Mock Exam- With Explications

Lending to non-domestic governments or state-owned companies creates: a. compliance risk. b. liquidity risk. c. sovereign risk.

Lending to non-domestic governments or state-owned companies creates sovereign risk.

Low transaction costs are most likely indicative of which type of market efficiency? a. Operational b. Allocational c. Price

Markets in which trades are easy to arrange with low transaction costs are operationally efficient.

A feature of a global depositary receipt (GDR) is that it has: a. a feature to convert it to common stock in the firm. b. a cumulative feature. c. no maturity date.

A GDR has no maturity date.

Uncertainty about the future level of unemployment is a type of: a. market risk. b. specific risk. c. idiosyncratic risk.

A change in the level of unemployment affects the economy as a whole and will affect many, if not all, companies and the values of the securities they have issued. No matter how well diversified the portfolio is, it will be sensitive to this risk, which is therefore a type of market or systematic risk.

A fee-based account for a retail investor that includes brokerage services, investment advice, and financial planning is referred to as a(n): a. commingled account. b. actively managed account. c. wrap account.

A fee-based account that includes multiple services, such as brokerage, investment advice, and financial planning, is a wrap account.

The success of a firm will most likely have the greatest impact on the return of a firm's: a. preferred stock. b. debt securities. c. common stock.

A firm's success will affect the return on common stock the most because common shareholders are the residual claimants.

A hedge fund is most accurately identified as a: a. seller of securitised products. b. buy-side firm. c. sell-side firm.

A hedge fund is considered a buy-side firm.

An example of a buy-side firm is a(n): a. pension fund. b. market maker. c. investment broker.

A pension fund is a buy-side firm. Buy-side firms purchase products and services sold by sell-side firms.

Rebalancing a portfolio is the process of: a. moving it to a tactical asset allocation. b. changing its asset allocation to reflect changes in market momentum. c. returning it to its strategic asset allocation.

A portfolio is rebalanced when securities are sold and others bought to return it to its long-term strategic asset allocation.

A private equity strategy that involves acquiring companies that have the potential to generate strong revenues and profits in the future but are currently underperforming can be referred to as a: a. buyout strategy. b. a venture capital strategy. c. growth equity strategy.

A private equity buyout involves the takeover of an established but underperforming company that has good future prospects.

An example of a corporate action that increases the number of shares outstanding is a: a. seasoned equity offering. b. share repurchase. c. reverse stock split.

A seasoned equity offering is the sale of additional shares by a publicly traded company beyond the number of shares sold in previous equity offerings. Consequently, the shares outstanding will increase because of this action.

The purpose of a security market index is to: a. select which individual securities are best to purchase. b. diversify a group of individual securities into several portfolios. c. assess the performance of an entire security market using a single measure.

A security market index is a single measure that is representative of a security market's performance.

Compared with passive management of a particular asset class, active management most likely: a. results in a riskier portfolio. b. has lower transactions costs. c. requires more analytical resources.

Active management of an asset class, which involves analysing and selecting undervalued securities, requires more skilled employees, data, and computing power than passive management.

An investment industry participant that evaluates a company's accounting processes and reports and ensures that investors receive reliable information about the company is known as a(n): a. custodian. b. auditor. c. analyst.

An auditor reviews a company's accounting systems and controls and ensures the reliability of publicly disclosed financial statements, which are often referred to as "audited financial statements".

An example of a sell-side firm is a(n): a. investment bank. b. insurance company. c. mutual fund.

An investment bank is an example of a sell-side firm. It provides transaction services and investment products.

Asset-based valuation for common stock can be difficult when the balance sheet: a. is dominated by liabilities. b. asset values differ from current market values. c. contains no intangible assets.

Asset book values for some assets are based on historical cost and not current market value. Consequently, if book value and market value differ significantly for those assets, asset-based valuation will be inaccurate.

When compared with a similar "straight" bond, attaching warrants to a bond typically allows the issuer to offer a: a. shorter maturity. b. lower yield to maturity. c. lower coupon rate.

