FINC314 Exam 1 Practice Questions

When a distribution is positively skewed, standard deviation overestimates risk. standard deviation correctly estimates risk. standard deviation underestimates risk. the tails are fatter than in a normal distribution.

standard deviation overestimates risk.

The ____ is an example of a U.S. index of large firms. Wilshire 5000 DJIA DAX Russell 2000 All of the options.

DJIA (The DJIA contains 30 of some of the largest firms in the U.S.)

Which of the following portfolio construction methods starts with security analysis? Top-down Bottom-up Middle-out Buy and hold Asset allocation

bottom up (Bottom-up refers to using security analysis to find securities that are attractively priced. Top-down refers to using asset allocation as a starting point.)

The means by which individuals hold their claims on real assets in a well-developed economy are investment assets. depository assets. derivative assets. financial assets. exchange-driven assets.

financial assets (Financial assets allocate the wealth of the economy. Example: it is easier for an individual to own shares of an auto company than to own an auto company directly.)

Assume you sell short 100 shares of common stock at $30 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $35 per share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. -33.33% -25.63% -57.14% -77.23%

-33.33%

The continuously compounded annual return on a stock is normally distributed with a mean of 20% and standard deviation of 30%. With 95.44% confidence, we should expect its actual return in any particular year to be between which pair of values? Hint: Refer to Figure 5.4 (Links to an external site.). -40.0% and 80.0% -30.0% and 80.0% -20.6% and 60.6% -10.4% and 50.4%

-40.0% and 80.0% (With probability 0.9544, the value of a normally distributed variable will fall within 2 standard deviations of the mean; that is, between −40% and 80%. Simply add and subtract 2 standard deviations to and from the mean.)

You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin. 25.00% -33.33% 44.31% -41.67% -54.22%

-41.67%

Consider the following three stocks: StockPriceNumber of shares outstandingStock A$40200Stock B$70500Stock C$10600 The price-weighted index constructed with the three stocks is

40

You own 500 shares of a stock that you purchased on margin at a price per share of $20.12. The stock is currently valued at $24 a share. Your broker advised you today that your minimum equity position for this purchase is $4,800 as of today. What is the maintenance margin percentage? 25 percent 30 percent 35 percent 40 percent 50 percent

40%

Consider the following three stocks: StockPriceNumber of shares outstandingStock A$40200Stock B$70500Stock C$10600 The value-weighted index constructed with the three stocks using a divisor of 100 is

490

You have been given this probability distribution for the holding-period return for KMP stock: Stock of the EconomyProbabilityHPRBoom0.3018%Normal growth0.5012%Recession0.20-5% What is the expected standard deviation for KMP stock? 6.91% 8.13% 7.79% 7.25% 8.85%

8.13% s = [0.30 (18 - 10.4)2 + 0.50 (12 - 10.4)2 + 0.20 (-5 - 10.4)2]1/2 = 8.13%.

For the period 1927 - 2018, the mean annual risk premium for the US stock market over T-bills is around 8.34% See Table 5.4 5.58% 11.72% 3.38%

8.34% table 5.4

Which of the following statements is true regarding a corporate bond? A corporate callable bond gives the holder the right to exchange it for a specified number of the company's common shares. A corporate debenture is a secured bond. A corporate indenture is a secured bond. A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares. Holders of corporate bonds have voting rights in the company.

A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares.

Which of the following is not a mortgage-related government or government-sponsored agency? The Federal Home Loan Bank The Federal National Mortgage Association The U.S. Treasury Freddie Mac Ginnie Mae

The U.S. Treasury

Which one of the following statements regarding open-end mutual funds is false? The funds redeem shares at net asset value. The funds offer investors professional management. The funds offer investors a guaranteed rate of return. The funds redeem shares at net asset value and offer investors professional management.

The funds offer investors a guaranteed rate of return.

Which of the following measures of risk best highlights the potential loss from extreme negative returns? Standard deviation Variance Upper partial standard deviation Value at risk (VaR) None of the options are correct.

