund does not. B. an international fund invests in U.S. stocks while a global fund does not. C. all international funds are country specific while global funds are not. D. global funds may opt to be country or region specific while international funds may not. E. international funds tend to be more geographically diversified than global funds. See Section 4.6.

A. a global fund invests in U.S. stocks while an international fund does not.

58. An ETF is best described as: A. an index fund that trades like a closed-end fund. B. a closed-end fund that trades like a stock. C. a sector fund that trades like a bond. D. an index fund that trades only at the end of each day. E. an international fund that trades like a domestic stock. See Section 4.8.

A. an index fund that trades like a closed-end fund.

39. Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return? A. arithmetic average return for the period B. geometric average return for the period C. total return for the period divided by N - 1 D. arithmetic average return for the period divided by N - 1 E. geometric average return for the period divided by N - 1

A. arithmetic average return for the period

50. Anna is an individual investor. She purchases shares at the _____ price and sells at the _____ price. A. asked; bid B. average; asked C. bid; asked D. bid; average E. asked; average See Section 5.1

A. asked; bid

24. Which one of the following is an example of mental accounting? A. associating a security's gains or losses based on its purchase price B. calculating the gain or loss on a security on a daily basis C. computing the amount of tax due on the gain from a stock sale D. considering the gain realized when a stock pays a dividend E. comparing the gains and losses on a portfolio to those of the overall market See Section 8.2

A. associating a security's gains or losses based on its purchase price

40. A discretionary account: A. authorizes a broker to trade securities on your behalf. B. charges an annual fee to cover all trading and management services. C. is the term applied to brokerage accounts with check-writing and credit card services. D. is the same as a wrap account. E. is the account used to pledge securities as collateral for a margin loan.

A. authorizes a broker to trade securities on your behalf.

49. If the markets are efficient, then why is asset allocation still considered important? A. because the risk-return relationship must still be considered B. because market timing is critical in efficient markets C. because individual security selection is the key to the markets being efficient D. because asset allocation combines market timing with individual security selection E. because the majority of market gains tend to occur only over long periods of time See Section 7.8

A. because the risk-return relationship must still be considered

20. Which one of the following prices will an individual investor receive if he or she sells shares of Microsoft? A. bid B. ask C. issue D. offer E. Dutch See Section 5.1

A. bid

6. The financing provided for new ventures that are frequently high-risk investments is referred to as "venture _______". A. capital B. leverage C. risk funds D. funding E. investing See Section 5.1

A. capital

10. What is the accounting relationship in which earnings per share minus dividends equal the change in book value per share called? A. clean surplus relationship B. economic value added relationship C. accounting earnings identity D. payout-retention identity E. dividend valuation equation See Section 6.4

A. clean surplus relationship

54. You recently purchased a fund at a price of $39.97 per share. The NAV at the time of purchase was $40.67. You must have purchased a(n) _____ fund. A. closed-end B. global C. bond D. index E. asset allocation See Section 4.8.

A. closed-end

9. Which one of the following is the tendency to believe that random events that occur in clusters are not really random? A. clustering illusion B. sequential clustering C. random grouping D. representativeness heuristic E. gambler's fallacy See Section 8.4

A. clustering illusion

43. According to Dow theory, which one of the following is the primary means of eliminating secondary market trends? A. corrections B. confirmations C. continuations D. conversions E. coordinated trades See Section 8.7

A. corrections

56. The January effect: A. does not occur in the domestic market every year. B. occurs every year but only for large-company stocks. C. occurs every year but only for small-company stocks. D. is unaffected by institutional investors. E. is unique to the United States. See Section 7.10

A. does not occur in the domestic market every year.

28. The tendency to overvalue an item because you own it is referred to as which one of the following? A. endowment effect B. money illusion C. regret aversion D. myopic loss aversion E. sunk cost fallacy See Section 8.2

A. endowment effect

29. Yesterday, Krista stated that Overland stock was only worth $12 a share and since it was selling for $15 a share, she declared it overpriced and refused to buy any shares. This morning, she learned that she is inheriting 3,500 shares of Overland stock from her grandmother. Suddenly, she is saying that Overland stock is a great buy at $15 and is probably worth at least $17 a share. This is an example of which one of the following? A. endowment effect B. money illusion C. regret aversion D. myopic loss aversion E. sunk cost fallacy See Section 8.2

A. endowment effect

70. The NYSE circuit breakers are recalculated: A. every day B. every week C. monthly D. every 6 months E. annually See Section 7.11

A. every day

30. A NYSE member who trades only for his or her own account is called a(n): A. floor trader. B. specialist. C. individual broker. D. floor broker. E. house broker. See Section 5.2

A. floor trader.

38. The wider the distribution of an investment's returns over time, the _____ the expected average rate of return and the ______ the expected volatility of those returns. A. higher; higher B. higher; lower C. lower; higher D. lower; lower E. The distribution of returns does not affect the expected average rate of return.

A. higher; higher

31. If you believe that stock market prices follow a random walk, then: A. historical price information provides no benefit in predicting future prices. B. there is no financial benefit from investing in the stock market. C. having inside information will not lead to excess profits. D. studying past price movements will lead to excess profits. E. you also believe the market is strong-form efficient. See Section 7.6

A. historical price information provides no benefit in predicting future prices.

41. 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. if the price of the security increases.

23. If the financial markets were regulated such that the markets maintained strong-form efficiency, then: A. insider trading laws would be unnecessary. B. all investors would earn equivalent rates of return. C. risk premiums would vanish. D. all investors would become arbitrage traders. E. securities would tend to be continually underpriced. See Section 7.4

A. insider trading laws would be unnecessary.

19. Which one of the following best describes a broker? A. intermediary who arranges trades between a buyer and a seller B. trader who buys and sells from his or her inventory C. firm which charges a commission for arranging a transaction D. person who buys securities for his or her own account on an exchange floor E. trader who transacts business on behalf of a securities issuer See Section 5.1

A. intermediary who arranges trades between a buyer and a seller

31. The net asset value of a money market mutual fund: A. is dependent upon the value of the fund's assets. B. is guaranteed to be $1 a share. C. fluctuates as new shares are issued and old shares are redeemed. D. varies inversely with market interest rates. E. is insured by the sponsoring investment advisory firm. See Section 4.5.

A. is dependent upon the value of the fund's assets.

16. A mutual fund is owned by: A. its shareholders. B. a management company. C. a financial institution. D. the fund's board of directors. E. a mutual fund family. See Section 4.3.

A. its shareholders.

33. An order to buy shares of stock at a stated price or less is called a _____ order. A. limit B. stop C. market D. short E. bid See Section 5.3

A. limit

43. Which one of the following is a general characteristic of a tax-managed fund? A. low turnover rate B. concentration on income-producing securities C. high level of realized capital gains D. higher trading costs than average funds E. matching of dividend income to capital gains See Section 4.6.

A. low turnover rate

9. 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. margin call.

67. A hedge fund: A. may charge relatively high fees. B. must be registered if there are ten or more investors. C. is generally structured as a corporation. D. is limited to $1 million in assets. E. is fairly complicated to legally establish. See Section 4.8.

A. may charge relatively high fees.

22. An investor who follows a fully active strategy will: A. move money between asset classes as well as try to select the best performers in each class. B. move money between asset classes but will not be concerned about which individual securities are owned. C. focus on picking individual stocks only. D. maintain a relatively constant mix of asset classes while continually buying and selling individual securities. E. concentrate solely on asset allocation to maximize potential returns.

A. move money between asset classes as well as try to select the best performers in each class.

4. The value of a load mutual fund's assets less its liabilities, divided by the number of shares outstanding is referred to as the fund's: A. net asset value. B. offering price. C. open-end value. D. closed-end value. E. prime value. See Section 4.2.

A. net asset value.

10. A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n): A. normal distribution. B. variance distribution. C. expected rate of return. D. average geometric return. E. average arithmetic return.

A. normal distribution.

33. Dennison Lumber announced last week that its unpopular CEO had resigned. In response to this announcement, the firm's stock price increased from $17 a share to $23 a share. The following day the price declined to $21 a share and has remained constant at that level. This is an example of a(n): A. over-reaction and correction. B. underpricing. C. delayed reaction. D. pre-activity action. E. efficient market reaction. See Section 7.6

A. over-reaction and correction.

31. Investors who tend to invest too heavily in the securities issued by their employer suffer from the condition known as: A. overconfidence. B. loyalty adherence. C. status quo. D. local adhesion. E. familiarity. See Section 8.2

A. overconfidence.

6. What is the percentage of a firm's earnings that is distributed to shareholders called? A. payout ratio B. distribution percentage C. retention ratio D. dividend portion E. outflow ratio See Section 6.2

A. payout ratio

43. 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. predict future rates of return.

1. High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets? A. primary B. secondary C. third D. fourth E. over-the-counter See Section 5.1

A. primary

59. A stock's price has been relatively constant for an extended period of time. In this instance, the Bollinger bands are: A. relatively close to each other. B. non-existent. C. vertical. D. steeply upsloping. E. steeply downsloping. See Section 8.7

A. relatively close to each other.

38. How should cumulative abnormal returns react in an efficient market? A. relatively constant, sharp break, relatively constant B. relatively constant with no breaks C. steadily increasing D. steadily decreasing E. remain constant at zero See Section 7.6

A. relatively constant, sharp break, relatively constant

54. According to technical analysts, pricing patterns such as the head and shoulders are indicators of potential: A. reversals from the main trend line. B. upcoming corrections which will return the market to the current main trend line. C. increasing strength for the main trend line. D. decreasing market activity. E. increasing market activity. See Section 8.7

A. reversals from the main trend line.

17. 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. security selection

21. 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. security selection.

25. According to the concept of loss aversion, individual investors are most apt to do which one of the following? A. sell stocks with gains more frequently than stocks with losses B. sell stocks with losses more frequently than stocks with gains C. hold stocks with gains and sell stocks with losses D. sell all stocks after a pre-determined length of time E. hold all stocks unless they decline more than ten percent in value See Section 8.2

A. sell stocks with gains more frequently than stocks with losses

31. The location on an exchange floor where a particular security trades is called a(n): A. specialist's post. B. broker's terminal. C. floor spot. D. exchange spot. E. market pit. See Section 5.3

A. specialist's post.

10. The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the: A. spread. B. margin. C. offer differential. D. firm commitment. E. underwriting capital. See Section 5.1

A. spread.

62. Kelly wants to sell 600 shares of DeLux stock at the going market price after the stock reaches $42 a share. Which type of order should she place? A. stop B. limit C. market D. fixed E. loss See Section 5.3

A. stop

20. Arbitrage traders: A. tend to be well-capitalized. B. tend to be irrational investors. C. are dominated by irrational investors in an efficient market. D. lower the efficiency level of a market. E. sell only relatively inexpensive stocks. See Section 7.3

A. tend to be well-capitalized.

5. The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called: A. underwriting B. capitalizing C. securing D. brokering E. deploying See Section 5.1

A. underwriting

9. 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. volatility.

25. You analyze a firm's financial statements and invest based upon the results of this analysis. Which form of market efficiency must exist if you are able to earn excess profits on these investments? A. weak-form B. historical-form C. semi-strong form D. full-form E. mild-form See Section 7.4

A. weak-form

39. Sarah has a brokerage account with Jeff, who is a money manager with Downtown Brokers. Sarah pays an all-inclusive annual fee to the firm and Jeff manages her funds. She pays no trading costs or commissions. Which one of the following best describes this type of account? A. wrap B. cash C. margin D. mutual E. advisory

A. wrap

33. 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. your broker.

Based on the period of 1926-2009, the risk premium for small-company stocks averaged: A. 12.3 percent. B. 13.9 percent. C. 15.0 percent. D. 16.8 percent. E. 17.4 percent.

Christine owns a stock that dropped in price from $42.40 to $37.20 over the past year. The dividend yield on that stock is 1.4 percent. What is her total return on this investment for the year? A. -11.31 percent B. -10.86 percent C. -9.91 percent D. -9.59 percent E. -8.51 percent

The average risk premium on large-company stocks for the period 1926-2009 was: A. 6.7 percent. B. 7.9 percent. C. 8.5 percent. D. 12.3 percent. E. 13.6 percent.

The average risk premium on long-term corporate bonds for the period 1926-2009 was: A. 2.4 percent. B. 2.7 percent. C. 3.3 percent. D. 3.7 percent. E. 3.9 percent.

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

The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution. A. 50 B. 68 C. 82 D. 90 E. 95

Today, you sold 800 shares of Sky High, Inc., for $57.60 a share. You bought the shares one year ago at a price of $61.20 a share. Over the year, you received a total of $500 in dividends. What is your capital gains yield on this investment? A. -6.03 percent B. -5.88 percent C. -4.86 percent D. 6.25 percent E. 7.34 percent

Which one of the following statements is correct based on the historical returns for the period 1926-2009? A. For the period, Treasury bills yielded a higher rate of return than long-term government bonds. B. The inflation rate exceeded the rate of return on Treasury bills during some years. C. Small-company stocks outperformed large-company stocks every year during the period. D. Bond prices, in general, were more volatile than stock prices. E. For the period, large-company stocks outperformed small-company stocks.

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.

You purchased a stock for $46.70 a share and resold it one year later. Your total return for the year was 11.2 percent and the dividend yield was 2.8 percent. At what price did you resell the stock? A. $42.78 B. $50.62 C. $51.93 D. $52.08 E. $57.54

84. Joanne invested $15,000 six years ago. Her arithmetic average return on this investment is 8.72 percent, and her geometric average return is 8.50 percent. What is Joanne's portfolio worth today? A. $23,989 B. $24,472 C. $26,409 D. $26,514 E. $26,766

B. $24,472

49. You purchased a stock for $46.70 a share and resold it one year later. Your total return for the year was 11.2 percent and the dividend yield was 2.8 percent. At what price did you resell the stock? A. $42.78 B. $50.62 C. $51.93 D. $52.08 E. $57.54

B. $50.62

29. Staci just used $6,000 of cash plus a $3,000 margin loan to purchase $9,000 worth of stock. This is the only transaction in her brokerage account. According to her account balance sheet, she now has account equity of: A. $3,000. B. $6,000. C. $9,000. D. $12,000. E. $15,000.

B. $6,000.

58. Sun Lee purchased 1,500 shares of Franklin Metals stock for $16.80 a share. The stock was purchased with an initial margin of 65 percent. The maintenance margin is 30 percent. The stock is currently selling for $17.10 a share. What is the minimum dollar amount of equity that he must have in this stock today to avoid a margin call? A. $7,544 B. $7,695 C. $7,760 D. $7,808 E. $7,973

B. $7,695

71. You purchase 500 shares of stock on margin at a cost per share of $22. The initial margin requirement is 60 percent. The effective interest rate on the margin loan is 6.4 percent. How much interest will you pay if you repay the loan in four months? A. $68.77 B. $91.93 C. $102.16 D. $112.38 E. $117.04

B. $91.93

52. 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 percent. What is her total return on this investment for the year? A. -11.31 percent B. -10.49 percent C. -9.91 percent D. -9.59 percent E. -8.51 percent

B. -10.49 percent

62. Stacy purchased 400 shares of stock for $38 a share. She sold those shares six months later for $34 a share. The initial margin requirement is 80 percent and the maintenance margin is 40 percent. 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. -10.12; -12.84 B. -10.53; -13.16 C. -11.63; -14.30 D. -11.63; -14.54 E. -12.27; -15.82

B. -10.53; -13.16

47. Today, you sold 800 shares of Sky High Inc., for $57.60 a share. You bought the shares one year ago at a price of $61.20 a share. Over the year, you received a total of $500 in dividends. What is your capital gains yield on this investment? A. -6.03 percent B. -5.88 percent C. -4.86 percent D. 6.25 percent E. 7.34 percent

B. -5.88 percent

65. An asset had annual returns of 12, 18, 6, -9, and 5 percent, respectively, for the last five years. What is the variance of these returns? A. .00810 B. .01013 C. .01065 D. .02038 E. .04052

B. .01013

94. Tom decides to begin investing some portion of his annual bonus, beginning this year with $6,000. In the first year he earns a 8% return and adds $3,000 to his investment. In the second his portfolio loses 4% but, sticking to his plan, he adds $1,000 to his portfolio. In this year his portfolio returns 2%. What is Tom's dollar-weighted average return on his investments? A. 0.34 percent B. 1.20 percent C. 1.54 percent D. 2.23 percent E. 2.58 percent

B. 1.20 percent

46. One year ago, you purchased 400 shares of stock at a cost of $8,650. The stock paid an annual dividend of $1.10 per share. Today, you sold those shares for $23.90 each. What is the capital gains yield on this investment? A. 9.96 percent B. 10.52 percent C. 12.49 percent D. 13.33 percent E. 14.75 percent

B. 10.52 percent

77. Big Town Markets common stock returned 13.8, 14.2, 9.7, 5.3, and 12.2 percent, respectively, over the past five years. What is the arithmetic average return? A. 10.99 percent B. 11.04 percent C. 11.56 percent D. 12.20 percent E. 13.80 percent

B. 11.04 percent

93. Lisa owns a stock that has an average geometric return of 11.34 percent and an average arithmetic return of 11.51 percent over the past six years. What average annual rate of return should Lisa expect to earn over the next four years? A. 11.38 percent B. 11.41 percent C. 11.44 percent D. 11.47 percent E. 11.51 percent

B. 11.41 percent

28. Based on the period of 1926-2012, the risk premium for small-company stocks averaged: A. 12.3 percent. B. 13.9 percent. C. 15.0 percent. D. 16.8 percent. E. 17.4 percent.

