Chapter 12 Quiz, Chapter 13 Quiz, Chapter 14 Quiz, Chapter 15 Quiz, Chapter 16 Quiz, Chapter 17 Quiz, Chapter 18 Quiz, Part III Test

A "candlestick" investment strategy is where you invest in a diversified portfolio that reflects your return objectives and risk tolerance, and you hold on to it, making few changes.

False

A quantified return objective defines the ability or willingness of an investor to take on risk.

False

A vocational program prepares you to enter college by polishing your skills in reading, writing, research, and analysis.

False

All companies issue preferred stock, and only some issue common stock.

False

All countries who have stock exchanges signed an agreement to require companies to prepare financial statements using GAAP rules.

False

Anyone can buy or sell shares of stock, but brokers who are members of an exchange can get you discounted prices.

False

Business growth and contractions are not usually tied to the growth and contraction of the overall economy.

False

If layoffs are widespread enough, however, there may not be federal, state, or local government programs aimed at helping the many people in your situation, such as a retraining program or temporary income assistance.

False

In general, the shorter the term to maturity is, the riskier the bond is.

False

What is the relationship between a cover letter, resume, and interview?

The cover letter, resume, and interview are all efforts by the perspective employees to get the employers attention, create a good impression, and sell themselves and their abilities to the employer. (I got 3/5 on this)

If you are establishing a "buy and hold" strategy, you are establishing positions that you plan to hold for a long time. So, daily fluctuations in price won't matter.

True

If you are starting out and can't be expected to have lots of employment experience, employers looks for hints about your character—things like ambition, initiative, responsibility—that may indicate your success working for them.

True

In general, rising interest rates mean losses for bondholders who sell before maturity, and falling interest rates mean gains for bondholders who sell before maturity.

True

Investing in commodities involves transaction costs and a time limit on realizing your gains (or losses), because derivatives are time-sensitive contracts created with an expiration date.

True

Investors buy stocks hoping to share in corporate profits, benefiting from the success of the company's growth.

True

Loss aversion is a situation where a rational aversion leads you to underestimate a real cost, leading you to choose the lesser alternative.

True

Once a company is publicly traded, it falls under the regulatory scrutiny of federal and state governments, and must regularly file financial reports and analysis.

True

One of the biggest concerns when investing in international securities is the flow and quality of information

True

Other countries may not have filing requirements for corporations who offer stock to the markets, making information harder to get and likely incomplete

True

Some bonds are "privately placed", meaning that they are issued in a private sale instead of through a public market.

True

Some investors see a high dividend as a sign of weakness, indicative of a company that cannot grow because it is not putting enough capital into expansion and growth or into satisfying creditors.

True

The assets that became the objects of bubbles tended to be the drivers of a "new economy" at the time and thus were rationalized as investments rather than as speculation.

True

The stock market bubble of the 1920s happened as radio and telephone access became universal, while the stock boom of the 1990s correlates to the widespread use of cell phones and email.

True

When you buy a stock, you are buying a share of its future profits, but also share in its losses as well.

True

When you invest, you are transferring capital to those who need it on the assumption that they will be able to return it when you need or want it, paying you for its use in the mean time

True

Your best protection against your own behavioral impulses, however, is to have a plan based on an objective analysis of goals, risk tolerance, and constraints, taking your entire portfolio into account.

True

In most cases, if you are fired, your employer is required under federal law to offer you the opportunity to remain covered under your employee health insurance plan if you assume the cost.

Trust

Which of the following is NOT included in a company's annual report?

a listing of all current shareholders

When you buy a stock you are purchasing...

a piece of ownership of a company

The originator gets a number of people to invest, each of whom recruits more, and so on. The money from each group of investors, however, rather than being invested, is used to pay "returns" to the previous group of investors. The scheme is uncovered when there are not enough "returns" to go around. Thus, the originator and early investors may get rich, while later investors lose all their money."

a pyramid scheme

What is churning?

when a broker makes extra trades and changes to your account so that they can charge more transaction fees to earn more money