Value at risk (VaR) (Only VaR measures potential loss from extreme negative returns.)

________ is a risk measure that indicates vulnerability to extreme negative returns. Value at risk Lower partial standard deviation Standard deviation Value at risk and lower partial standard deviation None of the options are correct.

Value at risk and lower partial standard deviation (Value at risk and lower partial standard deviation are risk measures that indicate vulnerability to extreme negative returns.)

Consider the following three stocks: StockPriceNumber of shares outstandingStock A$40200Stock B$70500Stock C$10600 Assume at these prices that the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1? 265 430 355 490 1000

490 Value-weighted indexes are not affected by stock splits.

You purchased a share of stock for $20. One year later, you received $1 as a dividend and sold the share for $29. What was your holding-period return? 45% 50% 5% 40% None of the options are correct.

50% ($1 + $29 - $20)/$20 = .5 (dividend + new price - old price)/old price

In 2016, the proportion of mutual funds (based on total assets) specializing in common stocks was 21.7%. 28.0%. 52.1%. 73.4%. 63.5%.

52.1%

Practitioners often use a ________% VaR, meaning that ________% of returns will exceed the VaR, and ________% will be worse. 25; 75; 25 75; 25; 75 5; 95; 5 95; 5; 95 80; 80; 20

5; 95; 5 (Practitioners often use a 5% VaR, meaning that 95% of returns will exceed the VaR, and 5% will be worse.)

An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. 7.2%;9.1% 7.2%;7.735% 6.12%;7.735% 8.471%;9.1%

7.2 and 7.735

For a taxpayer in the 15% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of 6.2%. 5.27%. 8.32%. 7.29%.

7.29%. .062 = r(1-t); r = .062/.85; r =.0729

You recently purchased 800 shares of Southern Timber stock for $35 a share. Your broker required a cash payment of $19,600, plus trading costs, for this purchase. What was the initial margin requirement? 60 percent 65 percent 70 percent 75 percent 80 percent

70% purchase cost = 800 x $35 = $28,000 initial margin percentage = $19,600/$28,000 = 70%

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. 30; 30 30; 70 70; 30 70; 50 70; 70

70; 30

Commercial paper is a short-term security issued by ________ to raise funds. the Federal Reserve Bank commercial banks large, well-known companies the New York Stock Exchange state and local governments

large, well-known companies (Commercial paper is short-term unsecured financing issued directly by large, presumably safe corporations.)

In 2016, ____________ was(were) the most significant financial asset(s) of U.S. commercial banks in terms of total value. loans and leases cash real estate deposits investment securities

loans and leases (table 1.3)

The minimum equity that must be maintained at all times in a margin account is called the: initial margin. initial equity position. maintenance margin. call requirement margin call

maintenance margin

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? Cash Wrap Margin Short Asset allocation

margin

When your equity position in a security is less than the required amount, your brokerage firm will issue a: margin call. margin certificate. cash certificate. limit order. leverage call.

margin call

Ann just purchased $10,000 of stock. She paid $8,000 in cash and borrowed the remaining $2,000 needed to pay for this purchase. If you constructed a balance sheet reflecting this transaction, the total assets would be: $3,000. $9,000. $10,000 $15,000. $21,000.

$10,000

Alfonso purchased 600 shares of Crosswinds, Inc., stock on 60 percent 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? $7,680 $8,880 $9,600 $10,320 $11,560

$10320 margin loan = 600 x $37 x (1-.60) = $8880 current equity = (600 x 32)-8880 = $10320

Staci just used $5,000 of cash plus a $2,500 margin loan to purchase $7,500 worth of stock. This is the only transaction in her brokerage account. According to her account balance sheet, she now has account equity of: $2,500. $5,000. $7,500. $12,500. $15,000.

$5,000.

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. $3,690; $3,330 $3,690; $3,690 $7,770; $3,330 $7,770; $3,690 $8,610; $3,690

$7,770; $3,690

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two for one in the last period c. Calculate the rate of return for the second period (t = 1 to t = 2).

