FINAL REVIEW
Which one of the following is is most likely to increase the price of a stock?
rapid growth in earnings
The confidence index indicates a strong stock market when the
ratio of the average yield on high−grade corporate bonds to the average yield on low−grade corporate bonds rises.
In nearly all cases, the purpose of a hedge is to
reduce or eliminate risk.
The basic reason why investors use spreading strategies when speculating in commodities is to
reduce risk.
Investors who buy mutual funds that have had large gains over the last few years are exhibiting a tendency known as
representativeness.
The efficient frontier
represents the best attainable tradeoff between risk and return.
Most investors are risk−averse, which means they
require an increase in return for any increase in risk.
If the present value of an investment's benefits equals the present value of the investment's costs, then the investor would earn a
return equal to the discount rate.
Funds that invest in a portfolio of companies from the same or closely related industries are known as
sector funds.
The practice of bundling mortgages or other types of loans into pools and selling pieces of the pool as bond−like instruments to investors is known as
securitization.
When the Capital Asset Pricing Model is depicted graphically, the result is the
security market line.
To hedge a bond portfolio against rising interest rates, an investor should
sell interest rate futures.
If an investor does not respond to a margin call, the broker will
sell some of the investor's holdings to cover the margin call.
An investor who is worried about the impact of rising interest rates on the value of a large bond portfolio can reduce risk by
selling Treasury note or bond futures.
Larry is a corn farmer. To attempt to maximize the value of his crop, Larry is most likely to benefit from
selling a futures contract on corn for delivery at harvest time.
American depositary shares (ADS) are
shares of foreign companies traded on the U.S. markets.
Assume an investor thinks the stock market is about to undergo a sharp retreat. Under these conditions, the investor's best course of action would be to
short sell stock−index futures contracts.
If you expect market interest rates to rise, you should purchase
short term, high coupon bonds.
One of the calendar effect market anomalies indicates that ________ in value during January.
small cap stocks tend to increase
Investors seeking to increase their wealth as quickly as possible would invest in
smaller companies pursuing rapid growth.
Heather believes that by carefully examining a company's fundamentals and by applying the best valuation models she can identify stocks whose market prices are lower than their intrinsic values. In order for this to be true
some stocks must be incorrectly priced.
An inverted yield curve
sometimes results from actions by the Federal Reserve to control inflation.
A REIT or real estate investment trust may invest in all of the following except
stocks of companies engaged in construction and building materials.
Investors interested in predictable cash flow from their investments should consider funds that offer
systematic withdrawal plans.
In the real world, most of the assets available to investors
tend to be somewhat positively correlated.
LEAPS are a special type of option
that may have an expiration date as long as three years.
Analysts commonly use the ________ to measure market return.
the Standard & Poor's 500 Index
The value of a euro futures contract will go up when
the dollar weakens against the euro.
An investor should purchase a stock when
the expected rate of return equals or exceeds the required return.
In general, the higher the retention ratio
the higher the future growth rate of the company.
If a stock is purchased at the beginning of a year, a single dividend is paid at the end of the year and the stock is sold immediately after the dividend has been received. In this case
the internal rate of return equals the holding period return.
A put has fundamental value as long as
the market price of the underlying financial asset is less than the strike price.
The writer of a put option hopes that the price of the underlying stock will rise because
the option is less likely to be exercised.
One of the biggest differences between a futures option and a futures contract is that
the option limits the loss exposure to the price of the option.
The required return on a bond is equal to
the real rate of return plus a risk premium plus an expected inflation premium.
The constant−growth dividend valuation model is best suited for use with
the stocks of mature, dividend−paying companies.
If yields on Treasury bonds rise
the value of the corresponding bonds will fall and the value of interest rate index options will rise.
A mutual fund's net asset value is determined by
the value of the securities held by the fund.
The two provisions which investors should carefully consider when evaluating stock options are the
time until expiration and the strike price.
The futures market contains two primary types of traders: hedgers and speculators. In this context, hedgers:
trade futures contracts because of a need to protect a position in an underlying commodity.