Attaching warrants to a bond typically allows the issuer to reduce the coupon rate of the bond.

The least efficient way for an investor to gain exposure to a commodity investment is most likely through the purchase of: a. commodity derivatives. b. the commodity. c. commodity-related stocks.

Because of transportation and storage costs associated with the purchase of commodities, direct investment in commodities is the least efficient way to gain exposure to commodities compared with investing in commodity-related stocks or derivatives.

A bond portfolio manager will most likely execute trades on behalf of clients in a(n): a. brokered market. b. order-driven market. c. quote-driven market.

Bonds generally trade in quote-driven markets. A quote-driven market is known both as a dealer market and as a price-driven market. Investors trade with dealers at the prices quoted by the dealers. Dealers generally work for commercial banks, investment banks, broker/dealers, or proprietary trading houses.

A risk manager makes the following statement regarding legal risk: "Proper controls include delegating authority to those in the organisation who can appropriately review and approve contracts, and we should use template agreements and standard contract terms when possible". Are these appropriate risk management controls? a. No, using template agreements is not an appropriate control b. Yes c. No, delegating authority is not an appropriate control

Both controls outlined by the risk manager are appropriate for managing legal risk.

A portfolio manager most likely works for a: a. sell-side firm. b. middle-office firm. c. buy-side firm.

Buy-side firms are investment managers.

A bank is facing the possibility of not having sufficient capital reserves to meet the requirements of its national banking regulatory authority. Such a possibility is an example of a(n): a. investment risk. b. operational risk. c. compliance risk.

Compliance risk relates to the risk that a company fails to follow all applicable rules, laws, and regulations, such as not having the required capital reserves, and faces sanctions as a result.

Investors who have accumulated substantial assets will likely take which approach to achieving returns? a. Low or high risk b. Low risk c. High risk

Depending on an investor's appetite for risk and circumstances, those who have accumulated high levels of wealth may either not want to risk the accumulated wealth (willingness) or may have enough wealth to take on high levels of risk (ability).

The main reason investors diversify their investment portfolios is to: a. manage risk. b. control expected outcomes. c. increase returns.

Diversification of asset classes and securities within an investment portfolio is undertaken to help manage risk.

Which of the following pooled investment vehicles are typically passively managed to track a particular index or sector? a. Closed-end mutual funds b. Open-end mutual funds c. Exchange-traded funds

Exchange-traded funds are typically passively managed to track a particular index or sector.

For private equity investments, management fees are most likely paid on the capital: a. invested. b. returned from successful investments. c. committed.

For most private equity partnerships, management fees are based on the amount the limited partners have committed rather than the amount that has been invested.

For futures contracts, the process of marking to market means that profits and losses are settled: a. monthly. b. weekly. c. daily.

Futures contract are marked to market daily—that is, profits and losses are settled daily. This process also reduces counterparty risk.

Which of the following statements accurately describes a difference between forward contracts and futures contracts? Compared with futures contracts: a. forward contracts are only available on a limited number of underlying assets. b. counterparty risk is higher for forward contracts. c. it is easier to exit a forward contract.

Futures exchanges require initial and maintenance margin and daily marking to market to reduce counterparty risk of futures contracts.

The loss carry-back provision ensures that a hedge fund manager is paid a performance fee only when: a. there were no realised losses during the previous year. b. the value of the fund is above the high-water mark. c. the total return of the fund for the previous year was positive.

Hedge fund managers earn a performance fee only when the fund is above its current high-water mark. The high-water mark is the maximum level of the fund on which performance fees were paid in the past. The high-water mark provision ensures that investors pay the managers only for the net returns calculated from the initial investment and not for returns that recoup previous losses. The high-water mark provision is also known as the carry-back provision.

Hedge funds can be described as: a. available to all investors. b. conservative because market risk is hedged. c. requiring a fixed, committed time period.

Hedge funds are distinguished from other pooled investment products by a number of features, including agreements that lock up investors' capital for fixed periods.

Which of the following activities would be classified as a back-office function? a. Customer service b. Information technology c. Human resources

Human resources is typically classified as a back-office function.