0

If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be 0.08. 0.03. 0.20. 0.11. 0.25.

0.25. (8-3)/20=.25

For the period 1927 - 2018, the annualized Sharpe ratio for the US stock market is around 2 1 0.56 0.45

0.45

You have been given this probability distribution for the holding-period return for KMP stock: Stock of the EconomyProbabilityHPRBoom0.3018%Normal growth0.5012%Recession0.20-5% What is the expected holding-period return for KMP stock? 10.40% 9.32% 11.63% 11.54% 10.88%

10.40% (HPR = 0.30 (18%) + 0.50 (12%) + 0.20 (-5%) = 10.4%.)

The historical arithmetic excess return on U.S. small stocks over the 1927-2018 period has been around _______. The standard deviation of small stocks' excess returns has been ________ than the standard deviation of large stocks' excess returns. 12.31%, lower 12.31%, higher 15.38%, lower 15.38%, higher

12.31%, higher

If a portfolio had a return of 18%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 34%, the risk premium would be 13%. 18%. 49%. 12%. 29%.

13%.

The historical arithmetic excess return on U.S. small value stocks over the 1927-2018 period has been around _______. The Sharpe ratio of the small value stocks is ___ than the Sharpe ratio of the US equity market. 8.99%, higher 15.38%, lower 15.38%, higher 8.99%, lower

15.38%, higher

In 2016, the proportion of mutual funds (based on total assets) specializing in money market securities was 21.7%. 28.0%. 54.1%. 73.4%. 17.6%.

17.6%

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two for one in the last period b. Calculate the new divisor for the price-weighted index in year 2. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

2.34

For the period 1927 - 2018, the annualized standard deviation for the US stock market return is around 20.05% Table 5.4 24.70% 28.21% 11.59%

20.05% Table 5.4

In 2016, the proportion of mutual funds (based on total assets) specializing in bonds was 21.8%. 28.0%. 54.1%. 73.4%. 63.5%

21.8%

The maximum maturity of commercial paper that can be issued without SEC registration is 270 days. 180 days. 90 days. 30 days.

270 days. (SEC permits issuing CP for a max of 270 days without registration)

Tate Industries stock is selling for $20 a share. You would like to purchase as many shares of this stock as you can. Your margin account currently has available cash of $4,500 and the initial margin requirement is 75 percent. What is the maximum number of shares you can buy? 193 shares 287 shares 300 shares 360 shares 408 shares

300 shares max purchase = $4500/.75 = $6000 max # of shares = $6000/$20=300

Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two for one in the last period. a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 4 decimal places.) The answer is not in percentage.

4.17%

Which of the following securities is a money market instrument? Treasury note Treasury bond Municipal bond Commercial paper Mortgage security

Commercial paper (Only commercial paper is a money market security. The others are capital market instruments.)

The ____ index represents the performance of the U.K. stock market. DAX FTSE Nikkei Hang Seng

FTSE (Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada).)

The absolute minimum initial margin requirement is set by the: individual investor. brokerage firm. Correct! Federal Reserve. Security Investors Protection Corporation. Securities and Exchange Commission.

Federal Reserve

Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities. Sarbanes-Oxley Glass-Steagall SEC Sarbanes-Oxley and SEC None of the options

Glass-Steagall

In which of the following indices is(are) market-value weighted?I) The New York Stock Exchange Composite IndexII) The Standard and Poor's 500 Stock IndexIII) The Dow Jones Industrial Average

I and II DJ = price weighted

Which of the following are characteristics of preferred stock?I) It pays its holder a fixed amount of income each year at the discretion of its managers.II) It gives its holder voting power in the firm.III) Its dividends are usually cumulative.IV) Failure to pay dividends may result in bankruptcy proceedings.

I and III

Which of the following statement(s) is(are) true regarding municipal bonds?I) A municipal bond is a debt obligation issued by state or local governments.II) A municipal bond is a debt obligation issued by the federal government.III) The interest income from a municipal bond is exempt from federal income taxation.IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

I, III, IV State and local governments and agencies thereof issue municipal bonds on which the interest income is free from all federal taxes and is exempt from state and local taxation in the issuing state.