The risk of a portfolio consisting of two uncorrelated assets will be
greater than zero but less than the risk of the more risky asset.
Purchasers of call options:
have the right to buy a certain number of underlying shares at a specified price.
Logan sold a corn futures contract using the initial margin of $2,700. His maintenance margin is $2,000. The price of began to rise in early summer, but Logan wants to keep his contract. When his margin falls below $2,000 (minimum maintenance)
he will need to deposit at least $700 with his broker to bring his margin back up to the initial deposit.
Performance fees based on profits earned by the fund are typical of
hedge funds.
Typical characteristics of growth stocks include
high rates of growth in operations and earnings
If the purchaser of a futures contract fails to meet a margin call,
his/her contract will be sold at the current market price.
The behavioral tendency known as loss aversion causes some investors to:
hold losing stocks longer than winning stocks.
A bond's sinking fund provisions specifies
how the issuer will pay off the bond over time.
The most important lesson investors can learn from behavioral finance is
how to avoid letting their emotions and biases affect their investment decisions.
Beta can be defined as the slope of the line that explains the relationship between
. the return on a security and the return on the market.
The on balance volume (OBV) indicator
indicates an up market when heavy volume accompanies price increases.
Which one of the following types of risk cannot be effectively eliminated through portfolio diversification?
inflation risk
The value of an interest−rate futures contract will go up when
interest rates go down.
Target date funds
invest in more conservative assets as the target date approaches.
Socially responsible funds are distinguished from other mutual funds because they
invest only in companies that meet specified moral, ethical, or environmental standards.
Companies offering their stock to the public for the first time usually seek the assistance of
investment bankers.
Bonds with one of the top four ratings (Aaa through Baa, or AAA through BBB) are designated as
investment grade bonds.
A long straddle
is a strategy that produces profits when the price of the underlying security moves significantly in either direction.
The purchaser of a futures contract
is affected by the daily procedure known as mark−to−the−market.
A portfolio with a beta of 1.26
is considerably more risky than the overall market.
The on balance volume (OBV) indicator
is optimistic when prices are rising on high volume.
The amount paid at the time a futures contract is sold
is simply a refundable security deposit.
The margin deposit associated with the purchase of a futures contract
is used to cover any loss in market value of the contract resulting from adverse price fluctuations.
When a corporation declares a stock split, it usually does so because
it wants to make its stock more affordable to average investors.
If you are an income−oriented investor and you feel that interest rates are relatively high and will decline in the future, you should purchase
long−term, non−callable bonds.
The theory behind the mutual fund cash ratio is
when mutual fund managers hold high levels of cash, they must eventually buy stocks with it.
ABC Company stock currently has a market value equivalent to its intrinsic value. Marco perceives that ABC Company is increasing its level of risk and therefore Marco increases his required rate of return on ABC stock. This change in the required rate of return
will reduce the intrinsic value of ABC stock to Marco.
An aggressive growth mutual fund is least likely to purchase a stock
with a high dividend yield.
When the stock market has bottomed out and is beginning to recover, the best portfolio to own is the one with a beta of
+2.0.
An annual fee charged to cover the marketing costs of a mutual fund is called a:
12(b)-1 fee.
Factors considered in making a decision on a firm's dividend include the I. cash position of the firm. II. firm's growth prospects. III. the expectations of the shareholders. IV. minimum dividends required by law.
I, II and III only
The major advantages of futures options over futures contracts include I. positions can be hedged with a smaller commitment of capital. II. potential losses are limited to the size of the contract. III. greater leverage and the potential for higher percentage returns. IV. a greater variety of commodities is available for speculating or hedging purposes.
I, II and III only
Which of the following statements about the standard deviation are correct? I. The standard deviation is a measure of relative dispersion. II. Standard deviations should be in conjunction with expected returns to compare investments. III. The standard deviation is calculated by taking the square root of the variance. IV. The higher the standard deviation of an investment, the lower its risk.
I, II and III only
Which of the following statements are correct concerning municipal bonds? I. Yields on municipal bonds are usually lower than yields on Treasury bonds. II. Municipal bonds are most appealing to individuals with high incomes. III. Interest on a municipal bond is exempt from federal income tax. IV. Municipal bonds are less risky than Treasury bonds.
