INVESTMENTS - MIDTERM

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The primary emphasis of the profitability ratios is a determination of the firm's ability to pay off short-term obligations as they come due.

False

The stock price of an acquiring company generally changes parallel to that of the target.

False

The valuation process begins with an industry analysis

False

To be guilty of insider trading, one must be an officer of the company involved.

False

Treasury stock represents shares of common stock that have been authorized but not issued.

False

Under the Securities Act of 1933, the SEC can certify that a stock is fairly priced.

False

When an investment bank sells securities on a best efforts basis, it assumes all risk of the offering.

False

The valuation process begins with an industry analysis

False, empieza con el Economic Analysis

peak; decline

The week-end effect indicates that stocks tend to ___________ on Friday and ___________ on Monday.

true

There is concern by the SEC and Congress that dark pools create a two-tier market.

The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.

True

The combined earnings and dividend model considers the present value of dividends, plus the present value of a future P/E ratio times future projected earnings.

True

The first step in using the income-statement method of estimating earnings per share (EPS) is to develop an accurate sales forecast.

True

When monopolies exist, they are almost always found in mature industries.

True

The strong form of the efficient market hypothesis states that:

a market is more than highly efficient; it is actually perfect.

A type of index that weighs each company by its total market value as a percentage of the total market value for all firms is:

a value-weighted index.

According to Z score analysis, the higher the Z score, the greater the firm's bankruptcy potential.

False

According to insider trading rules of the SEC, securities analysts and financial writers may not trade on insider information, but these rules do not extend to relatives and friends.

False

An increase in reserve requirements by the Federal Reserve would decrease the money supply.

False

Assets must be currently producing income in order to give a company value.

False

Cash flows from operating activities would include the payment of cash dividends.

False

Companies in mature industries still have a dramatic need for internal cash flows to finance future growth.

False

Purchasing securities in open-market operations by the Federal Reserve has the same effect as increasing reserve requirements.

False

The idea that stock prices tend to move in trends that persist for long periods, and that these trends can be detected in charts, are basic assumptions of fundamental analysis.

False

Which of the following is true of over-the-counter markets?

-Trading takes place by telephone or electronic network -It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers -Government securities of the U.S. Treasury provide the largest dollar volume.

The weak form of the efficient market hypothesis can be tested by utilizing

-tests of independence -trading rule tests.

cash account; margin account

A ____________ requires full payment for the purchase of securities, while a _____________ allows the investor to borrow a portion of the purchase price from the brokerage firm.

The weak form of the efficient market hypothesis can be tested by utilizing

A and C Answers: tests of independence. trading rule tests.

high, low, and closing stock price on a daily basis

A bar chart is used to demonstrate:

the quality of fund management

A closed-end fund might trade at a premium due to:

money market fund

A fund investing in T-bills, Eurodollar deposits, commercial paper, and repurchase agreements is probably a:

represents a retail brokerage firm and transacts business on the floor for customers of that firm.

A house broker is one who:

low-quality bonds have returns much higher than high-quality bonds.

A low Barron's Confidence Index means that:

an index fund

A mutual fund in which the portfolio is weighted exactly like the Standard and Poor's 500 Index, or any other market measure is called:

true

A shelf registration enables an investment banker to sell a small portion of an issue without forming a syndicate.

___________ has two major functions: to handle special orders, such as purchases with a price contingency, and to maintain continuous, liquid, orderly markets.

A specialist

Financial assets; real assets

A(n) _____ is a legally documented claim on an asset, while a(n) _____ is an actual, tangible asset which may be seen, felt, held, or collected.

true

Abnormal returns refer to gains beyond what the market would normally provide after adjustment for risk.

false

Acceptance of the weak form of the EMH would indicate that charting can lead to profits.

False

According to insider trading rules of the SEC, securities analysts and financial writers may not trade on insider information, but these rules do not extend to relatives and friends.

negative real GDP growth

According to the traditional definitions, a recession is two or more quarters of:

true

All dividend valuation models are based on the present value of a future income stream.

In the comparative international arena of real GDP growth rates, which country has had the highest growth in real GDP over the years 1993 to 2005?

China

________ have a fixed supply of shares, which often trade at a discount from the market value of assets held.

Closed-end funds

the secondary market

Creating prices for securities and allowing for liquidity are functions of:

true

Every investment requires a total return comprised of a real rate of return, compensation for inflationary expectations, and a risk premium.

Studies generally show that the price-earnings ratio is a function of:

Expected changes in interest rates. Future estimated growth of earnings for the individual company. Expected changes in the required rate of return, Ke.

false

Extraordinary gains and losses are usually included in ratio analysis, since they reflect on the annual operating performance of a firm.