Returns are always calculated on a(n) _____ rate of return, or the percentage of return created for each unit of value in that time period

yearly

Match the investor behavior bias to its explanation

availability bias: when investors rely on information to make decisions, but all information is not readily available. representative bias: decision making based on stereotypes of investments' past performance overconfidence bias: having too much faith in the precision of your estimates and you underestimate the actual range of possibilities anchoring bias: when you cannot integrate new information into your decision making process because you place too much value on what you already know ambiguity aversion bias: the tendency to prefer the familiar to the unfamiliar when investing

A ___ trades on behalf of clients to fulfill client directives, while a ___ is a firm that is trading for its own accounts.

broker, dealer

In the job market, ____ are buyers of labor and _____ are sellers.

businesses, employees

"By minimizing the number of transactions, you can minimize transaction costs. Since you are holding your stocks, you are not realizing gains and are not paying gains tax." This quote describes which of the following?

buy and hold strategy

When a company participates in an IPO, its shares of stock are sold in the ______ and the money goes to the company to be used for growth and projects.

primary markets

Which of the following is repaid out of the revenue created by the project it was created to fund (like, building a highway)?

revenue bond

A "small cap" company will have market capitalization of approximately how much?

$300 million to $2 Billion

Which of the following sell stocks?

-NASDAQ -NYSE

Which of the following items relate to commodities?

-a natural or cultivated resource NOT: creates a return through regular, fixed, or floating interest rates NOT: creates a return through the distribution of profits or dividends

Which of the following items relate to stocks?

-a way to raise capital through selling ownership or equity -creates a return through the distribution of profits or dividends

Which of the following groups issue bonds?

-corporations -government agencies -local governments -the US government

Which of the following groups issue bonds?

-corporations -the US government -government agencies -local governments

Which of the following will increase market inefficiency?

-demographic factors of the population -attitudes reflected in popular culture -lowering of transaction costs -availability of information and analyses

Which of the following are included in your compensation?

-health insurance -vacation days -dental insurance -retirement -sick days -time off -salary -disability insurance

Bubbles tend to be accompanied by which of the following?

-increased use of debt financing -lower interest rates -decrease in government regulations and oversight -new technologies

Which of the following are characteristics of active management of investments?

-incurs transaction costs -choosing specific stocks and bonds -making security selections to maximize returns and minimize risks

Which of the following are characteristics of passive management of investments?

-investing in an index fund -saves transaction costs NOT: making security selections to maximize returns and minimize risks

Which of the following are characteristics of preferred stock?

-less risk -less risk (I think I need two more answers)

Which of the following are considered commodities?

-precious metals -currencies -energy resources -agricultural products

In an efficient market, prices reflect "fundamental value" as appraised by decision makers who have which of the following?

-the freedom to buy and sell whenever they want -access to information (NEED ONE MORE)

Which of the following are characteristics of common stock?

-voting rights -more reliable investment income NOT: less risk NOT: more price volatility (I think I need two more answers)

When a company experiences financial distress, what order are debts/profits paid off?

1. creditors 2. preferred stockholders 3. common stockholders

Match the market bubble to the asset that caused a major economic crisis

1890 - United States: silver, thanks to the Sherman Silver Act 2003 - United States: Real estate, thanks to monetary policy choices 1997 - Asia: currency, thanks to major globalization and deregulation 1863 - France: cotton, thanks to the Confederate defeat in the US Civil War 1636 - Netherlands: exotic tulip bulbs, thanks to over-speculation and the war with Spain

Conventionally, how long should you give notice to your employer before leaving a job?

2 weeks

A decline in the leading economic indicators is a strong sign that the economy is in a downturn or headed into a recession if it lasts for how long?

3 months

About what percent of all mutual fund transactions are done directly through a retirement plan contribution or mutual fund company

40%

In the US, ____ percent of adults own stocks or bonds.

47%

About ____ of all equity mutual funds have a turnover ratio of less than 50 percent.

50%

As an investor, how many financial crises can you generally expect within your lifetime?

6

The average person starting out in the world of work today can expect to change careers - not just jobs - how often?

7 times

Of these bond ratings, which is seen as the safest to invest in?