I, II and III only
A futures contract specifies: I. the exact commodity to be purchased or delivered. II. the exact quantity to be purchased or delivered. III. the delivery price. IV. the month of delivery.
I, II and IV only
Which of the following are specifically stated in futures contracts? I. the quantity of the commodity to be delivered II. the quality of the commodity to be delivered III. the exact price at which the commodity must be delivered V. the time and place at which the commodity must be delivered
I, II and IV only
Which of the following are true concerning institutional investors? I. Institutional investors are professionals who manage money for other people. II. Banks, insurance companies and mutual funds are all institutional investors. III. Institutional investors are individuals who invest indirectly through financial institutions. IV. Institutional investors invest large sums of money.
I, II and IV only
Which of the following statements concerning mortgage backed securities are correct? I. They are secured by a pool of residential mortgages. II. A portion of the income stream is a non−taxable return of capital. III. They are backed by the full faith and credit of the U.S. government. IV. Their maturity depends on prepayments of the mortgages in the pool.
I, II and IV only
Which of the following are needed to determine the appropriate value of a bond? I. required rate of return II. time to maturity III. frequency of interest payments IV. coupon rate
I, II, III and IV
Which of the following statements are correct in respect to high−yield bonds? I. They are junk bonds with highly unpredictable rates of return. II. The issuing corporation usually has an excessive amount of debt. III. They possess a high level of default and market risk. IV. They are often subordinated debentures.
I, II, III and IV
Open end mutual funds may charge which of the following fees? I. A front−end load at the time of purchase. II. A back−end load when shares are sold. III. Annual fees based on marketing and distribution costs. IV. Annual performance fees up to 20% of increases in net asset value.
I, II, and III only
Which of the following factors influence short−term interest rates on government securities? I. Federal Reserve actions III. expected future inflation IV. the real rate of return
I, III and IV only
Which of the following strategies appeal to investors who place primary emphasis on the storage of value aspects of an investment? I. buy and hold II. short−term trading III. quality long−term growth IV. consistent dividend record
I, III and IV only
Which of the following are advantages of the buy and hold strategy? I. rapid accumulation of wealth II. low transaction costs III. capital gains taxed at the long−term rate IV. portfolio requires less time and energy to manage than for most other strategies
II, III and IV only
Technical analysts consider the stock market to be strong when volume ________ in a rising market and ________ during a declining market.
increases; decreases
Which of the following is not a weighting scheme commonly used in creating equity market indexes?
industry-weighted.
Under current tax law, dividend income is taxed at the same rate as
long-term capital gains.
A mutual fund is generally more tax efficient when it has a ________ turnover rate and a ________ dividend yield.
low; low
In selecting investments consistent with your goals, you should consider
risks, returns, and taxes.
The financial crisis of 2008 resulted in
B and C, but not A.
Which type of mutual fund consists of both stocks and bonds with a combined objective of current income and long−term capital gains?
Balanced
Inflation tends to have a particularly negative impact on the price of
Bonds
The balance sheet value of a firm's assets minus the balance sheet amount of its liabilities is known as
Book Value
Which one of the following statements about the NYSE is correct?
Buy orders are filled at the lowest price and sell orders are filled at the highest price.
The expected rate of return and standard deviations, respectively for four stocks are given below: ABC 9%, 3% CDE 11%, 9% FGH 12%, 8% IJK 14%, 10% Which stock is clearly least desirable?
CDE
Which one of the following was the first listed exchange for stock options in the United States?
Chicago Board Options Exchange
The dominant options exchange is the
Chicago Board Options Exchange.
Two assets have a coefficient of correlation of −.4.
Combining these assets will reduce risk.
Which one of the following statements is correct concerning bond investors?
Conservative investors buy bonds when interest rates are high.