Good performance by a mutual fund in the past is highly indicative of good performance in the future.

False

Institutional investors often take advantage of the small firm effect.

False

Investment advisory recommendations are part of the smart money rules.

False

It is always a safe bet to invest in companies in growing industries.

False

It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.

False

LIFO accounting tends to increase inventory profits.

False

Leading indicators tend to give longer warnings before peaks than troughs.

False

Liquidity refers to how little the sales price of an asset has decreased from its cost.

False

Money market funds are usually load funds.

False

Mutual funds are a form of direct equity claims.

False

Oligopolistic industries are characterized by many competitors and few barriers to entry.

False

On average, mutual funds tend to outperform the market over the long run.

False

Since all companies must operate under generally accepted accounting principles, equal earnings per share for company A and B mean exactly the same thing to an investor.

False

The Federal Open Market Committee (FOMC) determines the monetary policy for the U.S. economy.

False

The Small Firm Effect asserts that there is a positive correlation between market capitalization and risk-adjusted returns.

False

The composite index of leading indicators has shown little variation in its ability to predict.

False

The indexes of The New York Stock Exchange, American Exchange, and NASDAQ are all price-weighted.

False

The margin requirement on stock is currently 30%.

False

The relative importance of each of the five basic competitive forces is the same for almost every industry.

False

A(n) _____ is a legally documented claim on an asset, while a(n) _____ is an actual, tangible asset which may be seen, felt, held, or collected.

Financial asset; real asset

true

Firms with P/E ratios higher than the overall market ratio are expected to provide greater than normal returns with equal or less risk.

spending and taxing plans

Fiscal policy concerns the implementation of the government's

Reliable sources of information about mutual funds include all of the following, except:

Forbes. Lipper. Morningstar.

false

Good performance by a mutual fund in the past is highly indicative of good performance in the future.

Growth rates are highest in which of the industry life cycle stages?

Growth

A rotational investor will rotate through stocks that perform well in different stages of the economy in which order (from trough to peak)?

Household durable goods; consumer cyclical; consumer non-cyclical; basic materials

true

In an efficient and informed capital market environment, those investments with the greatest return tend to have the greatest risk.

China

In the comparative international arena of real GDP growth rates, which country has had the highest growth in real GDP over the years 1993 to 2005?

true

In the last few years (since 2006), the trade deficit has increased dramatically.

true

Index funds are created to imitate a popular stock index such as the S&P 500 Index.

False

Institutional investors often take advantage of the small firm effect.

false

It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.

The Nikkei average relates to stock movements in what market?

Japan

A __________ order sets the price at which an investor is willing to buy or sell and assures the investor that he/she will pay no more or receive no less than the agreed-upon price.

Limit

false

Long-term capital gains are taxed as ordinary income

When using the top-down approach to company valuation, which is the proper order for an analyst to use?

Macro-economic environment, industry analysis, company analysis

true

Mathematically, the price-earnings ratio (P/E) is simply the price per share divided by earnings per share.

false

Money market funds are usually load funds.

Which stock market exchange has the most restrictive listing requirements?

NYSE New York Stock Exchange

The _______________ has/have the most restrictive listing requirements.

New York Stock Exchange

The ____________ suggests watching the small investor, who is right most of the time but misses key market turns, and then doing the opposite.

Odd-lot theory

False

Oligopolistic industries are characterized by many competitors and few barriers to entry.

expanding into markets overseas

One way some U.S. companies have increased sales growth is by:

their commissions are lower than full-service or discount brokers.

Online brokers have become popular because:

true

Professors Fama and French maintain that the ratio of book value to market value is more important than either the size effect or the P/E effect in explaining superior stock performance.

Which of the following is not an Asset-utilization ratio:

Quick Ratio

Which of the following is not an Asset-utilization ratio:

Quick ratio

Lipper, Forbes, Morningstar

Reliable sources of information about mutual funds include all of the following

Which of the following best describes the function of an investment banker selling an issue on a "best efforts" basis?

Return unsold securities to the firm

What is market capitalization?

Shares outstanding multiplied by the market value of the stock

When ranking security returns, the data shows that the annualized returns are as follows (ranked from highest return to lowest return):

Small stocks, large stocks, long-term corporate bonds, long-term government bonds, treasury bills.

money supply (M2), consumer expectations, and stock prices (S&P 500)

Some of the major leading indicators would be:

Which of the following stages does not belong in the industry life cycle?

Stagnation

True

Stocks traded over-the-counter, like through NASDAQ, have no centrally located market location.