B. 13.9 percent.

30. The average risk premium on long-term corporate bonds for the period 1926-2012 was: A. 2.4 percent. B. 2.9 percent. C. 3.3 percent. D. 3.7 percent. E. 3.9 percent.

B. 2.9 percent.

88. The short interest on Blue Water Cruisers stock was 351,900 when the market opened this morning. During the day, 288,500 shares were covered and 151,600 shares were sold short. What was the short interest on this stock at the end of the trading day? A. 203,100 shares B. 215,000 shares C. 233,100 shares D. 308,100 shares E. 447,900 shares

B. 215,000 shares

81. Celsius stock had year-end prices of $42, $37, $44, and $46 over the past four years, respectively. What is the arithmetic average rate of return? A. 3.17 percent B. 3.85 percent C. 4.28 percent D. 10.63 percent E. 11.79 percent

B. 3.85 percent

73. The DJIA is an index of the stock prices of _____ firms. A. 25 B. 30 C. 50 D. 100 E. 500 See Section 5.6

B. 30

74. Five months ago, you purchased 400 shares of stock on margin. The initial margin requirement on your account is 60 percent and the maintenance margin is 30 percent. The call money rate is 4.8 percent and you pay 1.85 percent above that rate. The purchase price was $16 a share. Today, you sold these shares for $18.00 each. What is your annualized rate of return? A. 26.15 percent B. 33.35 percent C. 42.77 percent D. 56.87 percent E. 64.64 percent

B. 33.35 percent

79. You recently purchased 1,300 shares of stock at a cost per share of $54.10. The initial margin requirement on this stock is 60 percent and the maintenance margin is 30 percent. The stock is currently valued at $42.30 a share. What is your current margin position? Ignore margin interest. A. 46.91 percent B. 48.84 percent C. 63.05 percent D. 65.28 percent E. 78.18 percent

B. 48.84 percent

49. Todd has a margin account with $17,400 in available cash. The initial margin is 70 percent and the maintenance margin is 30 percent. What is the maximum number of shares he can purchase if the price per share is $44? A. 395 shares B. 564 shares C. 698 shares D. 744 shares E. 842 shares

B. 564 shares

52. Donna recently purchased 500 shares of Deltona stock for $33.00 a share. Her broker required a cash payment of $10,725, plus trading costs, for the purchase. What is the initial margin requirement on this particular stock? A. 60 percent B. 65 percent C. 75 percent D. 80 percent E. 90 percent

B. 65 percent

35. The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution. A. 50 B. 68 C. 82 D. 90 E. 95

B. 68

86. Over the past five years, an investment produced annual returns of 16.5, 21, -18, 4, and 17 percent, respectively. What is the geometric average return? A. 6.42 percent B. 7.06 percent C. 8.00 percent D. 15.60 percent E. 16.00 percent

B. 7.06 percent

75. 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 percent and the maintenance margin is 40 percent. The call money rate is 4.4 percent and she pays 2 percent above that rate. Today, she sold these shares for $37.50 each. What is her annualized rate of return? A. 7.50 percent B. 7.61 percent C. 14.37 percent D. 16.90 percent E. 17.42 percent

B. 7.61 percent

69. The Latest Trend Fund has $2,648,900 in assets, and $1,878,400 in liabilities. How many shares are outstanding if the NAV is $10.07? A. 75,481 B. 76,514 C. 77,089 D. 79,142 E. 79,638 NAV = ($2,648,900 - $1,878,400)/$10.07 = 76,514

B. 76,514

88. An initial investment of $35,000 forty nine years ago is worth $1,533,913 today. What is the geometric average return on this investment? A. 7.47 percent B. 8.02 percent C. 9.23 percent D. 10.47 percent E. 11.08 percent

B. 8.02 percent

7. 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. Amount of cash that must be paid to purchase a security on margin

56. Which one of the following statements is correct regarding moving averages? A. The 50-day moving average reflects the long-term trend of the market. B. An exponential moving average is a weighted average. C. Moving averages are used primarily to measure trading volume. D. Short-term and long-term moving averages always move in the same direction. E. Moving averages are generally computed using average daily prices. See Section 8.7

B. An exponential moving average is a weighted average.

23. Which one of the following decisions falls under the category of asset allocation? A. Purchasing Ford stock rather than General Motors stock B. Determining that thirty percent of a portfolio should be invested in bonds C. Adopting a passive investment strategy D. Deciding to actively analyze individual securities E. Deciding to use an online broker

B. Determining that thirty percent of a portfolio should be invested in bonds

16. Which one of the following will automatically occur if all investors are rational? A. All stock prices will be equal. B. Equivalent risk assets will have equal expected rates of return. C. All investors will earn the market rate of return. D. All investors will earn the same rate of return. E. The riskier an asset, the higher its market price will be. See Section 7.3

B. Equivalent risk assets will have equal expected rates of return.

11. The Free Cash Flow Model: I. can be used to value a company with negative earnings II. is based on a firm having positive cash flows III. requires that a firm pay a dividend IV. directly estimates a value for a firm's equity A. I only B. I and II only C. I and III only D. I, II, and III only E. I, II, III, and IV See Section 6.4

B. I and II only

20. An investment company will be treated as a "regulated investment company" by the Internal Revenue Service provided that it: I. invests almost all of its assets in bonds, stocks, and other securities. II. invests solely in U.S. securities. III. does not invest more than two percent of its assets in any one security. IV. passes all its realized investment income through to its shareholders. A. I and III only B. I and IV only C. II and III only D. I, II, and IV only E. I, III, and IV only See Section 4.3.

B. I and IV only

29. Which of the following will lead to excess profits in a semistrong-form efficient market? I. private financial information II. historical price trends III. financial analysts reports IV. unreleased merger plans A. I only B. I and IV only C. II and III only D. I, II, and III only E. I, III, and IV only See Section 7.4

B. I and IV only

26. An NYSE Supplemental Liquidity Provider: I. can trade the same stocks as designated market makers II. can trade only from offices outside the exchange III. must quote bid or ask quotes a certain % of the day IV. are paid 30 cents per 100 shares traded A. I and II only B. I, II and III only C. I and III only D. I, II, and IV only E. I, II, III and IV See Section 5.2

B. I, II and III only

25. Assume a mutual fund is a pure no-load fund. Which of the following costs should an investor still expect to incur? I. contingent deferred sales charge II. management fee III. trading costs IV. redemption fee A. I, II, and III only B. II and III only C. II, III, and IV only D. I, II, III, and IV E. none of the costs listed See Section 4.4.

B. II and III only

67. NASDAQ has which of the following characteristics? I. trading floor II. computer network III. specialist system IV. multiple market makers A. I and IV only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV See Section 5.4

B. II and IV only

48. Which of the following are bullish indicators? I. flat advance/decline line II. breakout of a support level III. Arms ratio of .38 IV. heavy advancing volume A. I and II only B. III and IV only C. I and III only D. II and III only E. I and IV only See Section 8.7

B. III and IV only

64. Which of the following occurred during the Crash of 1987? I. market prices were kept up-to-date which increased investors' anxiety II. the market declined another 5 percent within the 2 days following the crash III. trading volume exceeded the exchange's capacities IV. NASDAQ went off-line A. I and II only B. III and IV only C. I, II and IV only D. II, III, and IV only E. I, II, III, and IV See Section 7.11

B. III and IV only

18. Based on the dividend discount model, an increase in which of the following will lower the current value of a stock? I. amount of the next dividend II. dividend growth rate III. discount rate A. I only B. III only C. I and II only D. II and III only E. I, II, and III See Section 6.2

B. III only

45. Which one of the following statements related to insider trading is correct? A. Licensed stockbrokers are exempt from insider trading laws. B. Individuals, such as Martha Stewart, who have been convicted of crimes, can be barred from being executive officers of publicly-traded companies. C. Because of the increased speed of information flows and the improved efficiency of the markets, insider trading laws were abolished in 2006. D. Martha Stewart was convicted of insider trading and subjected both to a fine and a jail sentence. E. An investor who receives advice from an investment advisor is automatically charged with insider trading when the advisor bases his recommendations on private information. See Section 7.7

B. Individuals, such as Martha Stewart, who have been convicted of crimes, can be barred from being executive officers of publicly-traded companies.

32. Which one of the following statements appears to be correct based on current research? A. Single, female investors tend to earn lower returns than their male counterparts. B. Overconfidence tends to result in lower returns. C. Excessive trading tends to increase returns. D. Men tend to trade less frequently than women. E. Investors with higher incomes tend to be more risk-adverse than other investors. See Section 8.3

B. Overconfidence tends to result in lower returns.

53. Which one of the following statements is correct? A. Professional money managers outperformed the Vanguard 500 Index Fund on an annual basis more than half the time for the period 1977-2011. B. Purchasing and holding a broad-based index fund is a highly recommended means of investing. C. The number of general equity mutual funds has decreased over the past 20 years due to their underperformance as compared to index funds. D. The survivorship bias lowers the returns earned by professional money managers as a group. E. In an efficient market, there is no need for professional money managers. See Section 7.9

B. Purchasing and holding a broad-based index fund is a highly recommended means of investing.

37. Lauren Mitchell has a margin account with a local brokerage firm, RL Brokers. She recently purchased 200 shares of Abbot Industries common stock that trades on the New York Stock Exchange (NYSE). These shares are held in street name and are registered under the name of: A. Lauren Mitchell. B. RL Brokers. C. Abbot Industries. D. the New York Stock Exchange. E. the Securities and Exchange Commission.

B. RL Brokers.

75. Which one of the following is the primary flaw of a price-weighted index? A. Price-weighted indexes ignore stock splits which affect stock prices. B. The effect a company has on the index is dependent solely on the price per share. C. Only a small number of stocks can be included in a price-weighted index. D. If the number of shares outstanding of an index stock changes, the index divisor must be recomputed. E. The index can only be computed once the trading day is over. See Section 5.6

B. The effect a company has on the index is dependent solely on the price per share.

23. Which one of the following statements is correct based on the historical returns for the period 1926- 2012? A. For the period, Treasury bills yielded a higher rate of return than long-term government bonds. B. The inflation rate exceeded the rate of return on Treasury bills during some years. C. Small-company stocks outperformed large-company stocks every year during the period. D. Bond prices, in general, were more volatile than stock prices. E. For the period, large-company stocks outperformed small-company stocks.

B. The inflation rate exceeded the rate of return on Treasury bills during some years.

14. 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. The total return can be negative but the dividend yield cannot be negative.

21. Which one of the following statements is correct regarding prospect theory? A. Average investors tend to lose more money than they earn from investing. B. Typical investors feel that losing $1 is twice as painful as the pleasure derived from making $1. C. Investors should focus on gains and losses in individual securities rather than their portfolio's total value. D. Typical investors tend to react irrationally only when focusing on total portfolio value. E. Average investors tend to prefer higher levels of risk. See Section 8.2

B. Typical investors feel that losing $1 is twice as painful as the pleasure derived from making $1.

60. Exchange traded notes were first created to mimic _____ index. A. the S&P 500 B. a commodity C. the dollar D. the Indian stock market E. the DJIA See Section 4.8.

B. a commodity

7. The turnover for a mutual fund refers to: A. the length of time an average investor holds fund shares. B. a measure of trading activity. C. replacing the fund's investment manager. D. the annual change in the number of shares outstanding. E. the percentage change in the ownership of fund shares. See Section 4.4.

B. a measure of trading activity.

66. Currently, the term "hedge fund" refers to: A. any registered fund with a stated investment objective. B. any unregistered fund pursuing any type of investment style. C. any fund that equally invests in long and short positions. D. any fund that adheres to a "market-neutral" investment strategy. E. any private fund that has a minimum investment requirement of $1 million or more. See Section 4.8.

B. any unregistered fund pursuing any type of investment style.

3. An investment company that issues a fixed number of shares which can only be resold in the open stock market is called a(n) _____ fund. A. hedge B. closed-end C. open-end D. public E. market See Section 4.2.

B. closed-end

27. The party who serves as a dealer for a few securities on an exchange floor and is obligated to maintain an orderly market for those securities is called a: A. floor trader. B. designated market maker. C. floor broker. D. member. E. house broker. See Section 5.2

B. designated market maker.

26. A decrease in which one of the following will increase a firm's sustainable rate of growth? A. net income B. dividend payout ratio C. total assets D. retention ratio E. earnings per share See Section 6.2

B. dividend payout ratio

71. The stocks listed on the Pink Sheets: A. are those stocks trading on the NASDAQ CAPITAL MARKET. B. do not have to file financial statements with the SEC. C. have all been delisted by the NYSE. D. are the highest priced stocks listed on NASDAQ. E. must file financial statements with the SEC but do not have to meet any listing requirements. See Section 5.4

B. do not have to file financial statements with the SEC.

38. Which type of fund should you purchase if you are interested in investing primarily in countries that have relatively new stock markets? A. international fund B. emerging markets fund C. social conscience fund D. global fund E. sector fund See Section 4.6.

B. emerging markets fund

28. A trading floor broker: A. is a NYSE member who trades on the floor for his or her personal account. B. executes orders on behalf of commission brokers in exchange for a fee. C. executes customers' orders in exchange for a commission. D. trades a limited number of securities and is obligated to maintain an orderly market for those securities. E. is any party who owns a NYSE trading license. See Section 5.2

B. executes orders on behalf of commission brokers in exchange for a fee.

44. Which one of the following is the distinguishing characteristic of a municipal bond fund? A. high-yield B. federally tax-free income C. mortgage backed D. short-term E. low quality See Section 4.6.

B. federally tax-free income

36. Small-cap funds: A. generally focus on dividend-paying stocks. B. focus more on capital appreciation than on current income. C. are defined as the smallest 20 percent of all funds based on total asset value. D. are defined as the 20 percent of funds with the smallest NAVs. E. are generally also classified as equity income funds. See Section 4.6.

B. focus more on capital appreciation than on current income.

24. When the offering price and the NAV are the same, you know that a mutual fund is not charging which one of the following fees? A. 12b-1 fee B. front-end load C. management fee D. contingent deferred sales charge E. trading costs See Section 4.4.

B. front-end load

18. Mutual funds are generally created to: A. provide tax shelters for investors. B. generate fees for an advisory firm. C. eliminate investment risk. D. avoid taxes. E. avoid regulation. See Section 4.3.