AAA

What is an appropriate strategy for diversifying investments between stocks, bonds, mutual funds, and other places? Describe what has the most and least risk and explain the spread of investments a typical investor would want to make across the available choices.

An appropriate strategy for diversifying investments between stocks, bonds, mutual funds, and other places is by not putting all of your money into any one of these. You would want to spread the wealth. Stocks are the most risky and bonds are the least risky. A typical investor would spread their risk by having more than one kind of investment therefore minimizing the risk. I got 5/5 on this

Bonds rated ____ and above are considered investment grade bonds that are safe for individual and institutional investors

BBB

Bonds rated ____ and below are referred to as "junk bonds" or "speculative bonds".

BBB

What is the idea of behavioral finance? How does it affect investing behaviors?

Behavioral finance is the idea of why individuals don't always make the predicted decisions and why markets don't behave how it was expected to behave. This affects investing behaviors because of the individuals biases. (I got 3/5 onthis)

Of these bond ratings, which is seen as the MOST risky?

D

Match the stock index to the type of stocks they track

Dow Jones Average: 60 leading corporations Dow Jones Industrial Average: 30 leading industrial corporations S&P 500: 500 largest corporations NASDAQ Composite: all companies listed on the NASDAQ exchange Russell 3000: 3,000 largest US companies based on total market capitalization

Match the stock index to the type of stocks they track

Dow Jones Average: 60 leading corporations Dow Jones Industrial Average: 30 leading industrial corporations S&P 500: 500 largest corporations NASDAQ Composite: all companies listed on the NASDAQ exchange Russell 3000: 3,000 largest US companies based on total market capitalizationThis answer is correct.

Match the stock index to the type of stocks they track

Dow Jones Corporate Bond Index: 696 equally weighted, recently issued corporate bonds Barclays Capital US Government/Credit Bond Index: US Government, Treasury-related, and corporate bonds JP Morgan Overseas Government Bond Index: Long-Term, non US government bonds JP Morgan Emerging Markets Bond Index: Government bonds issued by developing countries

In times of inflation or deflation, investors worry that the value or purchasing power of currency will change. They may invest in bonds as a more stable store of wealth than the currency that is supposed to represent the metal.

False

Investing in commodities is not a good way to achieve asset diversification in your portfolio, because often a commodity such as gold is cyclical to the economy, and therefore is similar to your stock and bond holdings as well.

False

Mortgage-backed securities do for real estate what mutual funds do for other assets; they provide investors with a way to invest with more liquidity and diversity and with comparatively lower transaction costs.

False

Mutual funds tend to grow in popularity during times of economic crisis.

False

Shorter-term bonds are more exposed to reinvestment, interest rate, and inflation risk than longer-term bonds.

False

Since a syndicate may be made up of any kind or many kinds of securities, it is not really another kind of investment. Rather, it is a way to invest without specifically selecting securities, a way of achieving a desired asset allocation without choosing individual assets.

False

The US bond market is about half the size (in dollars of capitalization) compared to the US stock market.

False

The economic cycle does not affect the aggregate job market or employment rate.

False

The secondary markets increase risk to the shareholder because the stock cannot be resold, meaning the shareholder cannot recover the invested capital and to make new choices with it

False

Match the economic indicator to what it measures in the economy

GDP: measures the value of a country's productive output Inflation: measures the currency's purchasing power Unemployment: measures the extent to which the economy creates opportunities for participation Interest rates: measures the impact of borrowing on the future value of money

Match the laws below to the regulations they established

National Labor Relations Act, 1935: Prevents employees who engage in union activities from being fired Fair Labor Standards Act, 1938: established minimum wage and overtime pay Title VII, The Civil Rights Act, 1964: prohibits discrimination based on race, color, religion, sex, or national origin Occupational Safety and Health Act, 1970: established safety standards and employees' rights to refuse work in unsafe conditions Family and Medical Leave Act, 1993: guarantees 12-week unpaid leave for illness, childbirth, or to care for an ill relative

Kim receives an order from a client to sell shares because the client believes the stock price will drop. Kim believes the client is right and so decides to sell her own personal shares in that stock as well. She places the order to sell her shares first, so that if the price drops as she sells, her shares will be sold at a higher price. She places the order to sell the client's shares after the price has dropped. According to professional ethics standards, is this acceptable?