The returns on the stock of DEF and GHI companies over a 4 year period are shown below: Year. DEF. GHI 1. 8%. 11% 2. 12%. 9% 3. −5%. −9% 4 6%. 13% From this limited data you should conclude that returns on
DEF and GHI are somewhat positively correlated
Which of the following methods might be used to protect a profit on a diversified portfolio of stocks?
Either A or B, but not C.
A normal yield curve is flat or downward sloping.
False
A stock will be an attractive investment if the required rate of return exceeds the expected rate of return.
False
A stock with a beta of 1.3 is less risky than a stock with a beta of 0.42.
False
American Depositary Receipts (ADRs) are issued against shares of U.S. corporations and are traded on foreign security exchanges.
False
An American investor who holds euro−denominated bonds will profit if the euro weakens against the dollar.
False
A company's board of directors must declare a dividend if the firm is profitable.
False
By design, half of all stocks betas are positive betas and half are negative.
False
Cash dividends are taxed at the same rate as ordinary income.
False
Diversifiable risk is also called systematic risk.
False
Electronic trading systems have increased transaction costs of odd−lot trades.
False
Hedge funds are subject to the same regulations and disclosure requirements as mutual funds.
False
Historically higher returns on the stocks of small companies can be completely explained by their higher risk.
False
Interest rates and bond prices are positively related.
False
Mortgage−backed bonds are issued primarily by state governments and are secured by home mortgages.
False
Most assets show a slight degree of negative correlation.
False
Most bonds pay interest quarterly.
False
Standard deviation is a measure that indicates how the price of an individual security responds to market forces.
False
The purchase price of a closed−end mutual fund is equivalent to the net asset value of the fund.
False
Zero coupon bonds have very limited price volatility.
False
NZMA stock is currently selling for $128. Which of the following options is "in−the−money"?
February 125 call
You hear a market analyst on television say that the advance/decline ratio for the session was 1.5. What does that mean?
For every stock that declined, 1.5 issues advanced. Or put another way, for every 10 stocks that declined, 15 advanced.
The commission charged when shares of an open−end mutual fund are purchased is called a
Front-end Load
Which of the following statements best describes the legal organization of mutual funds?
Funds split their basic functions such as record keeping and investment decisions among two or more companies.
Advantages of index funds include which of the following? I. Low management fees. II. They outperform most actively managed funds. III. They have a balanced mix of stocks and bonds. IV. Securities in the portfolio are selected by professional analysts.
I and II only
The effects of fluctuating foreign exchange rates may I. increase a U. S. investor's rate of return. II. decrease a U. S. investor's rate of return. III. can be avoided by investing in ADRs. IV. can be avoided by investing in mutual funds that specialize in foreign stocks.
I and II only
Which of the following represent in−the−money options? I. a call when the market price exceeds the strike price II. a call when the strike price exceeds the market price III. a put when the market price exceeds the strike price IV. a put when the strike price exceeds the market price
I and IV only
Which of the following characteristics apply to futures contracts? I. Futures contracts are an important tool to control risk. II. Futures contracts are highly risky and involve speculation. III. Futures contracts specify both the quantity and the quality of the item. IV. The buyer must hold the contract until maturity.
I, II and III only
Which of the following will affect the firm's future cash flows? I. state of the economy II. state of the industry III. the firm's recent and current earnings IV. new products in the firm's pipeline
I, II and IV only
Futures contracts exist for: I. corn. II. hogs. III. crude oil. IV. lumber.
I, II, III and IV
Value funds seek stocks I. with low dividend yields. II. with potential for growth. III. with low P/E ratios. IV. of newly discovered firms.
II and III only
Which of the following characteristics are referred to as representativeness? I. hesitating to sell stocks at a loss II. basing conclusions on small samples III. underestimating the effects of random chance IV. underestimating the level of risk in an investment
II and III only
Which of the following practices are more typical of traditional portfolio management than of modern portfolio theory? I. calculation of a portfolio beta to match the investor's risk tolerance. II. careful diversification across industries. III. portfolios dominated by large, well-known companies. IV. low correlations between portfolio components to reduce risk.