The ____ is an example of a U.S. index of small firms. S&P 500 DJIA DAX Russell 2000 All of the options are correct.

Russell 2000 (The Russell 2000 is a small firm index. The DJIA and S&P 500 are large firm U.S. indexes and the DAX is a large German firm index.)

Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the purchase. The interest rate on the loan is 8%. If the share price falls to $30 per share by the end of the year, and the maintenance margin requirement is 30%, will she receive a margin call? No Yes

No (work in notebook)

Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the Nasdaq 100 should choose SPY. DIA. QQQ. IWM. VTI.

QQQ

Which of the following is not a component of the money market? Repurchase agreements Eurodollars Real estate investment trusts Money market mutual funds Commercial paper

Real estate investment trusts (they are not short term investments)

What is the maximum loss you can incur if you have a long position on a stock in a cash account? The initial investment The initial margin The margin loan plus interest Zero Unlimited

The initial investment

Which of the following correctly describes a repurchase agreement? The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price. The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price. The purchase of a security with a commitment to purchase more of the same security at a specified future date.

The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.

If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA? The stock trading at the highest dollar price per share The stock having the greatest amount of debt in its capital structure The stock having the greatest amount of equity in its capital structure The stock having the lowest volatility

The stock trading at the highest dollar price per share (Higher-priced stocks affect the DJIA more than lower-priced stocks; other choices are not relevant.)

Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer market. Suppose you have submitted a limit order to sell at $55.62. What will happen? The trade will not be executed and The trade will be executed and

The trade will not be executed

Which one of the following is not a money market instrument? Treasury bill Negotiable certificate of deposit Commercial paper Treasury bond Eurodollar account

Treasury bond (Money market instruments are instruments with maturities of one year or less, which applies to all of the options except Treasury bonds.) ** MM = 1 year or less maturity

T-bills are financial instruments initially sold by ________ to raise funds. commercial banks the U.S. government state and local governments agencies of the federal government the U.S. government and agencies of the federal government

US government

Investment bankers perform which of the following role(s)? Market new stock and bond issues for firms Provide advice to the firms as to market conditions, price, etc. Design securities with desirable properties All of the options None of the options

all of the options

The ultimate stock index in the U.S. is the Wilshire 5000. DJIA. S&P 500. Russell 2000.

Wilshire 5000 (The Wilshire 5000 is the broadest U.S. index and contains more than 7000 stocks.)

Old Economy Traders opened an account to short sell 1,000 shares of Internet Dreams at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share. If the maintenance margin requirement is 30%, will Old Economy receive a margin call? Yes No

Yes

Which of the following functions do investment companies perform for their investors? Record keeping and administration Diversification and divisibility Professional management Lower transaction costs All of the options.

all of the options

The Dow Jones Industrial Average (DJIA) is computed by adding the prices of 30 large "blue-chip" stocks and dividing by 30. calculating the total market value of the 30 firms in the index and dividing by 30. adding the prices of the 30 stocks in the index and dividing by a divisor. adding the prices of the 500 stocks in the index and dividing by a divisor. adding the prices of the 30 stocks in the index and dividing by the value of these stocks as of some base date period.

adding the prices of the 30 stocks in the index and dividing by a divisor. (When the DJIA became a 30-stock index, it was computed by adding the prices of 30 large "blue-chip" stocks and dividing by 30; however, as stocks on the index have split and been replaced, the divisor has been adjusted.)

The ____________ refers to the potential conflict between management and shareholders. agency problem diversification problem liquidity problem solvency problem regulatory problem

agency problem (The agency problem describes potential conflict between management and shareholders. The other problems are those of firm management only.)

_______ are examples of financial intermediaries. Commercial banks Insurance companies Investment companies Credit unions All of the options

all of the above all bring borrowers and lenders together

Financial intermediaries exist because small investors cannot efficiently diversify their portfolios. assess credit risk of borrowers. advertise for needed investments. diversify their portfolios and assess credit risk of borrowers. All of the options.

all of the options (The individual investor cannot efficiently and effectively perform any of the tasks above without more time and knowledge than that available to most individual investors.)