Nope

Shonte is a financial advisor for a large broker-dealer that has acquired a large position in a certain bond issue. It now owns a lot of bonds. Wanting to reduce the company's exposure to risk from that position, Shonte's boss suggests that whenever possible, she should advise her clients to add this bond to their portfolios. That way the company can use its clients to buy its bonds and reduce its position. According to professional ethics standards, is this acceptable?

Nope

Tom, a dealer, has just shorted a large position in a tech stock. On his widely read blog, he announces that his "research" has revealed serious weaknesses in the tech company's marketing strategy and rumors of competitors' greater advantages in the market. Tom has no factual basis for his reporting, but if his "news" causes the price of the tech stock to fall, he will profit from his short position. According to professional ethics standards, is this acceptable?

Nope

Which government organization is tasked with regulating the US securities industry trading in the capital markets?

SEC

When using the "STAR" method to answer a question, what are the appropriate steps?

Situation, Task, Action, Result

Match the stage of life with the approximate age range you will be there...

Starting: 25-40 Accumulating: 40-65 Spending: 65-80 Gifting: 80+

What is behavioral finance?

The study of why individuals do not always make the decisions they are expected to make

Match the type of investment with its term length

Treasury bills: short term borrowing - usually less than 1 year Treasury notes: mid-term borrowing - a year to 10 years Treasury bonds: long term borrowing - 10 years or longer

A company sells stocks when it needs to raise more capital to fund projects it wants to create

True

A mutual fund provides an investor with cheaper and simpler diversification and security selection, requiring only one transaction to own a diversified portfolio (the mutual fund).

True

A prospectus is a published statement detailing a mutual fund's assets, liabilities, management personnel, and performance record.

True

Annual reports are audited and quarterly reports are generally unaudited by the SEC.

True

Antidiscrimination laws make it illegal for an employer to ask you your age; your height or weight; personal information such as your racial identity, sexual orientation, or health; or questions about your marital status and family situation, such as the number of children you have, whether you are single, or if you are pregnant or planning to start a family.

True

Any bond feature that makes those cash flows less certain increases the risk to the investor and thus the investor's return.

True

Bonds provide more secure income for an investment portfolio, while stocks provide more growth potential.

True

Bonds receive a speculative rating if their issuers are young companies, in a highly competitive market, or require a lot of operating capital

True

By investing in an index fund, you are achieving the most diversification possible for that asset class without having to make individual investments.

True

Directors or trustees may approve an investment policy statement and then leave the specific investment decisions up to professional investment managers.

True

Diversification in investments is not defined by the number of investments but by their different characteristics and performance

True

If layoffs are specific to your employer, you may be able to find a similar position with another company or you may be able to establish your own competitive business in the same industry.

True

If the costs of debt are affordable, a company may choose to borrow funds, which limits the company's commitment to its capital contributor, unlike selling stock would.

True

If the time period you are looking at is long enough, you can reasonably assume that the average return for an investment over time is what you can expect next year.

True

If you are buying a futures contract, you are purchasing now... the right to purchase something later at the current market price.

True

What is due diligence in investing?

a broker must investigate and report every detail of a potential investment to their clients

_____ create demand for more educators and pediatricians, while _______ create more demand for goods and services relating to elder care.

baby booms, older populations

Which of the following does not charge commission until you sell your shares, instead of when you buy them?

back end fund

____ allocation decided the amount of overall risk in the portfolio; ____ allocation tries to maximize the return you can get for that amount of risk.

capital, asset

With a ___, you trade only using the money you deposit directly... With a ____, you can make trades beyond the money you deposit by borrowing from your broker to finance the trade

cash account, margin account

Match the terms below to their correct definition.