II and III only
Which of the following represent systematic risks? I. the president of a company suddenly resigns II. the economy goes into a recessionary period III. a company's product is recalled for defects IV. the Federal Reserve unexpectedly changes interest rates
II and IV only
Which of the following increase(s) the time premium of a call option? I. a market price that exceeds the strike price II. increasing volatility in the market price of the underlying security III. decreasing market interest rates IV. decreasing the time to option expiration
II only
Which of the following trading strategies are correct? I. If you expect the British pound to appreciate in value, you should short the pound. II. If you expect interest rates to rise, you should go long on interest rate futures. III. If you expect the stock market to rise, you should go long on stock−index futures. IV. If you expect the stocks in your portfolio to temporarily decline in value, you should short stock−index futures.
III and IV only
A fund that is designed to match the performance of a measure such as the S & P 500 or the Russell 2000 is called a(n)
Index fund
Which of the following statements concerning Long−term Equity AnticiPation Securities (LEAPS) is correct?
LEAPS typically have a higher quoted price than that of a regular option.
Which one of the following statements about common stock returns is true?
Over the last 5 decades, stock market returns have averaged between 10% and 12%.
Which of the following methods is an investor least likely to use to terminate a futures contract?
Permitting the contract to expire worthless.
A stock's beta value is a measure of
Systematic Risk.
Congress considers a bill that would eliminate the mortgage interest deduction for individuals. For the housing industry, this is an example of
Tax Risk
The extraordinary run up in stock prices during the late 1990s primarily affected
Technology Stocks
The yield curve depicts the relationship between a bond's yield to maturity and its
Term to maturity
Although the major commodities exchanges continue to operate separately, ownership has been concentrated under
The Chicago Mercantile Exchange.
Which one of the following statements is true about a $1,000, 6% annual coupon bond that is selling for $1,012?
The current yield is less than 6%.
Bonhomme Co. issued $1,000 par value bonds with a 6% coupon rate, convertible into 25 share of Bonhomme common stock. When the bonds were issued the stock traded at $25 per share. The stock is now at $42 per share and pays a $0.10 per share annual dividend. In the near future
The issuing company will call the bonds and bondholders will convert them to common shares.
Which one of the following statements concerning mutual funds is correct?
The mutual fund industry is the largest financial intermediary in the United States
Which of the following best describes the relationship between a stock's beta and the standard deviation of the stock's returns?
The relationship depends on the correlation between the stock's returns and the market's returns.
Which one of the following statements is correct if a speculator short sells a commodity or financial futures contract?
The speculator expects to profit from a decline in the price of the contract.
A debenture is secured only by the issuer's promise to repay the debt.
True
A company's estimated future earnings and its P/E ratio can be used to estimate the stock's future price.
True
Betas for actively traded stocks. are readily available from online sources.
True
Between 1930 and 2014, the average return on stocks exceeded 10%.
True
Both modern portfolio theory and traditional portfolio management result in diversified portfolios, but they take different approaches to diversification.
True
Changes in the inflation rate have a direct and pronounced effect on market interest rates.
True
Correlation is a measure of the relationship between two series of numbers.
True
Generally speaking, short−term bonds have lower yields than long−term bonds.
True
In an inflationary environment, the interest payments on Treasury inflation−indexed obligations increase over time.
True
In response to the same external force, the return on one investment may increase while the return on another investment may decrease.
True
Index funds merely attempt to match the performance of some benchmark, not to outperform it.
True
Investing globally offers better diversification than investing only domestically.
True
It is not unusual for bear markets to occur two or more times in any given 10 year period.
True
Like ordinary stocks, exchange − traded funds (ETFs) can be sold short.
True
Lower risk investments are associated with lower expected rates of return.
True
Market volume is a function of market demand for and supply of stocks.
True
Mutual funds are used extensively as retirement investments.
True
Self−attribution bias causes investors to attribute their successes to skill and failures to chance.
True
The basic theory linking portfolio risk and return is the Capital Asset Pricing Model.
True
The intrinsic value of a zero−growth stock can be found simply by dividing the dividend by the required rate of return.
True
The number of shares available in an exchange−traded fund (ETF) can be increased or decreased according to demand for the shares.