B. generate fees for an advisory firm.

15. 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. has insufficient funds to purchase a security.

37. Inside quotes are the: A. highest asked and lowest bid quotes offered by securities dealers. B. highest bid and lowest asked quotes offered by securities dealers. C. latest prices at which corporate insiders have purchased or sold securities. D. bid and asked prices which are offered only to institutional traders or large private investors. E. latest price at which a security traded. See Section 5.4

B. highest bid and lowest asked quotes offered by securities dealers.

14. Technical analysis is the study of which one of the following as the basis for trading? A. systematic risk B. historical prices C. dividend growth D. financial statements E. investor's required return See Section 8.7

B. historical prices

51. Letter grades are most frequently assigned to mutual funds based on the fund's: A. projected future returns. B. historical rates of return. C. management style. D. portfolio size. E. investment objective. See Section 4.7.

B. historical rates of return.

48. If the financial markets are highly efficient, then: A. investing based on technical analysis is highly recommended. B. holding a diversified, low-cost, passively-managed portfolio is probably your best investment strategy. C. you should adopt an investment strategy based on market timing. D. having a professional manager who actively trades your portfolio is most likely your best investment strategy. E. it doesn't matter which securities you invest in as all securities will provide relatively equal returns. See Section 7.8

B. holding a diversified, low-cost, passively-managed portfolio is probably your best investment strategy.

19. Kay plans to retire in two years and wishes to liquidate her account at that time. Kay has a _____ constraint. A. resource B. horizon C. liquidity D. tax E. special circumstances

B. horizon

10. 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. hypothecation.

56. If you purchase shares in a closed-end fund at the initial offer price, you should expect to: A. earn an abnormally high rate of return the first year. B. immediately see a decrease in the value of your investment. C. receive offers to purchase your shares at a premium prior to the official first day of trading. D. earn tax-advantaged income. E. realize a capital gain if you sell your shares as soon as trading in the shares commences. See Section 4.8.

B. immediately see a decrease in the value of your investment.

34. 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. increase your maximum potential rate of return.

65. Which one of the following is seen as a bearish indicator? A. decreased short selling B. increased buying by odd-lot traders C. shorter skirt lengths D. a Super Bowl win by a National Football League team E. tight Bollinger bands See Section 8.7

B. increased buying by odd-lot traders

6. Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis? A. public B. informed C. normal D. inside E. block See Section 7.7

B. informed

2. 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. initial stock price.

30. Money market mutual funds do which one of the following? A. offer a guaranteed rate of return B. invest in securities that mature in 90 days or less C. provide a risk-free means of investing D. invest only in government bonds E. trade for $10 a share See Section 4.5.

B. invest in securities that mature in 90 days or less

4. A firm that specializes in arranging financing for companies is called a(n): A. floor broker B. investment banking firm C. investment dealer D. private broker E. marketing firm See Section 5.1

B. investment banking firm

44. A short sale: A. creates a long position in a stock. B. involves the borrowing of securities. C. is the purchase of less than 100 shares of a stock. D. is a bullish outlook towards a security. E. is the resale of a security within four hours of purchase.

B. involves the borrowing of securities.

35. Four of the last five stocks your investment adviser recommended have outperformed the market. Thus, you believe that if you continue to follow her advice, that 80 percent of your investments will outperform the market over the long term. This belief is based on the: A. gambler's fallacy. B. law of small numbers. C. law of large numbers. D. clustering illusion. E. positive performance illusion. See Section 8.4

B. law of small numbers.

11. Which of the following are three key advantages of mutual funds? A. diversification, taxes, high initial investments B. low initial investments, professional management, diversification C. liquidity, high initial investments, diversification D. professional management, high initial investments, taxes E. costs, diversification, liquidity See Section 4.1.

B. low initial investments, professional management, diversification

30. Ted constantly ignores the effects of inflation on money. Ted is suffering from which one of the following? A. endowment effect B. money illusion C. regret aversion D. myopic loss aversion E. sunk cost fallacy See Section 8.2

B. money illusion

39. Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio? A. net income minus dividends B. net income plus depreciation C. net income minus depreciation plus taxes D. earnings before interest and taxes plus depreciation E. earnings before interest and taxes See Section 6.6

B. net income plus depreciation

21. The constant perpetual growth model is applicable primarily to those firms which: A. adhere to a residual dividend policy. B. pay dividends that increase at a steady rate. C. have irregular dividend growth rates. D. maintain a constant dividend payout ratio. E. have multiple rates of dividend growth. See Section 6.2

B. pay dividends that increase at a steady rate.

29. What are the two best reasons for considering a load fund? A. lack of good no-load funds and superior market performance B. preference for a particular fund manager or a specialized type of fund C. superior market performance and preferential tax treatment D. tax-free income and superior fund managers E. no management fees and a particular fund manager See Section 4.4.

B. preference for a particular fund manager or a specialized type of fund

41. You would like to know the value of a firm's equity today in relation to the cost of that equity. Which one of the following ratios will provide you with this information? A. price-earnings B. price-book C. price-sales D. price-cash flow E. price-assets See Section 6.6

B. price-book

12. What is the market value of a share of stock divided by the net income per share called? A. earnings per share B. price-earnings ratio C. value-earnings ratio D. earnings yield E. market multiple See Section 6.6

B. price-earnings ratio

16. The document that must be prepared in order to receive approval for a stock offering is called a: A. tombstone. B. prospectus. C. offering agreement. D. regulatory report. E. offering paper. See Section 5.1

B. prospectus.

34. Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio? A. two-stage growth B. residual income C. perpetual dividend growth D. supernormal growth E. perpetual cash flow See Section 6.4

B. residual income

63. Fibonacci numbers: A. are all odd numbers of increasing value. B. result in a golden mean which has an approximate value of 1.618. C. are the square roots of the products of the two previous numbers in the series. D. result in a phi which is approximately equal to .382. E. are a series of numbers which are equal to the product of the two previous numbers. See Section 8.7

B. result in a golden mean which has an approximate value of 1.618.

10. Which one of the following best describes heuristics? A. clustering B. rules of thumb C. grouping D. representativeness E. herding See Section 8.5

B. rules of thumb

7. Marco Painting 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. supplemental offering. B. seasoned equity offering. C. initial public offer. D. market expansion offer. E. after-market underwriting. See Section 5.1

B. seasoned equity offering.

2. 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. primary B. secondary C. third D. fourth E. fifth See Section 5.1

B. secondary

6. Kate just purchased $7,000 worth of stock. She paid $5,000 in cash and borrowed $2,000. In this example, the term margin refers to: A. the total amount of the purchase. B. the percentage of the purchase that was paid in cash. C. the percentage of the purchase paid with borrowed funds. D. any future increase in the value of the stock. E. any future decrease in the value of the stock.

B. the percentage of the purchase that was paid in cash.

8. An unwillingness to take a risk after a loss describes: A. over-confidence B. the snakebite effect C. the illusion of knowledge D. the clustering illusion E. loss aversion See Section 8.4

B. the snakebite effect

35. 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 See Section 2.3

B. to demand funds to increase your margin position

18. A securities dealer is a(n): A. intermediary who arranges trades between a buyer and a seller. B. trader who buys and sells from his or her inventory. C. firm which charges a commission for arranging a transaction. D. person who buys securities for his or her own account on an exchange floor. E. trader who transacts business on behalf of a securities issuer. See Section 5.1

B. trader who buys and sells from his or her inventory.

28. Which one of the following is NOT included in the fee table found in a mutual fund prospectus? A. 12b-1 fee B. turnover rate C. redemption fee percentage D. management fee E. front-end load See Section 4.4.

B. turnover rate

26. According to the concept of house money, individual investors are most apt to do which one of the following? A. take more risks with their initial investment than with the gains on that investment B. value money differently depending upon its source C. treat paper profits the same as initial cash investments D. apply the same level of risk-aversion to all investments E. place high value on paper profits but low value on paper losses See Section 8.2

B. value money differently depending upon its source

28. Which form of market efficiency exists if the market is efficient only in regard to historical information? A. mild-form B. weak-form C. historical-form D. semistrong-form E. strong-form See Section 7.4

B. weak-form

Elise just sold a stock and realized a 6.2 percent return for a 4-month holding period. What was her annualized rate of return? A. 11.98 percent B. 14.78 percent C. 19.78 percent D. 21.29 percent E. 27.20 percent

One year ago, you purchased 100 shares of Southern Foods common stock for $40.7 a share. Today, you sold your shares for $39.70 a share. During this past year, the stock paid $1.40 in dividends per share. What is your dividend yield on this investment? A. 3.30 percent B. 3.37 percent C. 3.44 percent D. 3.53 percent E. 3.61 percent

One year ago, you purchased 300 shares of stock at a cost of $7,521. The stock paid an annual dividend of $1.10 per share. Today, you sold those shares for $28.20 each. What is the capital gains yield on this investment? A. 9.96 percent B. 10.44 percent C. 12.49 percent D. 13.33 percent E. 14.75 percent

One year ago, you purchased 400 shares of Southern Cotton at $38.40 a share. During the past year, you received a total of $480 in dividends. Today, you sold your shares for $41.10 a share. What is your total return on this investment? A. 8.79 percent B. 9.64 percent C. 10.16 percent D. 11.64 percent E. 12.76 percent

The average compound return earned per year over a multiyear period when inflows and outflows are considered is called the: A. total return. B. average capital gains yield. C. dollar-weighted average return. D. arithmetic average return. E. geometric average return.

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.

The total dollar return on a share of stock is defined as the: A. change in the price 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 divided by the original stock price. E. annual dividend income received.

Todd purchased 600 shares of stock at a price of $68.20 a share and received a dividend of $1.42 per share. After six months, he resold the stock for $71.30 a share. What was his total dollar return? A. $1,008 B. $1,860 C. $2,712 D. $3,211 E. $3,400

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.

Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2009? A. only large-company stocks B. both large-company and small-company stocks C. only small-company stocks D. corporate bonds, large-company stocks, and small-company stocks E. No category earned an annual return in excess of 100 percent for any given year during the period.

83. You invested $5,000 eight years ago. The arithmetic average return on your investment is 10.6 percent and the geometric average return is 10.23 percent. What is the value of your portfolio today? A. $9,092 B. $10,623 C. $10,899 D. $10,947 E. $11,195

C. $10,899

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.

You purchased a stock five months ago for $40 a share. Today, you sold that stock for $44 a share. The stock pays no dividends. What was your annualized rate of return? A. 23.93 percent B. 24.77 percent C. 25.70 percent D. 26.03 percent E. 27.67 percent

You purchased a stock for $29.40 a share, received a dividend of $0.72 per share, and sold the stock after one year for $31.30 a share. What was your dividend yield on this investment? A. 2.30 percent B. 2.38 percent C. 2.45 percent D. 2.67 percent E. 2.80 percent

30. Amy just purchased $12,000 of stock. She paid $9,000 in cash and borrowed the remaining $3,000 needed to pay for this purchase. If you constructed a balance sheet reflecting this transaction, the total assets would be: A. $3,000. B. $9,000. C. $12,000. D. $15,000. E. $21,000.

C. $12,000.

51. Todd purchased 600 shares of stock at a price of $68.20 a share and received a dividend of $1.42 per share. After six months, he resold the stock for $71.30 a share. What was his total dollar return? A. $1,008 B. $1,860 C. $2,712 D. $3,211 E. $3,400

C. $2,712

87. Matt short sold 500 shares of Tall Pines stock at $19 a share at an initial margin of 65 percent. The maintenance margin is 35 percent. What is the highest the stock price can go before he receives a margin call? A. $20.12 B. $21.48 C. $23.22 D. $24.07 E. $25.16

C. $23.22

66. Marti purchased 100 shares of Better Foods stock on margin at a price of $49 a share. The initial margin requirement is 60 percent and the maintenance margin is 30 percent. What is the lowest the stock price can go before Marti receives a margin call? A. $17.00 B. $24.00 C. $28.00 D. $30.00 E. $33.00

C. $28.00

86. Jennifer believes that Northern Wine stock is going to decline in value so she is short selling 1,000 shares at $32 a share. Her initial margin requirement is 70 percent and the maintenance margin is 30 percent. What is the highest the stock price can go before she receives a margin call? A. $38.97 B. $40.15 C. $41.85 D. $43.75 E. $45.77

C. $41.85

72. Ina purchased 800 shares of Detroit Motors stock at a price of $55 a share. The initial margin requirement is 65 percent and the maintenance margin is 30 percent. The effective interest rate on the margin loan is 4.69 percent. How much margin interest will she pay if she repays the loan in seven months? A. $387.29 B. $401.32 C. $417.29 D. $530.42 E. $647.96

C. $417.29

68. Aaron purchased 300 shares of a technology stock for $16.80 a share. The initial margin requirement on this stock is 85 percent and the maintenance margin is 60 percent. What is the lowest the stock price can go before he receives a margin call? A. $4.43 B. $5.55 C. $6.30 D. $8.33 E. $10.03

C. $6.30

84. Matt short sold 600 shares of stock at $10.50 a share. The initial margin is 80 percent and the maintenance margin is 50 percent. The stock is currently selling for $6.80 a share. What is Matt's account equity at this time? Ignore margin interest. A. $3,070 B. $5,590 C. $7,260 D. $9,950 E. $11,510

C. $7,260

92. Recently, you sold 500 shares of stock for $16.60 a share. The sale was a short sale with an initial margin requirement of 70 percent. The maintenance margin is 35 percent. The stock is currently trading at $17.80 a share. What is your current short position in this stock? A. $4,916 B. $6,830 C. $8,900 D. $10,362 E. $11,976

C. $8,900

89. You just sold 1,200 shares of stock short at a price per share of $13.50. The initial margin requirement is 60 percent and the maintenance margin is 30 percent. What is your initial equity position? A. $6,480 B. $7,520 C. $9,720 D. $10,520 E. $16,200

C. $9,720

54. Stephen is purchasing 700 shares of KPT, Inc., stock at a price per share of $28.00. What is the minimum amount the Federal Reserve will require Stephen to pay in cash for this purchase? A. $4,488 B. $7,480 C. $9,800 D. $10,968 E. $11,960

C. $9,800

77. Robin sold 800 shares of a non-dividend paying stock this morning for a total of $29,440. She had purchased these shares on margin nine months ago at a cost per share of $35. The initial margin requirement on this stock is 60 percent and the maintenance margin is 30 percent. Robin pays 1.2 percent over the call money rate of 4.9 percent. What is her total dollar return on this investment? A. $816.48 B. $897.29 C. $931.41 D. $1,164.93 E. $1,440.00

C. $931.41

71. An asset has an average annual historical return of 11.6 percent and a standard deviation of 17.8 percent. What range of returns would you expect to see 95 percent of the time? A. -41.8 to +65.0 percent B. -34.4 to +53.6 percent C. -24.0 to +47.2 percent D. -6.2 to +29.4 percent E. -5.4 to +41.0 percent

C. -24.0 to +47.2 percent

67. An asset had returns of 6.8, 5.4, 3.6, -4.2, and -1.3 percent, respectively, over the past five years. What is the variance of these returns? A. .00173 B. .00184 C. .00216 D. .00240 E. .00259

C. .00216

66. Over the past five years, Southwest Railway stock had annual returns of 10, 14, -6, 7.5, and 16 percent, respectively. What is the variance of these returns? A. .00548 B. .00685 C. .00770 D. .01370 E. .02740

C. .00770

40. Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish? A. -1 B. 0 C. 1 D. 50 E. 100 See Section 8.7

C. 1

64. You purchased a stock for $18.45 a share using 70 percent margin. You sold the stock seven months later for $19.85 a 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. 8.77 percent B. 9.12 percent C. 10.84 percent D. 11.75 percent E. 12.13 percent