For a company trying to raise capital, which of the following methods of selling shares allow the quickest access to capital with the lowest level of regulatory compliance? a. Private placement b. Underwritten offering c. Shelf registration

In a private placement, a company sells securities directly to a small group of investors. This type of offering requires the least amount of public disclosure and has the lowest regulatory cost for the company.

How closely prices reflect fundamental value is a function of: a. information efficiency. b. operational efficiency. c. allocation efficiency.

Information efficiency relates to prices that reflect all available information about fundamental values.

Investors who add alternative investments to their portfolios may expect portfolio: a. Returns to fall and risk to fall b. Returns to rise and risk to rise c. Returns to rise and risk to fall

Investors add alternative investments to their portfolios in the hope that such investments enhance portfolio returns and reduce risk.

An example of an indirect investment vehicle is a: a. pension fund. b. government security. c. real estate property.

Investors make indirect investments through interests in pension funds, foundation funds, and endowment funds. Other indirect investments include mutual funds; exchange-traded funds; real estate investment trusts; limited partnerships in hedge funds, oil wells, and leasing companies; asset-backed securities, such as mortgage-backed securities; and student loans.

One of the most speculative segments of the commercial real estate market is: a. offices. b. land. c. retail.

Land is one of the most speculative segments of the commercial real estate market because it lacks the cash flow stream generated by lease payments from office and retail tenants.

A company's risk management team identifies a particular risk as having a low expected frequency and a low expected severity. The best risk response strategy for such risks is to: a. transfer them. b. terminate them. c. tolerate them.

Of the four "T" risk response strategies, the best strategy for low severity, low frequency (green) risks is to tolerate them.

If an investor fully pays for the purchase of shares with cash from his savings account and then holds the shares in an investment account, he is said to have a: a. long position. b. leveraged position. c. short position.

Owning an investment outright and not having borrowed to make the purchase is a long position.

Individuals at sell-side firms who assist buy-side customers with transactions are: a. sales traders. b. portfolio managers. c. client service agents.

Sales traders at sell-side firms assist buy-side customers with their trades.

A stock market index: a. contains shares from all companies currently listed on the exchange. b. can be used by an investor to assess how a particular market performed during a given period. c. is an investment product structured to track the returns of a specific index.

Stock market indices are a single measure that investors can use to assess the performance of a particular stock market during a given period.

Which of the following is not an element of the definition of risk management? a. Applied in strategy setting and across the enterprise b. Managing risk to be within risk appetite c. Effected by an entity's board of directors

The Committee of Sponsoring Organizations of the Treadway Commission partly defines risk management as "a process, effected by an entity's board of directors, management, and other personnel...".

An investor's risk tolerance resulting from a situation, such as whether there are sufficient assets to cover liabilities and the time horizon, is a function of the investor's: a. ability to take risk. b. ability and willingness to take risk. c. willingness to take risk.

The ability to take risk depends on the situation of the investor, such as the balance between assets and liabilities and the time horizon. If an investor has far more assets than liabilities, any losses that result from risk taking can usually be covered by the assets.

A bond currently trading at $102.50 was issued by a company three years ago at $98.00, representing a discount to its par value of $100. When calculating the coupon payment, the coupon rate is multiplied by: a. $102.50. b. $100.00. c. $98.00.

The answer is "$100.00." A fixed coupon rate is applied to the bond's par value, which in this instance is $100.00.

The shift to the right in the demand curve for an item from D to D1 is consistent with a decrease in: CAN'T IMPORT IMAGE A decrease in the price of a close complement A decrease in the price of a close substitute A decrease in production costs

The answer is "A decrease in the price of a close complement."A shift to the right in the demand curve is consistent with increased demand for the item. This shift is likely to arise if the price of a close complement declines; for example, hot dog buns are a close complement to hot dogs. A decrease in the price of hot dogs should lead to an increase in the demand for both hot dogs and hot dog buns.