True
The process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage.
True
The rate of return on a foreign investment is affected by changes in the exchange rates.
True
The required rate of return denotes the minimum rate of return an investor should expect.
True
The transaction costs of investing directly in foreign−currency−denominated assets can be reduced by purchasing American Depositary Shares (ADSs).
True
Trading in closed−end investment companies takes place between investors in the open market.
True
When a person sells a common stock short, she or he is betting that the price of the stock will fall.
True
When the market rate of interest drops below a bond's coupon rate, the bond will sell at a premium.
True
You are evaluating two possible stock investments, Buyme Co. and Getit Corp. Buyme Co. has an expected return of 12.1% and a beta of 0.96. Getit Corp. has an expected return of 12.1% and a beta of 1.21. Based only on this data, which stock should you buy and why?
You should buy the Buyme Co. stock because it has the same expected return as Getit Corp. but with less risk (a lower beta).
If the Canadian dollar became stronger relative to the U.S. dollar, the price of
a call option on the Canadian dollar will increase.
The dividend valuation model (DVM) cannot accommodate which of the following assumptions?
a constant growth rate of dividends greater than the required rate of return
The statement "A portfolio is less than the sum of its parts." means
a diversified group of assets will be less volatile than the individual assets within the group.
Madison believes that the leisure industry (resorts, travel, restaurants, etc.) is about to experience extraordinary growth because baby boomers are entering their retirement years. She should invest in
a sector fund.
A coupon-bearing bond purchased when issued at par value was held until maturity during which time interest rates rose. The ex-post realized return of the bond investment most likely was:
above the YTM at the time of issue.
Mutual funds often report returns as the growth of $10,000 over a period of time. These returns assume that
all dividends and capital gains are reinvested.
An efficient market reflects
all information including predictions about future information.
A well−conceived investment policy statement will specify
all of the above.
Which of the following will lower the rate of return on a stock whose price has doubled since you bought it?
an increase in the capital gains tax from 15% to 20%
The tendency of naive investors to buy high (after prices have risen for several periods) and sell low (after prices have dropped for several periods) can be explained by the behavioral tendency known as
anchoring.
Both the holding period to qualify and the tax rate on long−term capital gains
are subject to political pressure and occasionally change.
Reinvested dividends
are taxed at the time the dividend is paid.
One type of mutual fund spreads investors' money across equity markets, bond markets, and money markets. Moreover, as market conditions change, the amount of money invested in each market sector will change. This type of mutual fund is known as a(n)
asset allocation fund.
Exchange traded funds are
baskets of securities that trade like a single stock.
Asset backed securities (ABS)are relatively safe investments because
because the pool of assets backing the securities is often much larger than the bond issue.
A holding period return is calculated by adding the current income to the capital gains and dividing this sum by thebeginning investment value.
beginning investment value.g
As gasoline prices fell in 2015, sales of hybrid and electric vehicles dropped sharply. This is an example of
business risk.
Tiffany would like to own shares of Blackwood, Inc. but only if she can acquire them at a total cost of $30 a share or less. Blackwood is currently trading at $31.76. Cynthia should ________ with a strike price of $30. Ignore transaction costs.
buy a call
Beginning investors with small amounts to invest should
buy mutual funds or exchange traded funds (ETFs).
A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by
buying soy bean futures for delivery near the time of harvest.
Hedging in the commodities market is a strategy primarily used by
by producers and processors of commodities.
When interest rates are falling, most of the return on bonds will come from
capital gains.
Which of the following choices is in the correct order from less risk to more risk?
certificates of deposit, corporate bonds, mutual funds that invest in stock, common stock
Assume the Plum Corporation has two different issues of common stock. One issue carries voting rights, and the other issue does not. In this situation, Plum is said to have issued
classified stock.
The writer of a covered call has taken a(n)
conservative investment position with limited profits.
For a call purchased on an organized security exchange, the strike price specifies the
contractual price at which each of the shares of the underlying stock can be bought.
For a put purchased on an organized security exchange, the strike price specifies the:
contractual price at which each of the shares of the underlying stock can be sold.