C. 10.84 percent

91. The geometric return on an asset over the past 12 years has been 13.47 percent. The arithmetic return over the same period was 13.86 percent. What is the best estimate of the average return on this asset over the next 5 years? A. 13.47 percent B. 13.67 percent C. 13.72 percent D. 13.81 percent E. 13.86 percent

C. 13.72 percent

55. Elise just sold a stock and realized a 6.2 percent return for a 4-month holding period. What was her annualized rate of return? A. 11.98 percent B. 14.78 percent C. 19.78 percent D. 21.29 percent E. 27.20 percent

C. 19.78 percent

96. Jim began his investing program with a $4050 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar-weighted average return? A. 1.5 percent B. 1.8 percent C. 2.0 percent D. 2.2 percent E. 2.5 percent

C. 2.0 percent

45. You purchased a stock for $29.40 a share, received a dividend of $0.72 per share, and sold the stock after one year for $31.30 a share. What was your dividend yield on this investment? A. 2.30 percent B. 2.38 percent C. 2.45 percent D. 2.67 percent E. 2.80 percent

C. 2.45 percent

97. Jim began his investing program with a $4,000 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar-weighted average return? A. 1.6 percent B. 2.2 percent C. 2.6 percent D. 3.2 percent E. 3.6 percent

C. 2.6 percent

76. Over the past four years, the common stock of JL Steel Co. produced annual returns of 6.2, 5.8, 11.2, and 13.6 percent, respectively. Treasury bills produced returns of 3.4, 3.3, 4.1, and 4.7 percent, respectively over the same period. What is the standard deviation of the risk premium on JL Steel Co. stock for this time period? A. 2.23 percent B. 2.86 percent C. 3.22 percent D. 4.46 percent E. 4.61 percent

C. 3.22 percent

48. Taylor Industries stock is selling for $26 a share. You would like to purchase as many shares of this stock as you can. Your margin account currently has available cash of $4,700 and the initial margin requirement is 60 percent. What is the maximum number of shares you can buy? A. 193 shares B. 287 shares C. 301 shares D. 360 shares E. 408 shares

C. 301 shares

57. You own 700 shares of a stock that you purchased on margin at a price per share of $20.12. The stock is currently valued at $23 a share. Your broker advised you today that your minimum equity position for this purchase is $5,635 as of today. What is the maintenance margin percentage? A. 25 percent B. 30 percent C. 35 percent D. 40 percent E. 50 percent

C. 35 percent

62. Over the past four years, Jellystone Quarry stock produced returns of 12.5, 15.1, 8.7, and 2.6 percent, respectively. For the same time period, the risk-free rate 4.7, 5.3, 3.9, and 3.4 percent, respectively. What is the arithmetic average risk premium on this stock during these four years? A. 5.13 percent B. 5.25 percent C. 5.40 percent D. 5.83 percent E. 5.97 percent

C. 5.40 percent

70. Nelson purchased 1,600 shares of stock for $18.75 a share. The initial margin requirement is 70 percent and the maintenance margin is 40 percent. What is the maximum percent by which the stock price can decline before he receives a margin call? A. 30 percent B. 45 percent C. 50 percent D. 65 percent E. 70 percent

C. 50 percent

85. A stock produced annual returns of 5, -21, 11, 42, and 4 percent over the past five years, respectively. What is the geometric average return? A. 5.78 percent B. 6.03 percent C. 6.34 percent D. 7.21 percent E. 8.20 percent

C. 6.34 percent

63. Over the past five years, Teen Clothing stock produced returns of 18.7, 5.8, 7.9, 10.8, and 11.6 percent, respectively. For the same five years, the risk-free rate 5.2, 3.4, 2.8, 3.4, and 3.9 percent, respectively. What is the arithmetic average risk premium on Teen Clothing stock for this time period? A. 6.89 percent B. 7.01 percent C. 7.22 percent D. 7.34 percent E. 7.57 percent

C. 7.22 percent

31. 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 percent. The initial margin requirement is _____ percent and the maintenance margin is _____ percent. A. 30; 30 B. 30; 70 C. 70; 30 D. 70; 50 E. 70; 70

C. 70; 30

78. You recently purchased 100 shares of stock at a cost per share of $24.80. The initial margin requirement on this stock is 80 percent and the maintenance margin is 50 percent. The stock is currently valued at $19.80 a share. What is your current margin position? Ignore margin interest. A. 73.01 percent B. 73.83 percent C. 74.95 percent D. 75.69 percent E. 76.80 percent

C. 74.95 percent

80. Yvette recently purchased 500 shares of stock at a cost per share of $43.50. The initial margin requirement on this stock is 75 percent and the maintenance margin is 40 percent. The stock is currently valued at $44.75 a share. What is her current margin position? Ignore margin interest. A. 74.29 percent B. 74.78 percent C. 75.70 percent D. 76.03 percent E. 76.14 percent

C. 75.70 percent

60. A stock has an average historical risk premium of 5.6 percent. The expected risk-free rate for next year is 2.4 percent. What is the expected rate of return on this stock for next year? A. 6.50 percent B. 7.53 percent C. 8.00 percent D. 9.34 percent E. 11.70 percent

C. 8.00 percent

69. Over the past four years, a stock produced returns of 13, 6, -5, and 18 percent, respectively. What is the standard deviation of these returns? A. 8.63 percent B. 9.93 percent C. 9.97 percent D. 10.11 percent E. 10.15 percent

C. 9.97 percent

22. Today, you are selling shares of an open-end mutual fund and will be charged a CDSC of 3 percent. The price you will receive per share is equal to: A. 103 percent of the opening NAV. B. 97 percent of the opening offering price. C. 97 percent of the closing NAV. D. 103 percent of the closing offering price. E. the closing offering price. See Section 4.4.

C. 97 percent of the closing NAV.

30. Research on semistrong-form efficient markets indicates which one of the following is correct? A. Identifying a stock with repetitive price movements is generally the best method of active investing. B. Future returns on large company stocks tend to closely follow past pricing patterns. C. Buying and holding a broad market index is one of the best investment strategies. D. Predicting future stock prices is relatively easy for academic researchers. E. Trading costs have little, if any, impact on investment returns. See Section 7.6

C. Buying and holding a broad market index is one of the best investment strategies.

32. 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. Federal Reserve.

19. Investment advisory firms generally provide which of the following services to a mutual fund? I. marketing II. record keeping III. investment research IV. tax payment A. I only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV See Section 4.3.

C. I, II, and III only

61. Which of the following are considered in the computation of money flows? I. last trade price II. current trade price III. volume of each trade IV. time of each trade A. I and IV only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV See Section 8.7

C. I, II, and III only

44. Which of the following are common sources of venture capital? I. private individuals II. NASDAQ III. university endowment funds IV. insurance companies A. I and II only B. III and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV See Section 5.1

C. I, III, and IV only

72. Which of the following are common characteristic of the OTCBB market? I. low stock prices II. dual listings with NASDAQ III. high percentage price changes IV. thinly traded securities A. I and III only B. I, II, and III only C. I, III, and IV only D. II, II, and IV only E. I, II, III, and IV See Section 5.4

C. I, III, and IV only

53. Which one of the following statements is correct concerning an open-high-low-close bar chart? A. The prices indicated by the two horizontal lines are the maximum and minimum daily prices. B. The upper trendline indicates the support level. C. If the overall price movement is downward, the lower trendline is called the channel line. D. If the overall price movement is upward, the upper trendline is called the head line. E. The final price of the day is indicated by a horizontal line to the left side of the vertical line. See Section 8.7

C. If the overall price movement is downward, the lower trendline is called the channel line.

24. Which of the following is correct regarding the compensation paid to private equity fund managers? A. Managers typically receive 20% of fund profits but no separate management fee. B. Managers typically receive a high percentage management fee but no portion of fund profits. C. Management compensation is usually subject to a "clawback" provision to limit the performance fees. D. "Carried interest" refers to the interest fund managers earn on performance fees. E. Fees paid to fund managers do not reduce the net return of the fund. See Section 5.1

C. Management compensation is usually subject to a "clawback" provision to limit the performance fees.

27. 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. Margin

35. A market centered on dealers buying and selling for their own inventories is called a(n): A. exchange floor. B. SuperDot. C. OTC market. D. subscriber market. E. Big Board. See Section 5.4

C. OTC market.

76. Which one of the following statements related to stock indexes is correct? A. The index divisor increases in value whenever a stock in the index undergoes a stock split. B. A value-weighted index includes both dividends and capital gains. C. The S&P 500 index is value-weighted. D. The DJIA is value-weighted. E. Index staleness is more apt to be a problem for the DJIA than for the Wilshire 5000. See Section 5.6

C. The S&P 500 index is value-weighted.

57. Assume the 50-day moving average is currently intersecting the 200-day moving average. Also assume the 50-day average is downward sloping and the 200-day average is upward sloping. Which one of the following statements is accurate based on this information? A. The 50-day moving average is bullish. B. The short-term forecast is bullish. C. The long-term trend may be preparing to change. D. The long-term outlook is bearish. E. The short-term trend will change to match the long-term trend. See Section 8.7

C. The long-term trend may be preparing to change.

52. Trading symbols for mutual funds end in which letter? A. M B. F C. X D. Z E. Q See Section 4.7.

C. X

22. Which one of the following is a correct formula for computing a geometric average dividend growth rate? A. [(1 + D0) + (1 + D1) × (1 + DN)]N + 1 - 1 B. [(1 + D0) × (1 + D1) × (1 + DN)]N - 1 - 1 C. [DN/D0]1/N - 1 D. [D0/DN]N - 1 E. [DN/D0]N/1 - 1 See Section 6.2

C. [DN/D0]1/N - 1

5. Which one of the following returns is computed as the observed return minus the expected return? A. visible B. distinct C. abnormal D. subjective E. efficient See Section 7.6

C. abnormal

1. What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions? A. logical B. individual C. behavioral D. rational E. personal See Section 8.1

C. behavioral

69. The orders displayed on NASDAQ are placed by: A. individuals on ECNs only. B. market makers only. C. both market makers and individuals on ECNs. D. brokerage firms. E. floor brokers. See Section 5.4

C. both market makers and individuals on ECNs.

1. 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. See Section 2.1

C. buying and selling of securities in anticipation of the overall direction of the market.

18. Independent deviations from rationality: A. only exist when the overall market is overvalued. B. prevent the markets from ever being efficient. C. can create an efficient market. D. are the actions taken by rational arbitrage traders. E. do not exist in an efficient market. See Section 7.3

C. can create an efficient market.

1. The total dollar return on a share of stock is defined as the: A. change in the price 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 divided by the original stock price. E. annual dividend income received.

C. capital gain or loss plus any dividend income.

38. Which one of the following is used as an indicator that a firm has good-quality earnings? A. declining price-earnings ratios B. constant price-earnings ratios C. cash flow per share that exceeds earnings per share D. earnings per share that exceed cash flow per share E. positive earnings per share See Section 6.6

C. cash flow per share that exceeds earnings per share

33. The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics? A. overconfidence B. excess trading C. clustering illusion D. diversification E. risk aversion See Section 8.4

C. clustering illusion

6. Representativeness heuristic is best explained as: A. the process of assuming events are random even when they are not. B. the creation of patterns in planned events. C. concluding that casual factors cause random events when in fact they do not. D. believing that random events that occur in clusters are truly random. E. overconfidence in one's own skills as an investor. See Section 8.4

C. concluding that casual factors cause random events when in fact they do not.

3. The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate. A. diminishing valuation growth model B. increasing valuation growth model C. constant perpetual growth model D. irregular growth perpetual model E. two-stage growth model See Section 6.2

C. constant perpetual growth model

46. Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency? A. ascertaining how historical prices relate to current stock prices B. determining whether a market reaction was appropriate or overstated C. correctly determining the correct risk-adjustment procedure D. determining what undocumented information existed on any particular trading day E. identifying patterns that occur over time in the pricing of a particular security See Section 7.8

C. correctly determining the correct risk-adjustment procedure

11. Which one of the following terms is used to describe a sudden and significant collapse in market prices? A. dive B. recession C. crash D. adjustment E. rebound See Section 7.11

C. crash

32. Two weeks ago Ace Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Ace common stock closed at $20. On the day following the announcement, Ace closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement the stock traded at $23. Last week, Ace stock traded at $26, a level it has maintained since then. This is an example of a(n): A. over-reaction and correction. B. underpricing. C. delayed reaction. D. pre-activity action. E. efficient market reaction. See Section 7.6

C. delayed reaction.

13. The average compound return earned per year over a multi-year period when inflows and outflows are considered is called the: A. total return. B. average capital gains yield. C. dollar-weighted average return. D. arithmetic average return. E. geometric average return.

C. dollar-weighted average return.

1. Which one of the following states that investors cannot consistently earn positive excess returns? A. market return hypothesis B. current market hypothesis C. efficient market hypothesis D. risk-return theory E. excess theory See Section 7.1

C. efficient market hypothesis

35. Which type of stock fund focuses primarily on current income? A. growth and income B. small-company C. equity income D. capital appreciation E. growth See Section 4.6.

C. equity income

15. The price-book ratio is computed as the market value per share divided by the per share book value of: A. total assets. B. long-term debt. C. equity. D. long-term debt plus equity. E. net working capital. See Section 6.6

C. equity.

35. Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement? A. web survey B. market analysis C. event study D. auditing review E. trend study See Section 7.6

C. event study

4. Which one of the following is a research method used to study the effects news has on stock prices? A. polarization B. market analysis C. event study D. news theory E. reaction hypothesis See Section 7.6

C. event study

9. A fund that is basically an index fund that trades like a closed-end fund is called a(n): A. open-end fund. B. money market fund. C. exchange-traded fund. D. mutual fund. E. depository receipt. See Section 4.8.

C. exchange-traded fund.

12. 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. Dutch auction B. full-fledge C. firm commitment D. best efforts E. guaranteed sale See Section 5.1

C. firm commitment

81. ML Underwriters paid an issuer $37,694,528 as IPO proceeds. The IPO offered 1.86 million shares of which 1.835 million were sold at an offer price of $21.85 a share. The underwriting spread was 7.25 percent. What type of underwriting was this? A. best efforts B. variable C. firm commitment D. plain vanilla E. stand-by Number of shares = [$37,694,528/(1 - .0725)]/$21.85 = 1,860,000 shares. This was a firm commitment underwriting since the issuer was paid for all of the shares, even though the underwriter did not sell the entire issue.

C. firm commitment

48. Which one of the following types of funds invests in both stocks and bonds and actively attempts to time the market? A. income B. convertible C. flexible portfolio D. balanced E. insured See Section 4.6.

C. flexible portfolio

24. 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. full-service broker.

34. Tricia has lost money on a particular stock for the past three years. Thus, she believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the: A. law of small numbers. B. house money effect. C. gambler's fallacy. D. false consensus. E. recency bias. See Section 8.4

C. gambler's fallacy.

20. The constant perpetual growth model assumes the: A. dividends are paid for a stated number of years only. B. net income is all paid out in dividends. C. growth rate is less than the discount rate. D. dividends are constant in amount. E. discount rate increases at a constant rate. See Section 6.2

C. growth rate is less than the discount rate.

67. Immediately following the Crash of 1987, the stock market: A. remained in a slump for five years. B. remained flat for an extended period of time. C. had one of the biggest short-term gains ever. D. began a very slow and choppy recovery. E. began a very slow and smooth recovery. See Section 7.11

C. had one of the biggest short-term gains ever.

14. Growth stocks are frequently described as having which one of the following characteristics? A. high dividends B. a value orientation C. high P/E ratios D. low cash flows per share E. low retention ratios See Section 6.6

C. high P/E ratios

44. Helena is the chief executive officer of Beltway Holdings (BEH). She owns 1.2 million shares of BEH stock and wishes to sell 10 percent of those shares to diversify her holdings. She follows the SEC requirements, along with those of her firm, and proceeds with the sale on Monday, June 9. On Tuesday, June 10, BEH stock declines by 25 percent. Helena's stock trade is: A. legal but any future trading in BEH will be prohibited as long as she remains employed by the firm. B. illegal and could subject her to both fines and jail time. C. legal. D. subject to reversal by the SEC. E. subject to a forfeiture of her profits to the SEC. See Section 7.7

C. legal.

11. The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms? A. noise trading bounds B. market bounds C. limits to arbitrage D. implementation limits E. sentiment borders See Section 8.6

C. limits to arbitrage

8. 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. maintenance margin.