Assume that housing prices have reached a peak and begun to decline. Which of the following is consistent with the phase of the business cycle that is occurring? a. An increase in government tax revenues b. An increase in business investment c. An increase in demand for social services

The answer is "An increase in demand for social services." Housing prices having reached a peak is indicative of a peak of a business cycle. As housing prices decline, consumer confidence and wealth declines, business investment declines with lower consumer demand, government tax revenues decline, and larger amounts are paid by the government for social services.

Who is responsible for ensuring compliance with regulations by financial market participants? a. Regulators b. Both regulators and financial market participants c. Financial market participants

The answer is "Both regulators and financial market participants." The regulator will monitor companies and individuals under its supervision to ensure compliance with regulations. In addition, firms will also monitor their processes, procedures, and employees to ensure that they comply with applicable regulations so that they are not in danger of losing the ability to operate.

Which of the following do not play a role in direct finance? a. Money markets b. Capital markets c. Credit institutions

The answer is "Credit institutions." Direct finance occurs when savers and spenders (borrowers and lenders, respectively) trade directly with one another as they do in money markets and capital markets. This trading does not occur with a credit institution because the saver deposits money at the credit institution and the spender borrows money from the credit institution. Thus, the credit institution is a financial intermediary and a part of indirect finance.

In an amortising mortgage, which of the following portions of the fixed payment decreases with the passage of time? a. Interest only b. Both interest and principal c. Principal only

The answer is "Interest only" In an amortising mortgage, each periodic payment is the same (fixed), but the interest paid each period is based on the principal remaining at the start of that period. From the payment, interest is paid first and the remainder of the payment pays down principal. As some principal is repaid each period, the amount of interest decreases over time and more of each future payment goes toward repaying principal.

Which of the following assets is reported at its original cost minus any accumulated depreciation? a. Accounts receivable b. Inventory c. Machinery

The answer is "Machinery." Machinery or other capital assets are normally carried on the balance sheet at their net book value, which is the original (gross) value of an asset minus its accumulated depreciation.

Which of the following activities is classified as a cash outflow from financing activities? a. Purchase of equipment b. Purchase of inventory c. Payment of dividends

The answer is "Payment of dividends." The payment of dividends is classified as a financing activity because dividends are payments to shareholders.

Which of the following actions taken by a central bank is best described as expansionary? a. Purchasing government bonds b. Increasing the reserve requirement c. Increasing its policy rate

The answer is "Purchasing government bonds." If the central bank purchases government bonds (from commercial banks), the cash reserves of commercial banks will be increased, allowing them to extend additional loans. The result will be an increase in the money supply, lower interest rates, and economic expansion.

Which of the following financial statements identifies the profit or loss generated by a company over a given period of time? a. Statement of financial position b. Cash flow statement c. Statement of operations

The answer is "Statement of operations." The statement of operations is another name for the income statement, and it is the financial statement that identifies the profit or loss generated by a company over a given time period.

A temporary worker comes from Mexico each year to help with the harvest on Canadian farms. The worker sends a large portion of his weekly earnings back to his homeland. What treatment is given to the wages paid to this worker in Canada's balance of payments account? a. The amount sent to Mexico is an outflow from Canada's current account. b. The entire wage payment is an inflow into Canada's capital account. c. The amount retained in Canada is an inflow into Canada's current account.

The answer is "The amount sent to Mexico is an outflow from Canada's current account." Money sent home by migrant workers is an outflow from the current account of the country where they work and an inflow to the current account of the country where the money is sent. This amount is included in the current transfers subaccount of the current account.

Which of the following is a characteristic of free market capitalism? a. The government's role in business is minimal. b. The government and the private sector are in competition. c. Natural resources are publicly owned.

The answer is "The government's role in business is minimal." In free market capitalism, most assets are owned, and most business decisions are made by private parties with the central authority (e.g., government) making minimal economic decisions. In the real world, the government plays an economic role in all economies, even in market-driven economies, but its role is minimised in a capitalist system.

Why would a company agree to pay a regulatory fine despite not being guilty of any regulatory violation? a. The time needed to defend their case is too disruptive to their business. b. The reputational risk is felt to be too great if mistakenly found guilty. c. The cost of defending their innocence is considered to be minimal.