The date on which an investor must be a registered shareholder of the firm in order to receive a dividend is called the
date of record.
Combining uncorrelated assets will
decrease the overall risk level of a portfolio.
Technical analysts consider the stock market to be weak when volume __________ in a rising market and __________ during a declining market.
decreases; increases
Government securities money funds are structured to eliminate
default risk.
Which of the following has declined in recent years?
direct ownership of stock by individual investors
One advantage gained by investing in a bond fund rather than in individual bonds is the
diversification among issuers.
To take advantage of the opportunity to acquire additional shares of a company's stock without incurring any brokerage commissions, many investors participate in
dividend reinvestment plans.
One characteristic of 12(b)−1 charges is that they are payable
each year regardless of the performance of the mutual fund.
Writers of option contracts
earn a profit when the option expires without being exercised.
P/E ratios could rise even as earnings fall if
earnings fall at a faster rate than stock prices.
The stock of Plomb Co. falls sharply on news that its CEO has drowned in a boating accident while on vacation. This is an example of
event risk.
The stock valuation process reflects a firm's:
expected future dividends and capital gains.
One characteristic of bond funds is the
fluctuation in value in response to changing interest rates.
For which one of the following situations will the dividend−growth models work especially well?
mature firm with a policy of increasing its earnings and dividends at an average rate of 5% per year
Investors seeking tax−exempt income should invest in
municipal bond funds.
A convenient way for small investors to enjoy the benefits of a broadly diversified portfolio is by purchasing:
mutual fund shares.
The major forces behind earnings per share are
net income and the number of shares outstanding.
Market segmentation theory explains the typical upward sloping shape of yield curves as a function of
normally greater demand for short term notes than for long−term bonds.
Portfolio risk is:
not equal to the weighted average of the risks of the individual securities in the portfolio.
Which of the following is a contrary indicator?
odd−lot trading
Four "decision traps " identified by behavioral finance are
overconfidence, representativeness, loss aversion, narrow framing.
The writer of a put or call is the
party who creates an option by selling it.
The Capital Asset Pricing Model (CAPM) is a mathematical model that depicts the
positive relationship between risk and return.
The most important factor affecting the market price of a put or call is the
price behavior of the underlying common stock.
As bonds approach their maturity dates
prices will approach their par values.
An internal rate of return (IRR) is the discount rate that
produces a present value of future benefits equal to the market price of a stock.
Including foreign investments in a portfolio
provides potential benefits from changes in currency values.
When a company offers the investing public a certain number of shares of its stock at a certain price, the company is making what is known as a
public offering.
An investor who exercises a call option on a S&P 500 ETF will
purchase ETF shares at the strike price.
Which one of the following actions would be the most appropriate hedge to a short sale of common stock?
purchase of a call
Eurodollar bonds are
purchased and redeemed in dollars but issued by entities outside the U.S.
The return on a futures contract is calculated as
(selling price − purchase price)/margin deposit.
The beta of the market is
1.0
Compared to yields on general purpose money funds, the yields on tax−exempt money funds are
20 to 30 percent lower.
Evidence suggests that the price of a stock continues to move up or down for a period of
6 to 12 months.
Treasury STRIPS are securities created by stripping the coupon and principal payments made by an ordinary bond and selling them as individual securities. A U.S. Treasury note with exactly four years to maturity most likely can be broken into as many as:
9 Treasury STRIPS.
Which one of the following statements is correct concerning international funds?
A devaluation of the dollar causes returns on foreign investments to improve from a U.S. perspective.
Which one of the following statements is correct concerning the mutual fund cash ratio (MFCR)?
A low MFCR indicates that fund managers might be forced to sell securities should investors wish to withdraw funds.
Which of the following investments may be impacted by government actions?
A. corporate bonds B. stocks C. government bonds D. all of the above
American investors can participate in international stock markets by
A. purchasing shares in a mutual fund that invests in foreign companies. B. purchasing shares of a U.S. based company such as Coca Cola or McDonald's with extensive international operations. C. purchasing ADSs (American Depositary shares). D. all of the above.