32. 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. short E. stop See Section 5.3

C. market

60. Faith placed an order to sell 7,500 shares of stock she currently owned. As soon as the order reached the trading floor, the shares were immediately sold. Which type of order did Faith place? A. limit B. day C. market D. short E. stop See Section 5.3

C. market

13. Which one of the following is required for a trader to earn excess profits? A. excessive trading B. excessive research C. market inefficiency D. highly volatile market state E. relatively stable market state See Section 7.2

C. market inefficiency

15. Shares in closed-end funds: A. can be resold to the fund at any time. B. are more popular than shares in open-end funds. C. may sell for more or less than the NAV. D. are referred to as mutual fund shares. E. cannot be resold. See Section 4.2.

C. may sell for more or less than the NAV.

25. An owner of a trading license on the NYSE is called a: A. broker. B. shareholder. C. member. D. trader. E. dealer. See Section 5.2

C. member.

8. An open-end fund which invests solely in short-term debt obligations is called a(n) _____ mutual fund. A. growth B. stock C. money market D. asset allocation E. balanced See Section 4.5.

C. money market

12. Which one of the following is a trader whose trades are not based on meaningful financial analysis or information? A. specialist B. arbitrageur C. noise trader D. sentiment trader E. market maker See Section 8.6

C. noise trader

66. NASDAQ dealers post which one of the following in addition to their bid and ask prices? A. commission rates B. front-end load charges C. number of shares they will commit to buy or sell D. total trades for the day E. trading fees See Section 5.4

C. number of shares they will commit to buy or sell

24. Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2012? A. only large-company stocks B. both large-company and small-company stocks C. only small-company stocks D. corporate bonds, large-company stocks, and small-company stocks E. No category earned an annual return in excess of 100 percent for any given year during the period

C. only small-company stocks

2. An investment company that will repurchase shares at any time is called a(n) _____ fund. A. hedge B. closed-end C. open-end D. public E. exchange traded See Section 4.2.

C. open-end

51. For the past year, a particular stock has a relative strength value of 1.03 as compared to the market. This means that the stock: A. increased in value 3 percent more than the market for the day. B. has 3 percent more risk than the average security. C. outperformed the market for the period. D. had 3 percent higher trading volume on a growth basis as compared to the market. E. is selling for 103 percent of the market value per share. See Section 8.7

C. outperformed the market for the period.

41. Which one of the following characteristics best fits an index fund? A. market outperformer B. high expenses C. passively managed D. dividend oriented E. high turnover rate See Section 4.6.

C. passively managed

1. An investment company: A. specializes in investing funds on behalf of a financial institution. B. is a closed-end fund that invests in real estate. C. pools funds from individual investors. D. is a specific type of a bank. E. is a specialized form of a joint stock company. See Section 4.2.

C. pools funds from individual investors.

33. To determine the actual objective of a fund, you should primarily refer to the: A. fund's objective statement. B. fund's prospectus. C. portfolio holdings. D. sales literature. E. portfolio manager's comments in the annual report. See Section 4.6.

C. portfolio holdings.

62. Assume a stock's price remains relatively stable while the money flow becomes highly positive. Which one of the following is most expected given this scenario? A. price decrease B. stable price C. price increase D. increasing trading volume E. decreasing trading volume See Section 8.7

C. price increase

22. Which one of the following best describes the type(s) of information included in a strong-form efficient market? A. historical B. historical and public C. private and public D. current and public E. historical and private See Section 7.4

C. private and public

53. In order to currently trade on the floor of the NYSE, members must: A. be registered as a floor trader B. own a seat C. purchase a trading license D. be a specialist E. be designated as a floor broker See Section 5.2

C. purchase a trading license

58. Lucas wants to sell 9,000 shares of stock and places a market order. The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to "stop" the stock. What has the specialist agreed to do? A. cancel the order B. place the order into the order book to hold until an order to buy 9,000 shares is received C. purchase the shares if no other buyer is readily available D. sell the shares to the next available buyer regardless of the price received E. sell the shares at the end of the trading day at the best price available at that time See Section 5.3

C. purchase the shares if no other buyer is readily available

37. In an efficient market, daily abnormal returns: A. are very volatile. B. reflect news within the past week. C. reflect news since the prior trading day. D. remain constant. E. do not exist. See Section 7.6

C. reflect news since the prior trading day.

27. Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment. Peter is suffering from: A. money illusion. B. frame dependence. C. regret aversion. D. risk-taking. E. mental accounting. See Section 8.2

C. regret aversion.

19. The measure of performance of one investment compared to another investment is called the: A. wave height. B. relative arm. C. relative strength. D. bar height. E. support factor. See Section 8.7

C. relative strength.

7. What is the percentage of a firm's net income which is reinvested in the firm to support future growth called? A. payout ratio B. distribution percentage C. retention ratio D. equity ratio E. equity reinvestment See Section 6.2

C. retention ratio

9. A public offering of securities which are offered first to current shareholders is called a(n): A. existing shareholder offer. B. limited offer. C. rights offer. D. venture offer. E. preference offer. See Section 5.1

C. rights offer.

60. Investors who use the MACD indicator as a signal for trading are most apt to buy a security when the MACD: A. equals zero. B. is equal to 1.0. C. rises above the signal line. D. parallels the signal line. E. falls below the signal line. See Section 8.7

C. rises above the signal line.

6. 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. risk-free rate.

20. Prospect theory is based on the concept that investors are: A. always risk takers. B. risk-adverse regarding losses. C. risk-taking regarding losses. D. always risk-averse. E. neutral regarding risk. See Section 8.2

C. risk-taking regarding losses.

48. Which one of the following transactions occurs in the primary market? A. sale of stock by Shareholder A to Shareholder B B. gift of shares from a grandmother to her granddaughter C. sale of newly issued shares by the issuer to a shareholder D. sale of shares in the third market E. purchase of shares by a dealer from a shareholder See Section 5.1

C. sale of newly issued shares by the issuer to a shareholder

16. According to Elliott wave theory, market predictions should be based on which one of the following? A. eight-week repetitive trading patterns B. the tidal waves created by the gravitational pull of the moon C. series of historical market price swings D. an industry's historical rate of growth E. market fads and trends See Section 8.7

C. series of historical market price swings

45. 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. short

46. Rose wants to invest in a bond fund. She is a very conservative investor with a high marginal tax rate. Which one of the following types of bond funds might be most suited for her situation? A. high-yield corporate B. long-term world C. short-term municipal D. single-state corporate E. mortgage See Section 4.6.

C. short-term municipal

46. How long is the "lock-up" period that is commonly found in an IPO underwriting contract? A. one month B. three months C. six months D. one year E. eighteen months See Section 5.1

C. six months

34. An order to sell that involves a preset trigger point is called a _____ order. A. limit B. day C. stop D. short E. market See Section 5.3

C. stop

11. 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. street name.

7. The belief that information you hold is superior to information held by other investors best describes: A. over-confidence B. the snakebite effect C. the illusion of knowledge D. the clustering illusion E. loss aversion See Section 8.4

C. the illusion of knowledge

18. 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. total percentage return.

8. The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model. A. flexible B. increasing C. two-stage D. stepped up E. geometric See Section 6.3

C. two-stage

50. Besides size, how else does a mutual fund style box classify equity funds? A. cost and fees as a percent of NAV B. taxability at federal, state, and local levels C. value versus growth characteristics D. age of the fund E. short and long-term rates of return See Section 4.6.

C. value versus growth characteristics

26. Amy uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices. Secondly, she analyzes the financial statements of The Atwater Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Amy earns excess profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least _____ efficient but less than _____ efficient. A. weak-form; mild-form B. mild-form; semistrong-form C. weak-form; semistrong-form D. semistrong-form; full-form E. semistrong-form; strong-form See Section 7.4

C. weak-form; semistrong-form

A stock sold for $30 at the beginning of the year. The end of year stock price was $30.50. What is the amount of the annual dividend if the total return for the year was 7.7 percent? A. $1.11 B. $1.38 C. $1.60 D. $1.81 E. $2.31

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.

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.

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.

For the period 1926-2009, long-term government bonds had an average return that ______ the average return on long-term corporate bonds while having a standard deviation that _______ the standard deviation of the long-term corporate bonds. A. exceeded; was less than B. exceeded; equaled C. exceeded; exceeded D. was less than; exceeded E. was less than; was less than

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.

Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before reselling it. What is the value of "m" when computing the annualized return on this investment? A. .25 B. .33 C. .40 D. 3.00 E. 4.00

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.

The geometric return on an investment is approximately equal to the arithmetic return: A. plus half the standard deviation. B. plus half the variance. C. minus half the standard deviation. D. minus half the variance. E. divided by two.

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.

Which one of the following had the greatest volatility of returns for the period 1926-2009? A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bonds

Which one of the following had the highest average return for the period 1926-2006? A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bonds

Which one of the following had the highest risk premium for the period 1926-2009? A. U.S. Treasury bills B. long-term government bonds C. large-company stocks D. small-company stocks E. intermediate-term government bonds

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

You have been researching a company and have estimated that the firm's stock will sell for $44 a share one year from now. You also estimate the stock will have a dividend yield of 2.18 percent. How much are you willing to pay per share today to purchase this stock if you desire a total return of 15 percent on your investment? A. $37.55 B. $38.00 C. $38.24 D. $39.00 E. $40.20

5. A fee that is charged at the time mutual fund shares are purchased by an investor is called a: A. contingent deferred sales charge. B. 12b-1 fee. C. back-end load. D. front-end load. E. issuance charge. See Section 4.4.

D. front-end load.

15. 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. is computed as (1 + holding period percentage return)m, where m is the number of holding periods in a year.

82. Elizabeth short sold 400 shares of stock at $72 a share. One month later, she covered the short at a price of $68. What was her total dollar return on this investment? A. -$2,400 B. -$1,800 C. -$920 D. $1,600 E. $2,200

D. $1,600

55. Alfonso purchased 600 shares of Crosswinds, Inc., stock on 60% margin when the stock was selling for $37 a share. The stock is currently selling for $32 a share. What is his current equity position? A. $7,680 B. $8,880 C. $9,600 D. $10,320 E. $11,560

D. $10,320

54. Shane purchased a stock this morning at a cost of $13 a share. He expects to receive an annual dividend of $.27 a share next year. What will the price of the stock have to be one year from today if Shane is to earn a 8 percent rate of return on this investment? A. $12.38 B. $12.60 C. $12.88 D. $13.77 E. $14.28

D. $13.77

81. You short sold 600 shares of a stock at $48 a share. The initial margin requirement is 60 percent and the maintenance margin is 30 percent. What is the amount of your total liability for this transaction as initially shown on your account balance sheet? A. $8,640 B. $17,280 C. $22,210 D. $28,800 E. $37,440

D. $28,800

53. You have been researching a company and have estimated that the firm's stock will sell for $44 a share one year from now. You also estimate the stock will have a dividend yield of 2.18 percent. How much are you willing to pay per share today to purchase this stock if you desire a total return of 15 percent on your investment? A. $37.55 B. $38.00 C. $38.24 D. $39.00 E. $40.20

D. $39.00

50. Theresa has a margin account with a 60 percent initial margin requirement and a 35 percent maintenance margin. What is the maximum dollar amount of stock she can purchase if her cash balance in the account is $35,300? A. $19,140.00 B. $31,900.00 C. $44,093.33 D. $58,833.33 E. $91,142.86

D. $58,833.33

59. Rosita purchased 300 shares of a stock for $37 a share. Today, the stock is selling for $41 a share. The initial margin requirement is 70 percent and the maintenance margin is 30 percent. Rosita had to pay _____ in cash to purchase the stock and must have at least _____ in equity today. A. $3,690; $3,330 B. $3,690; $3,690 C. $7,770; $3,330 D. $7,770; $3,690 E. $8,610; $3,690

D. $7,770; $3,690

3. 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. (Pt + 1 - Pt)/Pt.

73. An asset has an average historical rate of return of 13.2 percent and a variance of .00972196. What range of returns would you expect to see approximately two-thirds of the time? A. -2.28 to +24.48 percent B. -6.52 to +32.92 percent C. -9.58 to +38.8 percent D. +3.34 to +23.06 percent E. +13.1 to +13.3 percent

D. +3.34 to +23.06 percent

76. Three months ago, Trevor purchased 500 shares of stock at a cost per share of $64.20. The purchase was made on margin with an initial margin requirement of 65 percent. Trevor pays 1.6 percent over the call money rate of 4.8 percent. What will his total dollar return be on this investment if he sells his shares today at a price per share of $63.40? Ignore dividends. A. -$548.60 B. -$539.67 C. -$534.95 D. -$575.60 E. -$591.19

D. -$575.60

59. Scott purchased 200 shares of Frozen Foods stock for $48 a share. Four months later, he received a dividend of $0.22 a share and also sold the shares for $42 each. What was his annualized rate of return on this investment? A. -44.69 percent B. -40.14 percent C. -33.00 percent D. -31.95 percent E. -28.07 percent

D. -31.95 percent

61. Tony purchased 100 shares of T-Rex stock for $43 a share. On the same day, Sam also purchased 100 shares of T-Rex stock for $43 a share. Tony paid cash for his purchase while Sam used margin. The initial margin requirement on this stock is 60 percent while the maintenance margin is 40 percent. Both Tony and Sam sold their shares after eight months at a price of $40 a share. The stock pays no dividends. Tony had a holding period percentage return of _____ percent as compared to Sam's _____ percent return. Ignore margin interest and trading costs. A. -4.19; -6.98 B. -4.19; -11.63 C. -6.98; -4.19 D. -6.98; -11.63 E. -11.63; -7.56

D. -6.98; -11.63

Which one of the following had the smallest standard deviation of returns for the period 1926-2009? A. large-company stocks B. small-company stocks C. long-term government bonds D. intermediate-term government bonds E. long-term corporate bonds

92. A stock has an average arithmetic return of 10.55 percent and an average geometric return of 10.41 percent based on the annual returns for the last 15 years. What is projected average annual return on this stock for the next 10 years? A. 10.17 percent B. 10.21 percent C. 10.38 percent D. 10.46 percent E. 10.79 percent

D. 10.46 percent

60. Allan purchased 800 shares of stock on margin for $31 a share and sold the shares five months later for $33.50 a share. The initial margin requirement was 65 percent and the maintenance margin was 30 percent. The interest rate on the margin loan was 7.5 percent. He received no dividend income. What was his holding period return? A. 7.05 percent B. 8.45 percent C. 9.88 percent D. 10.76 percent E. 11.82 percent

D. 10.76 percent

68. An asset had annual returns of 13, 10, -14, 3, and 36 percent, respectively, for the past five years. What is the standard deviation of these returns? A. 8.96 percent B. 16.05 percent C. 17.92 percent D. 18.09 percent E. 20.03 percent

D. 18.09 percent

58. Jason owned a stock for four months and earned an annualized rate of return of 11 percent. What was the holding period return? A. 2.37 percent B. 2.42 percent C. 2.46 percent D. 2.64 percent E. 2.72 percent

D. 2.64 percent

89. A stock had year-end prices of $24, $27, $32, and $26 over the past four years, respectively. What is the geometric average return? A. 2.02 percent B. 2.18 percent C. 2.55 percent D. 2.70 percent E. 2.81 percent

D. 2.70 percent

57. Eight months ago, you purchased 300 shares of a non-dividend paying stock for $27 a share. Today, you sold those shares for $31.59 a share. What was your annualized rate of return on this investment? A. 17.00 percent B. 21.45 percent C. 25.50 percent D. 26.55 percent E. 28.00 percent