The material wealth of a society is a function of all financial assets. all real assets. all financial and real assets. all physical assets.

all real assets

Asset allocation refers to choosing which securities to hold based on their valuation. investing only in "safe" securities. the allocation of assets into broad asset classes. bottom-up analysis.

allocation of assets into broad asset classes

The stocks on the Dow Jones Industrial Average have remained unchanged since the creation of the index. include most of the stocks traded on the NYSE. are changed occasionally as circumstances dictate. consist of stocks on which the investor cannot lose money. include most of the stocks traded on the NYSE and are changed occasionally as circumstances dictate.

are changed occasionally as circumstances dictate. (The stocks on the DJIA are only a small sample of the entire market and have been changed occasionally since the creation of the index; one can lose money on any stock.)

In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs by adjusting the divisor. automatically. by adjusting the numerator. quarterly on the last trading day of each quarter.

automatically (The calculation of the value-weighted S&P indices includes both price and number of shares of each of the stocks in the index. Thus, the effects of stock splits are automatically incorporated into the calculation.)

To be considered liquid, a security must: be held in a cash account. pay dividends. be able to be sold on short notice. be held for less than one year. be able to be sold quickly with little, if any, price concession.

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

Bond market indexes can be difficult to construct because they cannot be based on firms' market values. bonds tend to trade infrequently, making price information difficult to obtain. there are so many different kinds of bonds. prices cannot be obtained for companies that operate in emerging markets. corporations are not required to disclose the details of their bond issues.

bonds tend to trade infrequently, making price information difficult to obtain. (Bond trading is often "thin," making prices stale (or not current).)

If you opt to purchase shares of stock on margin rather than with cash, you will: decrease your maximum potential rate of return. increase your maximum potential rate of return. guarantee yourself a profit. eliminate any potential profit. have equal rates of return regardless of how the purchase is made.

increase your maximum potential rate of return

The risk premium for common stocks cannot be zero, for investors would be unwilling to invest in common stocks. must always be positive, in theory. is negative, as common stocks are risky. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. (If the risk premium for common stocks were zero or negative, investors would be unwilling to accept the lower returns for the increased risk.)

Security selection refers to choosing which securities to hold based on their valuation. investing only in "safe" securities. the allocation of assets into broad asset classes. top-down analysis.

choosing which securities to hold based on their valuation

In 2016, ____________ was(were) the most significant liability(ies) of U.S. commercial banks in terms of total value. loans and leases cash real estate deposits investment securities

deposits (table 1.3)

Financial assets permit all of the following except consumption timing. allocation of risk. separation of ownership and control. elimination of risk.

elimination of all risk (Financial assets do not allow risk to be eliminated. However, they do permit allocation of risk, consumption timing, and separation of ownership and control.)

The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the prime rate. discount rate federal funds rate. call money rate. money market rate.

federal funds rate. (The federal funds are required for the bank to meet reserve requirements, which is a way of influencing the money supply.)

Deposits of commercial banks at the Federal Reserve Bank are called bankers' acceptances. repurchase agreements. time deposits. federal funds. reserve requirements.

federal funds. (The federal funds are required for the bank to meet reserve requirements, which is a way of influencing the money supply. No substitutes for fed funds are permitted.

Commercial banks differ from other businesses in that both their assets and their liabilities are mostly illiquid. financial. real. owned by the government. regulated.

financial (table 1.3)

Financial assets directly contribute to the country's productive capacity. indirectly contribute to the country's productive capacity. contribute to the country's productive capacity, both directly and indirectly. do not contribute to the country's productive capacity, either directly or indirectly. are of no value to anyone.

indirectly contribute to the country's productive capacity (Financial assets indirectly contribute to the country's productive capacity because these assets permit individuals to invest in firms and governments. This in turn allows firms and governments to increase productive capacity.)