current yield: a measure of your bond's rate of return in the short term, if you buy the bond today and keep it for one year yield to maturity: a measure of your return if you bought the bond and held it until maturity, waiting to claim the face value holding period yield: the annualized rate of return that you receive depending on how long you have held the bond, its gain or loss in market value, and the coupons you received in that period

____ tend to be more willing to assume investment risk, while ___ tend to be more risk averse.

entrepreneurs, those who have inherited wealth

Collectibles, including "ephemera" such as antique letters and photographs, are usually sold by whom?

dealers

Match the terms below to the correct definition.

default risk: the risk that a company will default on a bond reinvestment risk: the risk that when you go to reinvest the coupon, you will not find another opportunity that will pay as high a return because interest rates and yields have fallen inflation risk: the risk that your coupons and principal repayment will not be worth as much as you thought, because inflation has decreased the purchasing power or the value of the dollars you receive interest rate risk: the risk that a change in prevailing interest rates will change bond value

If you're looking for a bond that pays no interest for a while, but then pays higher than normal interest until maturity, which would you choose?

deferred coupon bond

Sonia is looking to buy her first home. After graduating from college, she decided to stay on because she liked the town and found a job as an elementary school teacher. She loves her job, but her income is limited. She finds a nice, two-family house in a neighborhood close to the college. It needs some work, but she figures she can use the summer months to fix it up—she's pretty handy—and renting to students won't be a problem. The tenants will pay their own utilities. Sonia figures that the rental income will help pay her mortgage, insurance, and taxes, and that after the mortgage is paid off, it will provide a nice extra income. Is Sonia making a direct or an indirect investment?

direct

"The advantage is primarily the savings on brokers' commissions. You can also buy fractional shares or less than a whole share, and there is no minimum amount to invest, as there can be with brokerage transactions." This quote describes which of the following?

direct investment

Match these kinds of brokerage services to what they do:

discretionary trading: a broker is empowered to make investment decisions on behalf of a client advisory dealing: a broker provides advice and guidance to the client, but the client makes all the decision execution only service: the broker's only role is to make the trades and investments ordered by a client.

"This is a way of negating the effects of market timing. By buying at regular intervals, you will buy at times when the price is low and when it is high, but over time your price will average out." This quote describes which of the following?

dollar-cost averaging

answers

earnings per share: (net income − preferred stock dividends) ÷ average number of common shares outstanding dividends per share: common stock dividends ÷ average number of common shares outstanding dividend yield: dividend per share (in dollars) ÷ price per share (in dollars) dividend payout rate: dividends ÷ earnings retention rate: capital retained ÷ earnings price to book ratio: price per share ÷ book value of equity per share price to earnings ratio: price per share ÷ earnings per share

Match the following terms related to bonds...

fixed interest rate: an interest rate that does not change over the course of ownership floating interest rate: an interest rate that changes with the market over the course of ownership issue price: what you pay to buy a bond when it is first issued maturity date: when the issuer of the bond has to repay you covenants: conditions the borrower must meet

Which type of mutual fund is described by the following? Mutual funds that own shares in other mutual funds rather than in specific securities. If you decide to use mutual funds rather than select securities, this will provide expertise in choosing funds.

funds of funds

Match the following terms with the correct definitions.

index funds: designed to mirror the performance of a specific index constructed to be representative of an asset class closed-end funds: funds for which a limited number of shares are issued open-end funds: investors buy shares directly from the fund and redeem or sell shares back to the fund exchange-traded funds: shares are traded and priced continuously throughout the day's trading session, rather than once per day at the end of trading

"Instead of choosing individual large cap companies, for example, you could invest in Standard & Poor's (S & P) 500 Index fund, which would provide more diversification for only one transaction cost than you could get picking individual securities." This quote describes which of the following?

indexing

Match the terms below with the correct definitions.

interest distribution: returns from a mutual fund if its assets involve bonds dividend distribution: returns from a mutual fund if its assets involve stocks turnover ratio: percentage of fund assets that have been turned over or replaced in the past year capital gains distribution: when net capital gains (or losses) are distributed on a per share basis