The answer is "The time needed to defend their case is too disruptive to their business." Defending against an alleged regulatory violation in a court of law can be costly both in terms of time and money. Therefore, it can be quite disruptive to a business. But reputational risk can also be just as high for a company that agrees to pay a fine as one that is found guilty.

Increased market efficiency and trust can lead to increased: a. access to capital. b. transaction costs. c. cost of financing.

The answer is "access to capital." Increased market efficiency and trust can increase access to equity and debt funding and decrease the cost of capital for companies and governments.

The industry structure in which there is a tendency for price collusion between producers is: a. an oligopoly. b. monopolistic competition. c. a monopoly.

The answer is "an oligopoly." The factors that affect a country's economic growth are a part of macroeconomics, which studies the economy as a whole.

Using the discounted cash flow (DCF) approach, the current value of a fixed-rate coupon bond most likely reflects coupon payments: a. and principal at maturity discounted at a rate determined by investors. b. discounted at a rate determined by statute. c. and principal at maturity discounted at the bond's coupon rate.

The answer is "and principal at maturity discounted at a rate determined by investors." The value of a fixed-rate bond or zero-coupon bond can be expressed as: where V0 represents the current value of the bond, CFt refer to the bond's cash flow (coupon payments and/or par value) in time t, r is the discount rate, and n is the number of periods until the maturity date. When estimating the value of a debt security using the DCF approach, an investor must estimate and use an appropriate discount rate (r) that reflects the riskiness of the bond's cash flows.

A limitation of fiscal policy is that: a. by the time the policy is finally functioning, the economic conditions for which it was designed may have already changed. b. a tax reduction may lead to increased private sector spending. c. as interest rates are lowered, consumers may choose to deleverage instead of spending more.

The answer is "by the time the policy is finally functioning, the economic conditions for which it was designed may have already changed.." Recognition, implementation, and response time lags exist in the application of fiscal policy so that when the action finally affects the economy, economic conditions may have already changed.

Ethical standards help to uphold trust in the investment industry because laws and regulations: a. can be vague. b. do not guide individual behaviour. c. change too quickly.

The answer is "can be vague." Laws and regulations can be vague or ambiguous as well as inconclusive and slow in responding to changes in the financial markets. As a result, ethical behaviour is needed to maintain trust in the financial markets.

Unethical conduct in the investment industry can lead to: a. significantly lower levels of firm risk. b. a decline in the number of declared bankruptcies. c. clients failing to meet their investment objectives.

The answer is "clients failing to meet their investment objectives." Unethical conduct in the investment industry can cause clients to suffer, including not being able to meet their investment objectives because of lower market participation as a result of a decline in trust by market participants.

When the failure of a large financial services company leads to the subsequent failure of many other financial services companies, causing serious damage to the economy, it is called: a. corruption. b. fraud. c. contagion.

The answer is "contagion." Contagion occurs when the failure of one large financial services company causes other financial services companies to fail, resulting in serious damage to the economy.

Over a period of time, the exchange rate between the euro and British pound changed from €1.23/£1 to €1.26/£1. For this period, relative to the pound, the euro is said to have: a. devalued. b. appreciated. c. depreciated.

The answer is "depreciated." Following the change, the cost of euros has increased relative to the pound (€1.26 as opposed to €1.23 previously). The pound has appreciated versus the euro, and the euro has depreciated versus the pound.

A country has been running a persistent current account deficit. The natural correction of this situation would arise if the domestic currency: a. appreciates, resulting in higher imports and lower exports. b. depreciates, resulting in higher imports and lower exports. c. depreciates, resulting in lower imports and higher exports.

The answer is "depreciates, resulting in lower imports and higher exports." A natural correction to a current account deficit (imports exceeding exports) is a depreciation of the domestic currency. The depreciation of the currency makes imports (foreign goods and services) more expensive, so they would decrease. Domestic goods and services sold abroad will be cheaper to foreigners and exports should rise. The two effects should help to correct the current account deficit.