________ specialize in helping companies raise capital by selling securities. Commercial bankers Investment bankers Investment issuers Credit raters

investment bankers (An important role of investment banking is to act as middlemen in helping firms place new issues in the market.)

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

involves the borrowing of securities.

_______ are real assets. Land Machines Stocks and bonds Knowledge Land, machines, and knowledge

land, machines and knowledge (stocks and bonds = financial assets)

If you ignore a margin call, your broker: will seize all the assets in your account. will close your account. may place a short sale on your behalf to cover the amount of the call. may sell some of your securities to repay the margin loan. will increase both your margin loan and the rate of interest on that loan.

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

When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the most realistic, as it is the most complete measure of risk. most pessimistic, as it is the most complete measure of risk. most optimistic, as it is the most complete measure of risk. most optimistic, as it takes the highest return (smallest loss) of all the cases.

most optimistic, as it takes the highest return (smallest loss) of all the cases.

Which of the following statement(s) is(are) true? Inflation has no effect on the nominal rate of interest. The realized nominal rate of interest is always greater than the real rate of interest. Certificates of deposit offer a guaranteed real rate of interest. None of the options are true.

none

The money market is a subsector of the commodity market. capital market. derivatives market. equity market. None of the options are correct.

none (Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums.)

In 2016, ____________ was the most significant financial asset of U.S. households in terms of total value. real estate mutual fund shares debt securities life insurance reserves pension reserves

pension reserves (table 1.1)

If a distribution has "fat tails," it exhibits positive skewness. negative skewness. a kurtosis of zero. positive kurtosis. positive skewness and kurtosis.

positive kurtosis.

A market order has: Correct! Price uncertainty but not execution uncertainty. Both price uncertainty and execution uncertainty. Execution uncertainty but not price uncertainty.

price uncertainty but not execution uncertainty (A market order is an order to execute the trade immediately at the best possible price. The emphasis in a market order is the speed of execution (the reduction of execution uncertainty). The disadvantage of a market order is that the price at which it will be executed is not known ahead of time; it thus has price uncertainty.)

New issues of securities are sold in the ________ market(s). primary secondary over-the-counter primary and secondary

primary

pay a fixed interest rate for life. pay a variable interest rate that is indexed to inflation but maintain a constant principal. provide a constant stream of income in real (inflation-adjusted) dollars. have their principal adjusted in proportion to the Consumer Price Index. provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index. (CPI adjusted principal)

In 2016, ____________ was the most significant real asset of U.S. households in terms of total value. consumer durables automobiles real estate mutual fund shares bank loans

real estate (see Table 1.1)

A form of short-term borrowing by dealers in government securities is are reserve requirements. repurchase agreements. bankers' acceptances. commercial paper. brokers' calls.

repurchase agreements (Repurchase agreements are a form of short-term borrowing, where a dealer sells government securities to an investor with an agreement to buy back those same securities at a slightly higher price.)

A municipal bond issued to finance an airport, hospital, turnpike, or port authority is typically a revenue bond. general-obligation bond. industrial-development bond. revenue bond or general-obligation bond.

revenue bond. (Revenue bonds depend on revenues from the project to pay the coupon payment and are normally issued for airports, hospitals, turnpikes, or port authorities. General obligation bonds are backed by the taxing power of the municipality. Industrial development bonds are used to support private enterprises.)

The largest component of the money market is are repurchase agreements. money market mutual funds. T-bills. Eurodollars. savings deposits.

savings deposits table 2.1

Investors trade previously issued securities in the ________ market(s). primary secondary primary and secondary derivatives

secondary

If you benefit when a security decreases in value, you have a _____ position in the security. long margined short covered wrapped

short

This morning, Josh sold 800 shares of stock that he did not own. This sale is referred to as a: margin sale. long position. wrap trade. hypothecated sale. short sale.

short sale

_______ are financial assets. Bonds Machines Stocks Bonds and stocks Bonds, machines, and stocks

stocks and bonds

Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2016 show that Correct! stocks offered investors greater rates of return than bonds and bills. stock returns were less volatile than those of bonds and bills. bonds offered investors greater rates of return than stocks and bills. bills outperformed stocks and bonds. Treasury bills always offered a rate of return greater than inflation.

stocks offered investors greater rates of return than bonds and bills. (The historical data show that, as expected, stocks offer a greater return and greater volatility than the other investment alternatives. Inflation sometimes exceeded the T-bill return.)