Which type of mutual fund is described by the following? Funds that aim to increase in value when the market declines, to be countercyclical to index funds, which aim to increase in value when the market rises. These funds are set up to perform contrary to the index. Since most economies become more productive over time, however, you can expect indexes to rise over time, so this would make sense only as a very short-term investment.

inverse funds

The ____ the P/E ratio, the more expensive the stock is and the ____ you have to invest to get one dollar's worth of earnings in return.

larger, more

Which type of mutual fund is described by the following? Funds that invest both investors' money and money that the fund borrows to augment the investable assets and thus potential returns. Because they use borrowing, these funds are riskier than funds that do not use leverage.

leveraged funds

Which type of mutual fund is described by the following? "These funds perform both security selection and asset allocation for investors, determined by the target date. As the fund approaches its target date, its allocation of investments in stocks and bonds will shift to carry less risk as the target nears. These funds are used primarily in saving for retirement."

lifestyle funds

The ___ a company has been public, the ___ predictable its earnings and share price will be

longer, more

In the mid-20th century, the US economy was mostly based in _____, but after the 1990s, ____ has had a larger role in driving growth.

manufacturing, technology

Match the term below with the correct defiinition.

market order: buying a stock at the current market price limit order: buying a stock once it reaches a pre-established lower price long position: buying an investment that you expect to increase in price over time short position: buying an investment that you expect to decrease in price over time stop-loss order: an order to sell a security once its price falls below a certain level stop-buy order: an order to buy a stock at a certain price if you've shorted it and want to limit your loss of value

Which kind of risk refers to issues that might arise due to liquidity and volume of trade?

market risk

Match the terms below to their correct definition.

matching strategies: used to create a bond portfolio that will finance specific funding needs, such as education, a down payment on a second home, or retirement. immunization: designing a bond portfolio that will achieve a certain rate of return over a specific period of time, based on the idea of balancing interest rate risk and reinvestment risk cash flow matching: choosing bonds that match your anticipated cash flow needs by having maturities that coincide with the timing of those needs.

A "large cap" company will have market capitalization of about how much?

more than $10 Billion

The ____ risk you are willing to take, the ____ potential return you can make.

more, more

Which of the following is secured by collateral like property or equipment?

mortgage bond

Which of the following is issued by a local government to fund a small project or school building?

municipal bond

Over a lifetime of work, in the United States a person with a college degree will earn _______ more than someone with a high school diploma.

over $1 million

Match the following terms about bonds to their definitions

par value: amount borrowed coupon rate: interest rate coupon: interest payment maturity: due date for the bond yield: return on bond investment

Which kind of risk refers to issues of government instability or the tendency to unexpectedly nationalize an industry?

political risk

Match the terms below to the correct definition.

risk seeker: someone who is willing to take on risk in an effort to get more return on an investment risk averse: someone who is not willing to take on risk in an effort to get more return on an investment

A ____ is a process that you learn to apply, like programming a computer or welding a pipe

skill

Match the terms below with the correct definitions.

syndicate: a group created to buy and manage commercial property such as an apartment, office building, or shopping mall limited partnership: the general partner manages the entity, while the limited partners invest in partnership shares. The limited partners are only liable for the amount of their investment; that is, they can lose only as much as they have put in. real estate investment trust: a mutual fund of real estate holdings mortgage-backed securities: bonds secured by pools of mortgages owned by large financial institutions or agencies of the federal government

"With the advent of digital cameras, for example, even single-use conventional cameras are no longer being manufactured in great quantity, and film developers are not needed as much as they once were. However, there are more jobs for developers of electronic cameras and digital applications for creating images and using digital images in communications channels, such as mobile phones." This is an example of how what can change the market for employment?

technology

What is arbitrage?

the process of creating investment gains from market mispricings

In efficient market theory, when investors don't behave rationally, why doesn't it effect the market?

their numbers are so great and their irrational behaviors so diverse that it has no effect

Why do corporations issue shares of stock?

to raise capital

For bond investments, which of the following indicates that interest rates will go up in the future?

upward-sloping yield curve

Shareholders investing in preferred stock give up ____ to get less risk and more dividends.

voting rights