D. 26.55 percent

79. You own a stock that has produced an arithmetic average return of 7.8 percent over the past five years. The annual returns for the first four years were 16, 11, -19, and 3 percent, respectively. What was the rate of return on the stock in year five? A. -5.00 percent B. 2.75 percent C. 6.25 percent D. 28.00 percent E. 32.00 percent

D. 28.00 percent

95. Bill has been adding funds to his investment account each year for the past 3 years. He started with an initial investment of $1,000. After earning a 10% return the first year, he added $3,000 to his portfolio. In this year his investments lost 5%. Undeterred, Bill added $2,000 the next year and earned a 2% return. Last year, discouraged by the recent results, he only added $500 to his portfolio, but in this final year his investments earned 8%. What was Bill's dollar-weighted average return for his investments? A. 1.5 percent B. 2.0 percent C. 2.5 percent D. 3.0 percent E. 3.5 percent

D. 3.0 percent

16. Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before reselling it. What is the value of "m" when computing the annualized return on this investment? A. .25 B. .33 C. .40 D. 3.00 E. 4.00

D. 3.00

74. Jeremy owns a stock that has historically returned 7.5 percent annually with a standard deviation of 10.2 percent. There is only a 0.5 percent chance that the stock will produce a return greater than _____ percent in any one year. A. 20.9 B. 22.9 C. 32.2 D. 38.1 E. 54.8

D. 38.1

90. 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 percent. The maintenance margin is 40 percent. Some positive news concerning the company was released last night and the stock price jumped this morning to $38 a share. What is your current margin position in this stock? A. 61.33 percent B. 56.67 percent C. 48.33 percent D. 38.68 percent E. 25.83 percent

D. 38.68 percent

64. Over the past ten years, large-company stocks have returned an average of 10.4 percent annually, long-term corporate bonds have earned 4.6 percent, and U.S. Treasury bills have returned 3.2 percent. How much additional risk premium would you have earned if you had invested in large-company stocks rather than long-term corporate bonds over those ten years? A. 1.7 percent B. 3.7 percent C. 5.2 percent D. 5.8 percent E. 8.1 percent

D. 5.8 percent

74. The value of the Amex Internet Index increased by about _____ percent from October 1998 to March 2000 and subsequently declined by about _____ percent by October 2002. A. 100; 50 B. 200; 75 C. 400; 80 D. 500; 90 E. 600; 80 See Section 7.11

D. 500; 90

51. You recently purchased 900 shares of Western Timber stock for $38 a share. Your broker required a cash payment of $25,650, plus trading costs, for this purchase. What was the initial margin requirement? A. 60 percent B. 65 percent C. 70 percent D. 75 percent E. 80 percent

D. 75 percent

72. From the end of 1989 to the spring of 2003, the Nikkei Index declined in value approximately _____ percent. A. 50 B. 60 C. 70 D. 80 E. 90 See Section 7.11

D. 80

55. Which one of the following is correct concerning a head and shoulders top pattern? A. The outside of the right shoulder is a bullish signal. B. The shoulders are higher than the head. C. The left shoulder must be higher than the right shoulder, but lower than the head. D. A piercing of the neckline is a reversal signal. E. The trendline must be relatively flat throughout the pattern. See Section 8.7

D. A piercing of the neckline is a reversal signal.

47. Which one of the following can be assumed when the SEC approves an IPO registration? A. The securities offering will provide value to the shareholders. B. The issuer is financially sound. C. The issuer will remain solvent. D. All rules have been followed to allow for full disclosure of information. E. The stock price is set at a level which will allow shareholders to earn a positive rate of return. See Section 5.1

D. All rules have been followed to allow for full disclosure of information.

61. Which one of the following statements is true? A. An ETN shareholder owns a fractional ownership of the trust shares. B. You can establish long, but not short, positions in ETNs. C. ETNs invest only in commodities. D. An ETN is an unsecured debt. E. ETN is just another name for an ETF. See Section 4.8.

D. An ETN is an unsecured debt.

23. A private equity fund: I. is set up as a limited partnership II. usually use a 2/20 fee structure III. place no constraints on manager compensation IV. typically have a stated life of 7 to 10 years A. I and II only B. I and III only C. I, II and III only D. I, II and IV only E. I, II, III, and IV See Section 5.1

D. I, II and IV only

59. Which of the following can you do with an ETF that you cannot do with an open-end fund? I. sell at mid-day prices II. short sell III. buy options on them IV. resell A. I and III only B. II and III only C. III and IV only D. I, II, and III only E. I, II, III, and IV See Section 4.8.

D. I, II, and III only

39. Which of the following sources of information are used by informed traders? I. financial statements II. inside information III. internet reports IV. analysts reports A. I and IV only B. II and III only C. III and IV only D. I, III, and IV only E. I, II, III, and IV See Section 7.7

D. I, III, and IV only

61. Steve placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Steve 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 a share. A. I and III only B. I and IV only C. II and III only D. II and IV only E. I only See Section 5.3

D. II and IV only

57. Which of the following are offered as possible causes of the January effect? I. new professional money managers who assume the role at the beginning of the year II. tax loss selling in December III. bonus lock-in effect IV. window dressing A. I and II only B. III and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV See Section 7.10

D. II, III, and IV only

3. Which one of the following defines frame dependence? A. Investors react differently to prospective gains and losses. B. Investors tend to make more cognitive errors when they view investing as gambling. C. Investors tend to be more irrational in bear markets than in bull markets. D. Investors react differently depending on how an opportunity is presented. E. Investors suffer from money illusion in bull markets but not in bear markets. See Section 8.2

D. Investors react differently depending on how an opportunity is presented.

42. Which one of the following is most apt to be considered insider trading? A. Ann overhears Martha say she is being promoted to accounts payables manager and then she purchases shares in Martha's employer. B. Jennifer compiles the financial statements and knows that net income for the latest quarter is significantly below analyst's forecasts but continues to hold shares of her employer's stock. C. Kate is an outside auditor and has found what she believes are significant accounting irregularities in a company's financial reports but owns no shares in the firm. D. Les buys stock in Winter's Wear after he overhears a conversation between the firm's president and vice-president concerning a proposed acquisition. E. Jeff buys shares of stock in his employer's firm through the company retirement plan on a regular monthly basis. See Section 7.7

D. Les buys stock in Winter's Wear after he overhears a conversation between the firm's president and vice-president concerning a proposed acquisition.

47. Which one of the following best describes the current understanding of market efficiency? A. The market tends to overreact to new information in a manner which can be used to earn abnormal returns. B. Markets under-react to unanticipated events in a manner which can be used to earn excess returns. C. The market appears to be highly inefficient. D. Short-term market movements are difficult, if not impossible, to predict accurately. E. Markets tend to react slowly to unanticipated announcements. See Section 7.8

D. Short-term market movements are difficult, if not impossible, to predict accurately.

14. Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that: A. Stock A is overpriced. B. the market return is 9.75 percent. C. Stock A represents the smallest-sized firm. D. Stock A has a positive excess return. E. Stocks B and C represent firms that are in the process of merging. See Section 7.2

D. Stock A has a positive excess return.

43. Which one of the following statements concerning the NYSE is correct? A. The NYSE was created based on the Walnut Tree Agreement. B. The average daily trading volume on the NYSE in 2007 was approximately one billion shares. C. The NYSE and NASDAQ merged in 2007. D. The NYSE is part of a firm that also operates a stock exchange in Amsterdam. E. The NYSE merged with NASDAQ in 2007. See Section Introduction

D. The NYSE is part of a firm that also operates a stock exchange in Amsterdam.

43. Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly. A. Barb knows that Sue, an accounting clerk, is planning on resigning on Friday. B. Linda knows a new receptionist has just been hired. C. Wendy knows that her firm's net income is continuing to increase at a steady rate. D. Tracey knows her employer just received patent approval on a key new product. E. Maria is the chief financial officer and knows the firm intends to maintain its current dividend policy. See Section 7.7

D. Tracey knows her employer just received patent approval on a key new product.

33. Which one of the following will increase the current residual income of a firm? A. an increase in required earnings B. a decrease in the current earnings per share C. a decrease in future earnings per share D. a decrease in the required return on the firm's equity E. an increase in the firm's beginning book equity per share See Section 6.4

D. a decrease in the required return on the firm's equity

4. How is a sustainable dividend growth rate defined? A. a constant rate at which dividends increase B. a rate of growth that does not exceed two percent of the annual increase in revenue C. a rate of growth that is set equal to one-half of the average growth rate of a firm's earnings D. a rate that can be supported over time by a company's earnings E. a rate of dividend growth that is equal to the discount rate used to value the firm's stock See Section 6.2

D. a rate that can be supported over time by a company's earnings

26. Martin has an investment account with William, who is a broker with City Brokerage. Martin believes that William has mishandled his account by churning it. If he files a complaint against William seeking compensation, the case will most likely be decided by: A. the office manager of City Brokerage. B. a civil suit judge. C. a jury. D. an arbitration panel. E. the SEC Hearing Board.

D. an arbitration panel.

21. Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding? A. issue B. option C. bid D. ask E. primary See Section 5.1

D. ask

19. The dividend discount model assumes that: A. the dividend payout ratio will remain constant. B. the dividend growth rate is equal to the discount rate. C. discount rate increases at a constant rate. D. at least one dividend will be paid in the future. E. the dividend payout ratio increases at a constant rate. See Section 6.2

D. at least one dividend will be paid in the future.

13. When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting. A. Dutch auction B. partial C. firm commitment D. best efforts E. pro-rata See Section 5.1

D. best efforts

10. Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support? A. bear market B. cloud C. inversion D. bubble E. crash aversion See Section 7.11

D. bubble

44. If you are a proponent of the Elliott wave theory, you are most apt to do which one of the following? A. sell on wave 2 B. sell on wave 3 C. buy on wave A D. buy on wave 2 E. buy on wave 5 See Section 8.7

D. buy on wave 2

32. Money market mutual funds: A. must be valued at $1 a share or more. B. invest only in certificates of deposit. C. produce income that is always tax-exempt. D. can provide "triple-tax-free" income. E. are insured by the FDIC. See Section 4.5.

D. can provide "triple-tax-free" income.

34. Which type of stock fund focuses on maximizing share price appreciation? A. growth and income B. large-company C. equity income D. capital appreciation E. growth See Section 4.6.

D. capital appreciation

12. Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session? A. order flows B. market timers C. crash helmets D. circuit breakers E. trade barriers See Section 7.11

D. circuit breakers

39. A sector fund: A. tends to perform consistently from one year to the next. B. is usually highly diversified. C. rarely outperforms other types of funds. D. concentrates on investing in one industry or one commodity. E. is best evaluated by its past performance. See Section 4.6.

D. concentrates on investing in one industry or one commodity.

23. Which one of the following costs can a mutual fund shareholder avoid by holding shares for an extended period of time? A. 12b-1 fee B. front-end load C. management fee D. contingent deferred sales charge E. trading costs See Section 4.4.

D. contingent deferred sales charge

36. According to the theory of recency bias, investors tend to believe the financial markets will: A. gravitate to their long-term average rates of return. B. react over the next year in direct opposition to the performance of the prior year. C. have a maximum of three years of positive annual returns before declining somewhat. D. continue to perform as they have over the past couple of years. E. tend to reverse direction at least every five years. See Section 8.4

D. continue to perform as they have over the past couple of years.

58. Bollinger bands: A. graphically reflect the differences between two moving averages. B. graphically depict the relative strength of a security as compared to the market. C. are a graphical representation of an exponential moving average. D. depict a 2-standard deviation bound around a moving average. E. are equal to the 20-day moving average plus or minus one standard deviation. See Section 8.7

D. depict a 2-standard deviation bound around a moving average.

54. Which one of the following has the greatest duty to provide liquidity to the financial market? A. floor broker B. independent broker C. dealer D. designated market maker E. floor trader See Section 5.2

D. designated market maker

55. Which one of the following is a common characteristic of a closed-end fund but not of an open-end fund? A. professional management B. annual fees C. stated objective D. discounted price E. taxable distributions See Section 4.8.

D. discounted price

2. 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. distribution of investment funds among various broad asset classes.

13. The net income per share divided by the market price per share is called the: A. profit margin. B. profit yield. C. market yield. D. earnings yield. E. income ratio. See Section 6.6

D. earnings yield.

4. 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. effective annual return.

36. Which one of the following would best reveal how stock prices react when competitive firms merge? A. financial analysis B. field testing C. risk analysis D. event study E. market survey See Section 7.6

D. event study

2. Security A and Security B have similar risks. However, Security A has a higher rate of return than Security B. The return on Security A minus the return on Security B is referred to as which one of the following? A. market return B. abnormal return C. deviated return D. excess return E. real return See Section 7.12

D. excess return

55. The SuperDOT system has lessened the role of which one of the following? A. personal financial advisers B. floor traders C. specialists D. floor brokers E. underwriters See Section 5.2

D. floor brokers

39. The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market. A. home B. independent C. third D. fourth E. SuperDot See Section 5.5

D. fourth

1. Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information? A. technical analysis B. conceptual analysis C. prediction valuation D. fundamental analysis E. discounted valuation See Section 6.1

D. fundamental analysis

45. Which one of the following types of bond funds tends to have the highest level of risk? A. short-term government B. intermediate-term corporate C. treasury D. high-yield E. single-state municipal See Section 4.6.

D. high-yield

23. Investors tend to make better decisions when looking at a decision: A. based on historical performance. B. only in respect to potential losses. C. based on individual securities. D. in broad terms. E. based on historical costs. See Section 8.2

D. in broad terms.

27. Mutual fund trading costs: A. are computed as a percentage of a fund's assets. B. are generally set at a flat amount per year. C. generally include a bonus fee for outperforming an index. D. increase in direct relation to the turnover rate. E. are the costs paid to brokers in the form of sales commissions. See Section 4.4.

D. increase in direct relation to the turnover rate.

36. 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. increase the standard deviation of the portfolio.

40. A fund which tracks the S&P 500 would best be classified as which type of fund? A. sector B. global C. equity income D. index E. growth See Section 4.6.

D. index

3. Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n): A. open-end sale B. break-out issue C. public service offering D. initial public offering E. initial trial issue See Section 5.1

D. initial public offering

17. A mutual fund is created by which one of the following parties? A. fund shareholders B. fund's board of directors C. SEC D. investment advisory firm E. discount broker See Section 4.3.

D. investment advisory firm

4. A Roth IRA: A. is a form of "tax-deferred" account B. funds are taxed at the time you begin withdrawals C. are well-suited to investors nearing retirement D. invests after-tax dollars E. is the type of account offered by most employers See Section 2.1

D. invests after-tax dollars

19. The term "independent deviations from rationality" implies that: A. irrational investors are absent from an efficient market. B. arbitrage traders act independent of each other. C. markets must be inefficient. D. irrational investors behave differently from one another. E. arbitrage traders act together to offset the actions of rational investors. See Section 7.3

D. irrational investors behave differently from one another.

64. Which of the following will exempt a hedge fund from registering with the SEC? A. offering shares to the general public B. being in existence for more than two years C. limiting sales to individual investors D. locking up investor's money for at least two years E. exceeding $25 million in assets See Section 4.8.

D. locking up investor's money for at least two years

20. 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. market capitalization.

50. Moving money in and out of the market based on your market expectations is called _____ and tends to lead to returns that are _____ than the overall market return, assuming that the market is relatively efficient. A. asset allocation; higher B. asset allocation; lower C. market timing; higher D. market timing; lower E. security selection; higher See Section 7.8

D. market timing; lower

36. 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. may sell some of your securities to repay the margin loan.

42. The geometric return on an investment is approximately equal to the arithmetic return: A. plus half the standard deviation. B. plus half the variance. C. minus half the standard deviation. D. minus half the variance. E. divided by two.