Exchange-traded funds (ETFs) are similar to index mutual funds, but they trade on stock exchanges like common stock.

TRUE

______________ analysis focuses on charts and graphs based on internal market data, while _____________ analysis emphasizes earnings reports, management capabilities, and new product development.

Technical; fundamental

true

The Dow Theory puts emphasis on long-run trends.

True

The Intercontinental Exchange (ICE) is now operating 24 hours per day using a computerized trading system.

Japan

The Nikkei average relates to stock movements in what market?

true

The S&P 500 Index and Gross Domestic Product (GDP) seem to have similar long-term growth paths.

odd-lot theory

The ____________ suggests watching the small investor, who is right most of the time but misses key market turns, and then doing the opposite.

New York Stock Exchange

The _______________ has/have the most restrictive listing requirements.

true

The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.

economic variables, industry variables, financial statements

The basis of stock valuation includes an analysis of

Which of the following is NOT a characteristic of a growth company?

The company usually pays a dividend equal to 40-50% of earnings

false

The composite index of leading indicators has shown little variation in its ability to predict.

that the discount rate must be greater than the dividend growth rate

The constant growth dividend valuation model assumes

false

The divisor in the Dow Jones Industrial Average equals 30.

When a company repurchases shares of their own common stock,

The earnings per share will rise. The dividends paid out in total will decline. The earnings per share growth rate will rise. All of the other items will happen (Answer)

The NEW York Stock Exchange

The exchange with the largest dollar volume in major companies and which has the most restrictive listing requirements is:

Chicago Mercantile Exchange (CME)

The first exchange to become a publicly traded company was the:

equity growth funds and aggressive growth

The growth fund category of funds would include:

False

The indexes of The New York Stock Exchange, American Exchange, and NASDAQ are all price-weighted.

true

The intent of dollar-cost averaging is to avoid buying high and selling low.

Why would an investor want to use the rotational investing method?

The investor is attempting to profit from movements in the economic cycle

true

The more saturated an industry gets with competitors, the further along the life cycle it will probably be.

a declining stock price

The success of a short investment position depends on:

true

The support level is the stock price that generates new demand, while the resistance level is the price at which investors begin to sell in order to take a profit.

Profitability Ratios

The type of ratio that allows the analyst to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital is:

false

Treasury stock represents shares of common stock that have been authorized but not issued.

A limit order can ensure that you will not pay above a given price in purchasing a stock or sell below a given price in selling a stock.

True

A stop order is similar to a limit order, except that the order turns into a market order once the stop price is hit.

True

All dividend valuation models are based on the present value of a future income stream.

True

All things being equal, the more rapid growth a firm enjoys, the higher the P/E ratio.

True

An important consideration with an open-end fund is whether it is a load fund or a no-load fund.

True

An investor in a mutual fund can incur capital gains even if no shares are sold.

True

At the end of 2009, approximately 43% of U.S. households owned shares in mutual funds.

True

Beta measures a security's return relative to the market.

True

Between 1977 and 2007, the U.S. government budget has showed a surplus in only a few years.

True

Cash flows from financing activities would include the repurchase of debt and equity.

True

Closed-end funds have a fixed number of shares; open-end funds do not.

True

Common stock represents a direct equity claim.

True

Dividend valuation models are best suited for firms in the expansion or maturity phase of their life cycle.

True

Every investment requires a total return comprised of a real rate of return, compensation for inflationary expectations, and a risk premium.

True

Exchange-traded funds (ETFs) are similar to index mutual funds, but they trade on stock exchanges like common stock.

True

Financial ratios are meaningless unless they are compared to a company standard or historical or industry data.

True

Firms with P/E ratios higher than the overall market ratio are expected to provide greater than normal returns with equal or less risk.

True

Fiscal policy involves government spending and taxation policies.

True

If a stock is held for less than 12 months, any gain in value is taxed as ordinary income.

True

If the DJIA declines by 10% in the time between 2:00-2:30 PM, a 30 minute halt to trading occurs.

True

In an efficient and informed capital market environment, those investments with the greatest return tend to have the greatest risk.

True

In the formula P0 = D1/(Ke - g), if g decreases, the price of the stock will go down.

True

In the last few years (since 2006), the trade deficit has increased dramatically.

True

Index funds are created to imitate a popular stock index such as the S&P 500 Index.

True

Large, established companies make up the Dow Jones Industrial Average.

True

Load funds, which charge a commission, generally perform no better than no-load funds.

True

Morningstar Mutual Fund Survey is considered one of the leading authorities on mutual fund performance.

True

OTC stocks may not uphold the semi-strong form of the efficient market hypothesis, while listed stocks generally do.