Gatekeeping rules are designed, in part, to: a. ensure firms have sufficient capital. b. dictate how firms operate. c. determine the integrity of personnel.

The answer is "determine the integrity of personnel." Gatekeeping rules are designed, in part, to determine who can operate within the industry. Consequently, personnel are required to meet certain minimum requirements to ensure that they measure up to standards of competency and integrity.

A report was recently published in a magazine widely read across the world by retail and high-net-worth investors. The report exposed a common unethical practice among stockbrokers in small illiquid emerging markets. The report focused on practices in a particular local market. This report may negatively affect investor confidence in: a. the emerging markets specifically mentioned. b. financial markets worldwide. c. the highlighted local market only.

The answer is "financial markets worldwide." Any report about unethical practices, no matter where they take place, will have investors worldwide wondering if similar unethical practices are also taking place in their market, which may lead to a decline in public trust and investor confidence.

In most countries, there are laws and regulations that are designed to prevent investment: a. risk. b. fraud. c. losses.

The answer is "fraud." Laws and regulations are developed to make sure investors are treated fairly and honestly. Fraud prevention is a general principle that is applied consistently.

Operating income is calculated as: a. gross profit minus other operating expenses. b. earnings before taxes minus tax expense. c. revenues minus cost of sales.

The answer is "gross profit minus other operating expenses." Operating income = Gross profit - Other operating expenses.

The risk that the price of a coupon bond will decline if discount rates increase is referred to as: a. interest rate risk. b. reinvestment risk. c. coupon reset risk.

The answer is "interest rate risk." Interest rate risk is the risk that interest rates will change. More specifically, it refers to the risk associated with decreases in bond prices resulting from increases in interest rates. This risk is particularly important for fixed-rate bonds and zero-coupon bonds.

An investment manager who also actively runs her own restaurant until late in the evening each day often misses morning investment strategy meetings as a result. She justifies missing these meetings by stating she is directly servicing clients when she holds late-night dinner meetings with them. The investment manager might not be loyal to her employer because she: a. jeopardises her investment clients' interests by missing the strategy meetings. b. submits reimbursement forms for her client's wholesale dinner costs. c. does not invite the firm's other clients to have similar dinners.

The answer is "jeopardises her investment clients' interests by missing the strategy meetings." By missing investment strategy meetings as a result of working at her restaurant until late in the evening, the investment manager is being disloyal to her employer. In missing these meetings, during which important information is being shared that could affect her clients' portfolios, she is not taking the requisite care for her clients' interests.

The growth of GDP is measured by the growth of the: a. gains in productivity adjusted for inflation. b. labour force minus productivity gains. c. labour force plus productivity gains.

The answer is "labour force plus productivity gains." The growth of GDP is measured by the growth of the labour force plus productivity gains.

One of the consequences of a regulatory failure is a possible increase in: a. economic stability. b. corporate earnings expectations. c. market inefficiency.

The answer is "market inefficiency." Regulation helps to enhance efficiency through standardisation of processes. Consequently, a regulatory failure could contribute to a decrease in market efficiency.

A government implements a policy that encourages consumers and businesses to increase spending and investment. Those who benefit from this additional spending, in turn, increase their own spending. The mechanism by which the initial increase in spending increases total spending by a greater amount is known as the: inflationary effect. financial contagion effect. multiplier effect.

The answer is "multiplier effect." The multiplier effect arises when an initial amount of spending produces income for other consumers and/or businesses, which causes them, in turn, to increase their own spending. The result is that the overall amount spent will be greater than the initial amount spent.

Which of the following statements is true about the profitability of firms in a perfectly competitive market? In the long run, the firms in the industry earn: a. abnormal profits. b. accounting profits. c. normal profits.

The answer is "normal profits." In perfectly competitive markets, companies earn normal profits, which compensates the owners of the companies for their opportunity cost (also known as economic profit). Abnormal profits can be earned only in the short run in a competitive industry.

A company's reported profits will be lower than its cash flow for the same period if the company: a. makes most of its sales on credit. b. purchases long-term assets for cash and depreciates them over several years. c. owes employees wages at the end of the period.