D. minus half the variance.

49. If the closing tick of the day is +32, this means that the: A. DJIA ended the day up 32 basis points. B. discount rate at the end of the day was 3.20 percent. C. number of stocks closing on an uptick was 32. D. number of stocks closing on an uptick exceeded those closing on a downtick by 32. E. number of stocks closing on an uptick was 32 more than on the prior trading day. See Section 8.7

D. number of stocks closing on an uptick exceeded those closing on a downtick by 32.

52. Studies indicate that the Vanguard 500 Index fund tends to: A. underperform most professional money managers. B. produce a return equal to that of professional managers. C. outperform the average professional money manager, but only over the short-term. D. outperform most professional money managers especially over longer-periods of time. E. support the argument that the stock market is inefficient. See Section 7.9

D. outperform most professional money managers especially over longer-periods of time.

24. The retention ratio is the: A. net income divided by total equity. B. percentage of net income paid out to shareholders. C. net income divided by the number of shares outstanding. D. percentage of net income held by a firm for future growth. E. inverse of the dividend payout ratio. See Section 6.2

D. percentage of net income held by a firm for future growth.

21. 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. percentage return

16. A firm's current stock price divided by the firm's revenue per share is referred to as which one of the following ratios? A. price-earnings B. price-book C. price-income D. price-sales E. price-cash flow See Section 6.6

D. price-sales

40. Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price? A. balanced B. market-weighted C. dollar-weighted D. price-weighted E. value-weighted See Section 5.6

D. price-weighted

41. Which one of the following indicates the long-run direction of the market according to Dow Theory? A. daily fluctuations B. secondary reaction C. monthly changes D. primary trend E. tertiary trend See Section 8.7

D. primary trend

41. Ted is an engineer for True Tech and has just discovered a revolutionary method for strengthening metals. He knows this knowledge will add value to True Tech's stock. Ted happens to mention this discovery and its value to his neighbor, Fred. Fred can be charged with insider trading if he: A. continues to hold the True Tech shares of stock he already owns. B. shares this information with another neighbor. C. sells his shares in True Tech immediately after the news of the discovery is announced. D. provides this information to a friend who will trade the stock and split the profits with him. E. buys shares in True Tech immediately after the news is announced and then shortly thereafter sells the shares at a profit. See Section 7.7

D. provides this information to a friend who will trade the stock and split the profits with him.

51. What is the current structure of the NYSE? A. general partnership B. limited partnership C. non-profit organization D. publicly traded corporation E. government agency See Section 5.2

D. publicly traded corporation

4. Mental accounting is the process of associating a stock with its: A. prior day's market value. B. expected value. C. desired value. D. purchase price. E. lowest value. See Section 8.2

D. purchase price.

18. The maximum price at which a security is expected to trade is called the: A. fourth wave. B. stop limit. C. relative point. D. resistance level. E. support level. See Section 8.7

D. resistance level.

5. The portion of net income that is held by a firm, for future growth, comprises which one of the following balance sheet accounts? A. capital surplus B. common stock C. internal earnings D. retained earnings E. net earnings See Section 6.2

D. retained earnings

13. Which one of the following risks is related to irrational beliefs? A. systematic B. firm-specific C. industry-specific D. sentiment-based E. market See Section 8.6

D. sentiment-based

22. Which one of the following had the highest average return for the period 1926-2012? A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bonds

D. small-company stocks

26. Which one of the following had the highest risk premium for the period 1926-2012? A. U.S. Treasury bills B. long-term government bonds C. large-company stocks D. small-company stocks E. intermediate-term government bonds

D. small-company stocks

32. Which one of the following had the greatest volatility of returns for the period 1926-2012? A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bonds

D. small-company stocks

42. An index is valued on a daily basis. However, some stocks in this particular index have not traded recently. As a result, this index suffers from index: A. fatigue. B. devaluation. C. flatness. D. staleness. E. weighting. See Section 5.6

D. staleness.

47. Which one of the following advance/decline lines is the most bullish signal? A. relatively flat B. slightly upward sloping C. slightly downward sloping D. steeply upward sloping E. steeply downward sloping See Section 8.7

D. steeply upward sloping

37. Which one of the following is a characteristic of the self-attribution bias? A. believing what you wish to believe B. placing too much weight on information which you can gather easily C. believing that other investors agree with your thinking D. taking credit for the wins and blaming the losses on bad luck E. believing that your recent performance is an indication of your future performance See Section 8.4

D. taking credit for the wins and blaming the losses on bad luck

53. While reviewing mutual fund reports, Alex noticed that a fund was reported as "closed". What is the primary reason for closing a fund? A. all issued shares have been sold B. the fund is suffering a loss C. the NAV has declined noticeably D. the fund has grown too large in size E. the fund is underperforming its peers See Section 4.7.

D. the fund has grown too large in size

5. Loss aversion is defined as: A. the inability to mentally acknowledge a loss on a security. B. selling any security for less than the price paid to acquire it. C. selling a security as soon as it has increased significantly in value. D. the reluctance to sell a security after it has decreased in value. E. the tendency to quickly sell any investment that has decreased in value. See Section 8.2

D. the reluctance to sell a security after it has decreased in value.

38. The off-exchange market in which exchange-listed securities trade is referred to as the _____ market. A. independent B. secondary C. fourth D. third E. primary See Section 5.5

D. third

28. Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firm's stock? A. irregular dividend B. constant perpetual growth C. constant dividend D. two-stage dividend growth E. perpetuity formula See Section 6.3

D. two-stage dividend growth

63. Which one of the following correctly applies to hedge funds? A. highly liquid B. must be highly diversified C. available to the general public D. vast array of investment objectives E. limited investment options See Section 4.8.

D. vast array of investment objectives

34. For the period 1926-2012, long-term government bonds had an average return that ______ the average return on long-term corporate bonds while having a standard deviation that _______ the standard deviation of the long-term corporate bonds. A. exceeded; was less than B. exceeded; equaled C. exceeded; exceeded D. was less than; exceeded E. was less than; was less than

D. was less than; exceeded

17. Efficient markets tend to exist: A. only when all investors are rational. B. anytime market volume exceeds the average trading volume. C. only when market volatility is low. D. when rational arbitrage traders dominate irrational traders. E. when arbitrage trading is prohibited. See Section 7.3

D. when rational arbitrage traders dominate irrational traders.

17. 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. whether or not the investment is sold.

For the period 1926-2009, the annual return on large-company stocks: A. was negative following every three-year period of positive returns. B. was only negative for two or more consecutive years during the Great Depression. C. remained negative for at least two consecutive years anytime that it was negative. D. never exceeded a positive 30 percent nor lost more than 20 percent. E. was unpredictable based on the prior year's performance.

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.

The arithmetic average return is the: A. summation of the returns for a number of years, t, divided by (t - 1). B. compound total return for a period of years, t, divided by t. C. average compound return earned per year over a multiyear period. D. average squared return earned in a single year. E. return earned in an average year over a multiyear period.

The average compound return earned per year over a multiyear period is called the: A. total return B. average capital gains yield C. variance D. arithmetic average return E. geometric average return

The geometric mean return on large-company stocks for the 1926-2009 period: A. is approximately equal to the arithmetic mean return plus one-half of the standard deviation. B. exceeds the arithmetic mean return. C. is approximately equal to the arithmetic mean return minus one-half of the standard deviation. D. is approximately equal to the arithmetic mean return plus one-half of the variance. E. is less than the arithmetic mean return.

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.

Which one of the following had the narrowest bell curve for the period 1926-2009? A. large-company stocks B. long-term corporate bonds C. long-term government bonds D. small-company stocks E. U. S. Treasury bills

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

You have owned a stock for seven years. The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly. Given this, you know the arithmetic average return for the period is: A. positive but less than the geometric average return. B. less than the geometric return and could be negative, zero, or positive. C. equal to the geometric average return. D. either equal to or greater than the geometric average return. E. greater than the geometric average return.

67. You purchased 800 shares of stock for $49.20 a share. The initial margin requirement is 65 percent and the maintenance margin is 35 percent. What is the lowest the stock price can go before you receive a margin call? A. $9.27 B. $14.54 C. $17.22 D. $21.88 E. $26.49

E. $26.49

72. A stock has an average historical return of 11.3 percent and a standard deviation of 20.2 percent. 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. +5.8 to +31.6 percent D. -3.9 to +32.5 percent E. -8.9 to +31.5 percent

E. -8.9 to +31.5 percent

75. Jefferson Mills stock produced returns of 14.8, 22.6, 5.9, and 9.7 percent, respectively, over the past four years. During those same years, U.S. Treasury bills returned 3.8, 4.6, 4.8, and 4.0 percent, respectively, for the same time period. What is the variance of the risk premiums on Jefferson Mills stock for these four years? A. .00298 B. .00196 C. .00396 D. .00478 E. .00528

E. .00528

39. Which one of the following market sentiment index (MSI) values represents the best buying opportunity? A. 0.16 B. 0.29 C. 0.48 D. 0.61 E. 0.82 See Section 8.7

E. 0.82

50. Which one of the following Arms values is the most bearish? A. .28 B. .45 C. .88 D. 1.03 E. 1.26 See Section 8.7

E. 1.26

53. Suzette recently purchased 300 shares of Nu Electronics stock for $4.40 a share. Her broker required a cash payment of $1,320, plus trading costs, for the purchase. What is the initial margin requirement on this stock? A. 70 percent B. 75 percent C. 80 percent D. 90 percent E. 100 percent

E. 100 percent

48. One year ago, you purchased 300 shares of Southern Cotton at $32.60 a share. During the past year, you received a total of $280 in dividends. Today, you sold your shares for $35.80 a share. What is your total return on this investment? A. 8.79 percent B. 9.64 percent C. 10.16 percent D. 11.64 percent E. 12.68 percent

E. 12.68 percent

70. Downtown Industries common stock had returns of 8.2, 12.2, 11.5, and 6.3 percent, respectively, over the past four years. What is the standard deviation of these returns? A. 2.07 percent B. 2.38 percent C. 2.41 percent D. 2.59 percent E. 2.82 percent

E. 2.82 percent

65. A hedge fund may charge a special performance fee which commonly ranges from: A. 10 to 15 percent of NAV. B. 15 to 20 percent of the fund's profits. C. 20 to 30 percent of NAV. D. 20 to 40 percent of the market price. E. 20 to 40 percent of the fund's profits. See Section 4.8.

E. 20 to 40 percent of the fund's profits.

62. Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932? A. 5 B. 10 C. 15 D. 20 E. 25 See Section 7.11

E. 25

65. Rudolfo purchased 900 shares of stock for $62.20 a share and sold them ten months later for $64.60 a share. The initial margin requirement on this stock is 75 percent and the maintenance margin is 40 percent. Ignoring dividends and costs, what is his holding period return? A. 3.72 percent B. 3.86 percent C. 4.54 percent D. 4.95 percent E. 5.14 percent

E. 5.14 percent

63. A stock was purchased for $51 a share and sold eleven months later for $54 a share. If the shares were purchased totally with cash the holding period return would be _____ percent as compared to _____ percent if the purchase was made using 70 percent margin. Ignore trading costs and margin interest. A. 5.56; 3.89 B. 5.56; 7.94 C. 5.88; 4.12 D. 5.88; 6.69 E. 5.88; 8.40 HPR without margin = ($54 - $51)/$51 = 5.88 percent HPR with margin = ($54 - $51)/($51 × .70) = 8.40 percent

E. 5.88; 8.40

69. You purchased 700 shares of stock for $54.30 a share. The initial margin requirement is 75 percent and the maintenance margin is 35 percent. What is the maximum percentage decrease that can occur in the stock price before you receive a margin call? A. 35 percent B. 38 percent C. 48 percent D. 57 percent E. 62 percent

E. 62 percent

56. You purchased 1,000 shares of stock at $42 a share. The stock is currently selling for $45 a share. The initial margin was 70 percent and the maintenance margin is 30 percent. What is your current margin position? A. 28.36 percent B. 25.00 percent C. 75.00 percent D. 63.59 percent E. 72.00 percent

E. 72.00 percent

75. By the end of 2002, the AMEX Internet Index was at a level approximately equal to _____ percent of the index high. A. 75 B. 50 C. 25 D. 17 E. 9 See Section 7.11

E. 9

40. Which one of the following statements is correct? A. Company insiders are not permitted to trade their employer's securities. B. Only tippers can be accused of illegal insider trading. C. Tippees are permitted to trade securities based on information they know is private. D. Trading on private information which you just happen to overhear is legal. E. Any trading based on information known to be private is illegal. See Section 7.7

E. Any trading based on information known to be private is illegal.

65. Which one of the following occurred following the Crash of 1987? A. Program trading was barred. B. All market orders were changed to electronic orders. C. Trading is now halted for the day anytime the market declines by 10 percent or more. D. Trading now stops for one hour anytime the market declines by 10 percent. E. Congress decided not to pass any anti-takeover legislation. See Section 7.11

E. Congress decided not to pass any anti-takeover legislation.

52. In 2007, NYSE Holdings merged with which one of the following? A. NASDAQ B. AMEX C. Chicago Stock Exchange D. London Stock Exchange E. Euronext, N.V. See Section 5.2

E. Euronext, N.V.

25. 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. Full service brokers frequently provide financial planning services to clients.

17. An analysis of which of the following are commonly included as part of fundamental analysis? I. sales II. book value III. earnings per share IV. cash flow A. I and II only B. I and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV See Section 6.1

E. I, II, III, and IV

24. Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements A. I and III only B. I and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV See Section 7.4

E. I, II, III, and IV

35. Which of the following have the same meaning as the term "economic value added"? I. abnormal earnings II. residual income III. value created by a firm in period t IV. EPSt - Bt-1 × k A. I and II only B. III and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV See Section 6.4

E. I, II, III, and IV

38. Which of the following are impediments to the correction of a security's mispricing? I. sentiment-based risk II. implementation costs III. firm-specific risk IV. noise trader risk A. II only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV See Section 8.6

E. I, II, III, and IV

63. Which of the following are offered as factors contributing to the Crash of October 1987? I. bubble bursting II. market volatility III. negative economic signals IV. activities in Congress A. I and II only B. I and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV See Section 7.11

E. I, II, III, and IV

66. Which of the following factors contributed to the Crash of 1987? I. irrational investors II. program trading III. panic selling IV. price uncertainty A. II and IV only B. I, II, and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV See Section 7.11

E. I, II, III, and IV

13. Which one of the following statements is correct concerning an open-end mutual fund which charges a front-end load? A. The number of shares outstanding was fixed at the time the fund was created. B. If an investor wishes to sell her shares, she must do so by selling to another investor. C. The NAV exceeds the offering price. D. The load is expressed as a percentage of the NAV. E. Investors receive the NAV when shares are sold. See Section 4.2.

E. Investors receive the NAV when shares are sold.

28. Which one of the following statements is correct? A. The call money rate is the rate of interest brokerage firms charge on margin loans. B. The spread is the fee a deep-discount broker charges to execute a trade. C. The percentage of a purchase paid for with borrowed funds is referred to as the margin. D. A margin loan is treated as an asset on an account balance sheet. E. Margin is equal to account equity divided by the value of the securities owned.

E. Margin is equal to account equity divided by the value of the securities owned.

15. Which one of the following is the federal agency which regulates the financial markets in the U.S.? A. Treasury Department B. National Association of Securities Dealers C. Over the Counter Commission D. Federal Reserve E. Securities and Exchange Commission See Section 5.1

E. Securities and Exchange Commission

42. Which one of the following describes a short position? A. Purchasing a security on margin B. Selling a security that you originally purchased on margin C. Loaning a security to your broker to cover a margin call D. Having less equity than required in your margin account E. Selling a security that you do not own

E. Selling a security that you do not own

14. Which one of the following statements correctly relates to closed-end funds? A. Closed-end funds must sell at the NAV or above. B. The number of shares outstanding changes on a daily basis as shares are sold and repurchased. C. Shares in closed-end funds must be held until the funds mature. D. Once a fund closes, a new investor is unable to purchase shares in that fund. E. Shares of closed-end funds trade just like stocks. See Section 4.2.