True

One characteristic of efficient markets is that prices adjust rapidly to new information.

True

Return on assets can be stated to equal (net income/sales) x (sales/total assets).

True

Shares of a closed-end fund trade on an exchange, just like stocks.

True

Specialists buy and sell for their own account.

True

Stock prices plummet as industries move across the crossover point, because price-earnings ratios collapse as analysts lower growth expectations.

True

Stocks traded over-the-counter, like through NASDAQ, have no centrally located market location.

True

Tax rates that apply to income within a given tax bracket are referred to as marginal tax rates.

True

Technical analysis assumes that many chart patterns tend to repeat themselves.

True

The Dow Theory puts emphasis on long-run trends.

True

The Gramm-Leach-Bliley Act essentially repealed many of the prohibitions of the Glass-Steagall Act, which restricted commercial banks from also being in the investment banking business.

True

The Ibbotson study showed that high-risk investments generate high returns.

True

The Intercontinental Exchange (ICE) is now operating 24 hours per day using a computerized trading system.

True

The Value Line Average contains stocks from several exchanges or markets.

True

The intent of dollar-cost averaging is to avoid buying high and selling low.

True

The riskiness of an investment is measured by the dispersion of possible outcomes.

True

The support level is the stock price that generates new demand, while the resistance level is the price at which investors begin to sell in order to take a profit.

True

There is concern by the SEC and Congress that dark pools create a two-tier market.

True

Trading through an online broker is generally cheaper than trading through a discount broker.

True

Under the weak form of the efficient market hypothesis, stock prices are considered to be independent over time.

True

Under-pricing of new stock issues helps ensure the investment banker that the issue will be fully subscribed to at the initial market price.

True

When investment bankers underwrite a security, they usually guarantee purchase of the securities at a fixed price for the selling firm.

True

true

Under the weak form of the efficient market hypothesis, stock prices are considered to be independent over time.

Municipal bonds

Wealthy investors may prefer the favorable tax treatment of investments such as:

$32.10

What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.

true

When short sellers are bearish, it is though to be a bullish signal.

false

When you short a security you are actually selling a security that no one owns.

The automobile industry

Which of the following industries is a good example of an industry in the maturity stage?

Generic Drugs

Which of the following is the most significant detriment to the future profitability of the pharmaceutical industry?

It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers Trading takes place by telephone or electronic network It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers Government securities of the U.S. Treasury provide the largest dollar volume.

Which of the following is true of over-the-counter markets?

the Dow Jones Industrial Average

Which of then following is not all value-weighted indexes,:

Breadth of the market

While the Dow Jones Industrial Average may be weighted toward large firms, a __________ indicator may be used to examine all stocks on an exchange.

A specialist

___________ has two major functions: to handle special orders, such as purchases with a price contingency, and to maintain continuous, liquid, orderly markets.

The success of a short investment position depends on:

a declining stock price.

The difference between a cash account and a margin account is:

a margin account allows the investor to borrow a percentage of the purchase price from the brokerage firm.

The value of common stock can be viewed as:

a present value of a dividend stream, plus a market price at the end of the dividend stream.

The semi-strong form of the efficient market hypothesis maintains that:

all public information is already impounded into the value of a security.

An unexpected earnings surprise refers to the situation where:

announced earnings were better or worse than the analysts' forecast number.

The reason price-earnings ratios and inflation are related is because:

as inflation increases, the required return in the market rises, pushing down the prices of securities.

As the ratio of specialist short sales to total short sales increases, technicians consider the market to be:

bearish

The most widely used tool of the Federal Reserve is:

buying and selling securities for its own portfolio.

A ____________ requires full payment for the purchase of securities, while a _____________ allows the investor to borrow a portion of the purchase price from the brokerage firm.

cash account; margin account

The Dow Theory uses _________ to follow three major types of market movements.

charting

The first step in any stock valuation is

economic analysis.

Advantages of mutual funds include:

efficient diversification.

The growth fund category of funds would include:

equity growth funds and aggressive growth.

Investment company shares that trade on stock exchanges just like common stock and are essentially funds that mimic some index are:

exchange-traded funds.

One way some U.S. companies have increased sales growth is by:

expanding into markets overseas.

The Small Firm Effect is the theory that:

firms with small market capitalization outperform the market.

The study by Fama and French maintains that the lower the ratio of market value to book value, the:

higher the potential return on the stock.

The statement of cash flows tells us

how cash was created.

A stop order is similar to a limit order, except that once the set price is reached, the stop order

immediately becomes a market order.

The major device for measuring the profitability of a firm over a defined period of time is the

income statement.