The index that includes the largest number of actively-traded stocks is the NASDAQ Composite Index. the NYSE Composite Index. the Wilshire 5000 Index. the Value Line Composite Index. the Russell Index.

the Wilshire 5000 Index. (The Wilshire 5000 is the largest readily available stock index, consisting of the stocks traded on the organized exchanges and the OTC stocks.)

The holding-period return (HPR) on a share of stock is equal to the capital gain yield during the period plus the inflation rate. Correct! the capital gain yield during the period plus the dividend yield. the current yield plus the dividend yield. the dividend yield plus the risk premium. the change in stock price.

the capital gain yield during the period plus the dividend yield. (The HPR of any investment is the sum of the capital gain and the cash flow over the period, which for common stock is B.)

In the event of the firm's bankruptcy, the most shareholders can lose is their original investment in the firm's stock. common shareholders are the first in line to receive their claims on the firm's assets. bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders. the claims of preferred shareholders are honored before those of the common shareholders. the most shareholders can lose is their original investment in the firm's stock and the claims of preferred shareholders are honored before those of the common shareholders.

the most shareholders can lose is their original investment in the firm's stock and the claims of preferred shareholders are honored before those of the common shareholders. (Shareholders have limited liability and have residual claims on assets. Bondholders have a priority claim on assets, and preferred shareholders have priority over common shareholders.)

Kay just purchased $5,000 worth of stock. She paid $3,000 in cash and borrowed $2,000. In this example, the term margin refers to: the total amount of the purchase. the percentage of the purchase that was paid in cash. the percentage of the purchase paid with borrowed funds. any future increase in the value of the stock. any future decrease in the value of the stock.

the percentage of the purchase that was paid in cash.

The bid price of a T-bill in the secondary market is the price at which the dealer in T-bills is willing to sell the bill. the price at which the dealer in T-bills is willing to buy the bill. greater than the asked price of the T-bill. the price at which the investor can buy the T-bill. never quoted in the financial press.

the price at which the dealer in T-bills is willing to buy the bill. (T-bills are sold in the secondary market via dealers; the bid price quoted in the financial press is the price at which the dealer is willing to buy the bill.)

Skewness is a measure of how fat the tails of a distribution are. the downside risk of a distribution. the symmetry of a distribution. the dividend yield of the distribution. None of the options are correct.

the symmetry of a distribution. (Skewness is a measure of the normality of a distribution.)

What is the purpose of a margin call? to inform you that your margin loan is due and payable to demand funds to increase your margin position to let you know the amount of funds that are now available for you to borrow to advise you that the interest rate on your loan has changed to remind you of the upcoming monthly payment due on your margin loan

to demand funds to increase your margin position

Which of the following portfolio construction methods starts with asset allocation? Top-down Bottom-up Middle-out Buy and hold Asset allocation

top down

The largest component of the fixed-income market is _______ debt. Treasury asset-backed corporate tax-exempt mortgage-backed

treasury figure 2.9

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

unlimited.

Federally-sponsored agency debt is legally insured by the U.S. Treasury. would probably be backed by the U.S. Treasury in the event of a near-default. has a small positive yield spread relative to U.S. Treasuries. would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries. is legally insured by the U.S. Treasury and has a small positive yield spread relative to U.S. Treasuries.

would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries. (Federally sponsored agencies are not government owned. These agencies' debt is not insured by the U.S. Treasury, but probably would be backed by the Treasury in the event of an agency near-default. As a result, the issues are very safe and carry a yield only slightly higher than that of U.S. Treasuries.)

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: your broker. the stock exchange. the SEC. the SIPC. the Federal Reserve.

your broker