E. Shares of closed-end funds trade just like stocks.

38. Which one of the following is generally true concerning securities held in street name? A. The securities are registered under your mailing address rather than your name. B. There is a greater likelihood the security may be stolen. C. All dividend checks are mailed to your street address. D. The annual stock report is mailed directly to your street address. E. The brokerage firm is the owner of record.

E. The brokerage firm is the owner of record.

31. Which one of the following is correct concerning the two-stage dividend growth model? A. The discount rate is based on the coupon rate a firm pays on its outstanding bonds. B. The first growth rate must be higher than the second growth rate. C. The time value of money is ignored. D. The discount rate ignores the risks associated with an individual firm. E. The discount rate considers the risk-free rate of return. See Section 6.3

E. The discount rate considers the risk-free rate of return.

30. Which one of the following statements concerning beta is correct? A. The beta assigned to the overall market is zero. B. A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3. C. A stock with a beta of .5 has 50 percent more risk than the overall market. D. Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models. E. The higher the beta, the higher the discount rate used for the dividend discount models. See Section 6.3

E. The higher the beta, the higher the discount rate used for the dividend discount models.

65. Marcus just placed a stop limit order to sell 100 shares at $21 stop, $18 limit. Which one of the following statements is correct concerning this order if the current market price is $16? A. As soon as the price rises to $18, the stock will be sold. B. The stock will sell for at least $18 but less than $21. C. The stock will sell for $18 a share as soon as the price hits $21. D. The order will become a limit order to sell at $21 once the market price reaches $18. E. The order will become a limit order to sell at $18 once the market price reaches $21. See Section 5.3

E. The order will become a limit order to sell at $18 once the market price reaches $21.

68. Which one of the following statements concerning NASDAQ is correct? A. The NASDAQ Capital Market has the most stringent listing requirements of any of the NASDAQ companies. B. NASDAQ is actually comprised of four separate markets. C. Microsoft shares are listed on the NASDAQ Global Market. D. NASDAQ has more total dollar volume of trading than does the NYSE. E. There are more companies listed on NASDAQ than on NYSE. See Section 5.4

E. There are more companies listed on NASDAQ than on NYSE.

31. Which one of the following had the narrowest bell curve for the period 1926-2012? A. large-company stocks B. long-term corporate bonds C. long-term government bonds D. small-company stocks E. U.S. Treasury bills

E. U.S. Treasury bills

83. Today, you short sold 1,100 shares of Jasper Industrial stock at $48 a share. The initial margin is 60 percent and the maintenance margin is 30 percent. Which one of the following is correct concerning your account balance sheet for this transaction? A. You have an asset of $31,680 from the sale proceeds. B. You have a liability from the short position of $21,120. C. Your account equity is $21,120. D. Your initial margin deposit is $15,840. E. Your total assets are $84,480.

E. Your total assets are $84,480.

58. Market prices tend to _____ earnings "surprises". A. adjust quickly and efficiently to B. overreact and then correct in response to C. overreact and never correct in response to D. ignore E. adjust slowly to See Section 7.10

E. adjust slowly to

70. Stocks which are listed on the NYSE can: A. not be listed on any other exchange. B. only be dual listed on a regional exchange. C. only be dual listed on Instinet. D. only be dual listed on the Archipelago Exchange. E. also be listed on NASDAQ. See Section 5.5

E. also be listed on NASDAQ.

18. 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. asset allocation

47. Jim has managed to save $1,000 and wants to start investing. The financial markets make him nervous as he has very limited financial resources. Which one of the following types of funds is probably best for Jim at this time? A. sector B. aggressive growth C. social conscience D. high yield E. balanced See Section 4.6.

E. balanced

16. 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. See Section 2.1

E. be able to be sold quickly with little, if any, price concession.

59. Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings? A. selling stocks as soon as positive earnings surprises are announced B. selling stocks on Mondays only C. selling small-company stocks in December and repurchasing them in February D. selling stocks on the 25th of the month and repurchasing them on the 5th of the following month E. buying stocks with relatively low P/E ratios See Section 7.10

E. buying stocks with relatively low P/E ratios

26. Contingent deferred sales charges: A. are applied at the time fund shares are purchased. B. are applied only to front-end load funds. C. are charged on an annual basis to cover distribution and marketing costs. D. are no longer permissible. E. can be avoided. See Section 4.4.

E. can be avoided.

68. If the S&P 500 falls by 20 percent, the NYSE will: A. do nothing if the drop occurs after 2:30 P.M. B. halt trading for one hour. C. halt trading for one hour if the decline occurs before 3 P.M. D. halt trading for one-half hour if the decline occurs after noon. E. cease trading for the day. See Section 7.11

E. cease trading for the day.

62. ETFs are: A. limited to diversified index funds. B. generally held until they mature. C. sponsored primarily by large investment banks. D. based on market-cap-weighted indexes only. E. claims on shares held in a trust. See Section 4.8.

E. claims on shares held in a trust.

49. Trevor currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trevor is a securities: A. broker. B. representative. C. underwriter. D. floor broker. E. dealer. See Section 5.1

E. dealer.

32. How will the price of a stock be affected if the dividend growth rate is decreased? A. increase B. either increase or no change C. no change D. either decrease or no change E. decrease See Section 6.2

E. decrease

19. 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. effective annual return

34. Last week, New Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n): A. over-reaction and correction. B. post-activity reaction. C. delayed reaction. D. pre-activity action. E. efficient market reaction. See Section 7.6

E. efficient market reaction.

23. The arithmetic average dividend growth rate is: A. the compounded rate of growth over a specified time period. B. easier to compute than the geometric average dividend growth rate. C. the summation of the annual dividend growth rates. D. generally preferred over the geometric average growth rate by most financial analysts. E. generally larger than the geometric average growth rate when the annual growth rates are positive. See Section 6.2

E. generally larger than the geometric average growth rate when the annual growth rates are positive.

12. The average compound return earned per year over a multi-year period is called the: A. total return B. average capital gains yield C. variance D. arithmetic average return E. geometric average return

E. geometric average return

41. You have owned a stock for seven years. The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly. Given this, you know the arithmetic average return for the period is: A. positive but less than the geometric average return. B. less than the geometric return and could be negative, zero, or positive. C. equal to the geometric average return. D. either equal to or greater than the geometric average return. E. greater than the geometric average return.

E. greater than the geometric average return.

69. If the S&P 500 falls by 7 percent, the NYSE will: A. halt trading for thirty minutes. B. halt trading for two hours if the decline occurs before 3:25 P.M. C. halt trading for one hour. D. halt trading for one hour if the decline occurs after noon. E. halt trading for 15 minutes if the decline occurs before 3:25 pm. See Section 7.11

E. halt trading for 15 minutes if the decline occurs before 3:25 pm.

15. In an efficient market, stocks with similar risks will: A. have the same market price. B. pay similar dividends. C. yield the market rate of return. D. produce abnormal returns. E. have similar rates of return. See Section 7.2

E. have similar rates of return.

10. Which one of the following describes an investment company that generally has an unrestricted investment strategy and is not accessible to the general public? A. mutual fund B. open-end fund C. closed-end fund D. exchange-traded fund E. hedge fund See Section 4.8.

E. hedge fund

25. An increase in the retention ratio will: A. increase the dividends per share. B. decrease a firm's sustainable rate of growth. C. decrease the equity of a firm. D. increase the dividend growth rate. E. increase the value of a firm's stock. See Section 6.2

E. increase the value of a firm's stock.

29. The NYSE's Super Display Book is an electronic system which: A. maintains the historical records of each customer's trading activity. B. transmits the latest market information to the news media. C. allows floor traders to execute trades via cell phones. D. tracks the activity on an exchange floor to ensure regulatory compliance. E. is based on NYSE's ARCA electronic trading engine. See Section 5.2

E. is based on NYSE's ARCA electronic trading engine.

40. The geometric mean return on large-company stocks for the 1926-2012 period: A. is approximately equal to the arithmetic mean return plus one-half of the standard deviation. B. exceeds the arithmetic mean return. C. is approximately equal to the arithmetic mean return minus one-half of the standard deviation. D. is approximately equal to the arithmetic mean return plus one-half of the variance. E. is less than the arithmetic mean return.

E. is less than the arithmetic mean return.

73. The Asian stock market crash of 1990 was followed by a: A. long bull market. B. rapid recovery. C. prolonged flat market. D. short-term decline. E. long bear market. See Section 7.11

E. long bear market.

33. Which one of the following had the smallest standard deviation of returns for the period 1926-2012? A. large-company stocks B. small-company stocks C. long-term government bonds D. intermediate-term government bonds E. long-term corporate bonds

E. long-term corporate bonds

5. 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. margin

63. After the trigger point is reached, a stop-loss order will be executed at the: A. trigger price. B. stop price. C. trigger price or better. D. stop price or better. E. market price. See Section 5.3

E. market price.

7. Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released? A. material public information B. public information C. abnormal information D. private, non-material information E. material non-public information See Section 7.7

E. material non-public information

9. What is beta? A. a rate of return measure B. the return on a stock relative to the overall market C. the rate of dividend growth D. the percentage of net income paid out as a dividend E. measure of a stock's risk relative to the stock market average See Section 6.3

E. measure of a stock's risk relative to the stock market average

57. To be listed on the NYSE, a firm must have at least: A. 2,500 shareholders B. 100,000 shares traded on an average day C. 1.5 million shares held by the public D. $75 million in market value for an IPO E. pre-tax aggregate earnings of $10 million in the previous 3 years See Section 5.2

E. pre-tax aggregate earnings of $10 million in the previous 3 years

20. 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. protects investors from missing assets when a brokerage firm closes.

3. Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern? A. deviated pattern B. dispersed flow C. efficient movement D. overreaction and correction E. random walk See Section 7.6

E. random walk

17. A preliminary document provided to investors who are interested in a stock offering is called a(n): A. prospectus. B. inquiry form. C. draft offer. D. green shoe. E. red herring. See Section 5.1

E. red herring.

64. Some technical analysts use Fibonacci numbers to predict: A. primary trend breakthroughs. B. market turnarounds. C. secondary market trend lines. D. relative performance values. E. resistance and support levels. See Section 8.7

E. resistance and support levels.

11. The arithmetic average return is the: A. summation of the returns for a number of years, t, divided by (t - 1). B. compound total return for a period of years, t, divided by t. C. average compound return earned per year over a multi-year period. D. average squared return earned in a single year. E. return earned in an average year over a multi-year period.

E. return earned in an average year over a multi-year period.

40. The price-sales ratio helps measure the ability of a firm to generate: A. net profits. B. quality cash flows. C. higher earnings per share. D. higher cash flow per share. E. revenue growth. See Section 6.6

E. revenue growth.

8. 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. risk premium.

22. Phil is a contestant on a game show. At this point in the game, he can either accept $500 or spin a wheel for a chance of winning $100,000. Which type of behavior is he displaying if he spins the wheel? A. forward-looking B. risk-adverse C. prospective D. introspective E. risk-taking See Section 8.2

E. risk-taking

3. Jesse is researching chemical companies in an effort to determine which company's stock he should purchase. This process is known as: A. market timing. B. purchase shorting. C. marketing research. D. asset allocation. E. security selection.

E. security selection.

12. 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. short sale.

71. The primary purpose of the NYSE circuit breakers is to: A. halt short selling. B. encourage program trading. C. limit trading by specialists. D. minimize institutional trading. E. slow a market decline. See Section 7.11

E. slow a market decline.

42. You want to purchase shares in a fund and also ensure that your money does not support firms that harm the environment. Which type of fund should you purchase? A. international fund B. income fund C. tax-managed fund D. index fund E. social conscience fund See Section 4.6.

E. social conscience fund

22. The profit a dealer makes on a purchase and resale of shares of stock is called the: A. margin. B. bid. C. float. D. offer. E. spread. See Section 5.1

E. spread.

64. Which one of the following orders is frequently used as a means to limit losses resulting from a short sale? A. limit B. market C. day D. stop-sell E. stop-buy See Section 5.3

E. stop-buy

21. You are the chief financial officer of Donnelly Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation? A. mild-form B. weak-form C. historical-form D. semi-strong form E. strong-form See Section 7.4

E. strong-form

17. The minimum price at which a security is expected to trade is called the: A. stop value. B. par value. C. Elliott wave price. D. resistance level. E. support level. See Section 8.7

E. support level.

11. When a group of underwriters jointly work together to sell a new issue of securities, the underwriters form a(n): A. underwriting cartel. B. market union. C. venture capital association. D. Dutch market. E. syndicate. See Section 5.1

E. syndicate.

21. The income earned by a regulated investment company is: A. exempt from all taxation. B. taxed only at the state and local level. C. taxed only at the federal level. D. taxable income for the fund. E. taxable income for the fund's shareholders. See Section 4.3.

E. taxable income for the fund's shareholders.

2. The method of valuing a stock based on the present value of the future income derived from that stock is called: A. technical analysis. B. constant valuation. C. the basic stock valuation method. D. compound dividend analysis. E. the dividend discount model. See Section 6.2

E. the dividend discount model.

8. Under the provisions of a general cash offer, shares of stock are offered to: A. underwriters on a guaranteed sale basis only. B. current shareholders prior to being offered to the general public. C. institutional investors only. D. the issuer's employees on a cash purchase basis only. E. the general public on a "first-come" basis. See Section 5.1

E. the general public on a "first-come" basis.

5. 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. the rate of return on a riskless investment.

29. Which one of the following is a requirement of the two-stage dividend growth model? A. both growth rates must be less than the discount rate B. one of the two growth rates must exceed the discount rate C. the first growth rate must exceed the second growth rate D. the first growth rate must equal the discount rate E. the second growth rate must be less than the discount rate See Section 6.3

E. the second growth rate must be less than the discount rate

6. A 12b-1 fee is a fee charged by a mutual fund: A. at the time shares are issued. B. if shares are sold within a stated period of time. C. to cover trading costs. D. to pay the fund's managers. E. to cover marketing costs. See Section 4.4.

E. to cover marketing costs.

42. What is the primary purpose of Dow theory? A. to measure the level of investor optimism and pessimism B. to analyze daily market movements C. to identify and measure market waves D. to eliminate market corrections E. to signal changes in the market's primary direction See Section 8.7

E. to signal changes in the market's primary direction

51. Market timing tends to lead to: A. fairly consistent abnormal returns. B. increasing profits as experience is gained. C. superior returns but only if you are a professional money manager. D. a rate of return roughly equal to that of the overall market. E. underperforming the overall market. See Section 7.8

E. underperforming the overall market.

46. The maximum loss you can incur on a short sale is: A. limited to your initial equity. B. limited to your initial margin. C. limited to the margin loan plus interest. D. zero. E. unlimited.

E. unlimited.

41. When stocks are held in an index in proportion to their total company market value, the index is: A. dollar-weighted. B. front-weighted. C. back-weighted. D. price-weighted. E. value-weighted. See Section 5.6

E. value-weighted.

74. Stock market indexes: A. are all computed using the same methodology. B. all react the same to a change in the price of a particular stock. C. all cover the same market sectors. D. are all price-weighted. E. vary in the type of stocks included. See Section 5.6

E. vary in the type of stocks included.

25. For the period 1926-2012, the annual return on large-company stocks: A. was negative following every three-year period of positive returns. B. was only negative for two or more consecutive years during the Great Depression. C. remained negative for at least two consecutive years anytime that it was negative. D. never exceeded a positive 30 percent nor lost more than 20 percent. E. was unpredictable based on the prior year's performance.

E. was unpredictable based on the prior year's performance.

43. On August 8 of this year, Brent sold 500 shares of ADO stock for $24 a share. On September 6 of this year, he purchased 500 shares of ADO stock to cover his position. The transaction on August 8: A. was a short sale. B. was a margin trade. C. was a wrap transaction. D. created a long transaction. E. was a pooling transaction.

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