The answer is "owes employees wages at the end of the period." If the company has incurred wage expenses but has not yet paid them, the full wage expense will reduce profit, but for the unpaid portion, there will not yet have been a corresponding decrease in cash. Therefore, profits will be lower than cash flow in that period.

Previously, the exchange rate between euros and US dollars was €0.75/$1. Now, the exchange rate is €0.80/$1. This difference means that: a. now €1 can be exchanged for $0.80. b. previously $1 could be exchanged for €0.75. c. the euro appreciated between the two time periods.

The answer is "previously $1 could be exchanged for €0.75." An exchange rate of €0.75/$1 meant that it took €0.75 to purchase $1 (i.e., 1 US dollar could have been exchanged for 0.75 euro).

The relevance for investors in using the term structure of interest rates when valuing risky bonds is that it: a. provides a base yield to maturity for reference. b. indicates the required risk spread. c. outlines alternative maturities.

The answer is "provides a base yield to maturity for reference." The term structure for government bonds provides investors with a base yield to maturity, which serves as a reference to compare yields to maturity offered by riskier bonds.

The risk that coupon payments might have to be invested at a rate that reflects current market conditions is called: a. reinvestment risk. b. liquidity risk. c. interest rate risk.

The answer is "reinvestment risk." Reinvestment risk refers to the fact that in a period of falling interest rates, the coupon payments received during the life of a bond and/or the principal payment received from a bond that is called early must be reinvested at a lower interest rate than the bond's original coupon rate.

An investor with too few financial resources to hire an asset manager is known as a(n): a. retail investor. b. low-net-worth investor. c. institutional investor.

The answer is "retail investor." Investors without enough resources to hire an asset manager to manage their investments will buy products created and retailed by investment firms, such as mutual funds. Such investors are known as retail investors.

A key reason that issuers include a call provision in a bond is to: a. provide bondholders the opportunity to sell the bond if rates rise. b. not have to pay a premium if the bond is retired before maturity. c. retire an outstanding issue if market interest rates decline.

The answer is "retire an outstanding issue if market interest rates decline." A callable bond provides the issuer with the right to buy back (retire or call) the bond from bondholders prior to the maturity date at a prespecified price. In general, bond issuers choose to include a call provision so that they can refinance at a lower interest rate in the event that interest rates fall after the bond has been issued.

An employee compensation plan with a potentially negative impact on a firm's reputation is a compensation scheme based on: a. time spent at work. b. quality of work. c. sales levels.

The answer is "sales levels." An employee compensation package based on sales levels without strict oversight may cause employees to sell inappropriate products to clients based on the level of commission earned. If supervisory controls are not in place to limit this possibility, the firm's reputation could be harmed.

A risk-averse investor is considering three investments that all have the same expected return but quite different standard deviations. The investment that will be preferred is the one whose standard deviation is the: a. intermediate between the largest and smallest. b. largest. c. smallest.

The answer is "smallest." A risk-averse investor faced with three investments with the same expected return will prefer the one with the lowest variability (i.e., smallest standard deviation).

An import tariff can be described as a: a. limit on the quantity of goods that can be imported. b. subsidy paid by a government to discourage imports. c. tax or duty levied on imported products and services.

The answer is "tax or duty levied on imported products and services." An import tariff is a tax or duty levied on imported products and services. Its purpose is to generate revenue for the government and protect domestic suppliers.

A store owner recently turned down a substantial cash offer for his store and the land on which the store is located. Although the store owner considered the offer to be fair, he wanted to continue running the business. This year, his business has incurred costs for merchandise sold; wages paid to workers, including his own salary; utilities; and property taxes. When determining the business's accounting profit for the period, he is most likely to correctly exclude which of the following: a. his own salary. b. property taxes. c. the opportunity cost of the land and store.

The answer is "the opportunity cost of the land and store." Accounting profit is the difference between revenue generated from selling products and services and the explicit costs of producing them. The explicit costs here are the cost of merchandise sold, wages (including his own salary), utilities, and property taxes. He would not include the opportunity cost of the land and the store, which is what could be earned on the invested proceeds from the sale of the property. This opportunity cost would be included, however, in the calculation of the economic profit from the business.