If the Treasury bill rate (RF) increases, then Ke will

increase

In general, the P/E ratio of a stock _______________ as inflation _____________.

increases; decreases

All of the following are smart money rules except:

investment advisory recommendations.

Federal income tax on investment income and capital gains of a mutual fund:

is not required of the fund if it distributes at least 90% of its net investment income and capital gains.

Dual trading creates the following benefit:

it improves liquidity of a security.

The ability of the investor to convert an investment into cash in a short period of time is called:

liquidity

The ability of the investor to convert an investment into cash in a short period of time is called:

liquidity.

The tax rate that specifically applies to each new dollar of income is the:

marginal tax rate.

The primary tools used to stimulate economic activity are:

monetary and fiscal policies.

A fund investing in T-bills, Eurodollar deposits, commercial paper, and repurchase agreements is probably a:

money market fund

Wealthy investors may prefer the favorable tax treatment of investments such as:

municipal bonds

A back-end load fund has:

no charge upon purchase, and a declining charge, based on time owned, on sale.

The week-end effect indicates that stocks tend to ___________ on Friday and ___________ on Monday.

peak; decline

Some of the major coincident indicators would be:

personal income, employees on nonagricultural payrolls, and industrial production.

The purpose of a syndication for Investment Bankers is:

reducing or spreading the underwriting risk

From the investment banker's point of view, the major reason syndicates are formed in the distribution of large issues is for the purpose of:

reducing the underwriter's risk.

A house broker is one who:

represents a retail brokerage firm and transacts business on the floor for customers of that firm.

The constant growth dividend valuation model assumes

that the discount rate must be greater than the dividend growth rate.

The following are all value-weighted indexes, except:

the Dow Jones Industrial Average.

The exchange with the largest dollar volume in major companies and which has the most restrictive listing requirements is:

the New York Stock Exchange.

The major device that indicates what the firm owns, and how these assets are financed, in the form of liabilities or ownership interest is:

the balance sheet.

By using dollar-cost averaging,

the investor invests a fixed amount at regular intervals, at current market prices.

By using dollar-cost averaging:

the investor invests a fixed amount at regular intervals.

Characteristics of mutual funds with a goal of investing in growth companies include everything except:

the money is invested in stable companies, with an objective of strong dividend income.

Financial ratios are used to weigh and evaluate:

the operating performance and capital structure of the firm.

A closed-end fund might trade at a premium due to:

the quality of fund management.

Online brokers have become popular because:

their commissions are lower than full-service or discount brokers.

Because most investors are risk averse,

they will require a higher rate of return for a riskier investment.

The purpose of stock valuation is

to determine whether the common stock's value is fairly represented by its market price.

All of the following are reasons why an investment banker may under-price a new stock issue, except:

to insure adequate demand in the secondary market.

gains in excess of the market risk-adjusted average.

"Special or abnormal returns" refer to:

What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.

$ 30.00

What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.

$30.00

What would be the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3 dividend?

10%

Historically, the real rate of return in the U.S. economy has been:

2-3%.

What is the risk-free rate in an environment where the real rate is 3% and inflation is running at 3%? Use either method found in chapter one.

6.09% or just 6%

Which of the following is a characteristic of an unfriendly takeover?

All of the other answers are correct: Usually there is a high premium on stock price. An unacceptable suitor attempts to buy out the target company. The White Knight may succeed in rescuing the target company

return-on-equity to return-on-assets

An analyst can judge a company's level of debt by comparing these ratios:

false

An increase in reserve requirements by the Federal Reserve would decrease the money supply.

true

An investor in a mutual fund can incur capital gains even if no shares are sold.

capital gains

An investor will purchase shares of companies in the development stage for:

they will require a higher rate of return for a riskier investment.

Because most investors are risk averse,

True

Beta measures a security's return relative to the market.

true

Bond mutual funds can be divided into corporate, government, and municipal funds.

While the Dow Jones Industrial Average may be weighted toward large firms, a __________ indicator may be used to examine all stocks on an exchange.

Breadth of the market

An investor will purchase shares of companies in the development stage for:

Capital gains only

true

Cash flows from financing activities would include the repurchase of debt and equity.

The Dow Theory uses _________ to follow three major types of market movements.

Charting

The first exchange to become a publicly traded company was the:

Chicago Mercantile Exchange

True

Common stock represents a direct equity claim

The first step in any stock valuation is

Economic analysis

The January upward stock movement effect is often linked to:

tax considerations.

The _________ of the efficient market hypothesis suggests that there is little or nothing to be gained from studying past stock price trends.

weak form


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