In a dataset with a normal distribution, it is most likely that the mean will be: a. smaller than the median. b. larger than the median. c. the same as the median.

The answer is "the same as the median." In a dataset with a normal, perfectly symmetrical distribution, the mean, median, and mode will be identical.

During the past 10 years, two mutual funds have had the same geometric average return of 6%. Fund A had a standard deviation that was two times higher than Fund B's during this period. One can conclude that during the given time horizon, compared with Fund B, an investment in Fund A: a. suffered twice the loss. b. grew twice as fast. c. was riskier.

The answer is "was riskier." Standard deviation is a measure of dispersion around the mean. Larger values indicate greater variation in the dataset and more uncertainty. Hence Fund A is riskier than Fund B, even though both had the same average (positive) return during the period.

The benefits of increased market participation include: a. an increase in financial illiteracy. b. quicker security price adjustments. c. larger security price movements.

The answre is "quicker security price adjustments." Increased market participation leads to increased market efficiencies, which means that asset prices are able to adjust quickly to new information about the value of assets in the marketplace.

If an individual investor wanted to ensure that she did not invest in companies that sell tobacco products, she should use: a. pooled investments. b. direct investments. c. indirect investments

The best way for an individual investor to ensure that she did not invest in particular companies, such as those that sell tobacco products, would be to use direct investments.

The cumulative feature allows preferred shareholders to have: a. a claim on previously unpaid dividends. b. priority on asset claims over some types of creditors. c. double the voting rights of common shareholders.

The cumulative feature allows preferred shareholders to recover previously unpaid dividends. These dividends would have to be paid to the preferred shareholders prior to common shareholders receiving any dividends.

A private equity investment that requires financing with a cash flow to the target company at the time of investment is most likely a: a. distressed investment. b. leveraged buyout. c. secondary.

The financing for a leveraged buyout involves a high proportion of debt and will involve that cash flow being transferred to the company.

Which of the following is most likely a component of the market bid-ask spread? a. Highest offer price in the market b. Highest bid price in the market c. Highest ask price in the market

The highest bid in the market is the best bid (price at which the investor is willing to buy), and the lowest ask in the market is the best offer (price at which the dealer is willing to sell). The difference between the best bid and the best offer (or ask) is the market bid-ask spread. Therefore, the highest bid price in the market is a component of the market bid-ask spread.

An investor in a stock option contract that gives her the right to deliver the stock at the exercise price is most likely: a. short a call option. b. long a call option. c. long a put option.

The investor is long a put option on the stock. An investor with a long position in a put option on a stock has the right to deliver or sell the stock at the exercise price to the seller of the put option.

An investor in an option on a stock who must purchase the stock when the option is exercised is most likely: a. short a call option. b. short a put option. c. long a put option.

The investor is short a put option on the stock. When the buyer of the put option exercises the option, the seller of the put option must purchase the stock from the buyer at the exercise price.

The position most likely responsible for cash management within a firm is the: a. chief operation officer. b. chief accountant. c. treasurer.

The treasurer is responsible for cash management, including the payment of bills and the investment of cash receipts.

The value of a derivatives contract is most likely determined by: a. the exchange the contract trades on. b. negotiation between the parties involved in the derivatives trade. c. the performance of an underlying asset.

The value of a derivatives contract is based on the performance of an underlying asset. The exchange on which the contract trades may decide on the features of the contract, but it does not set the value of the derivatives contract. The parties involved in the derivatives trade do not determine the value of the derivatives contract.

One reason the investment industry provides mostly standardised services to retail investors is because they: a. generate the most revenue per investor. b. have the lowest level of knowledge. c. outnumber institutional investors.

There are many more retail investors than institutional investors, but retail investors generate low revenue per person. Therefore, the investment industry provides mostly standardised products with low marginal costs.

Before settlement for manually arranged trades, the confirmation: a. establishes the exact terms of the trade. b. reports the trade to the company's transfer agent. c. facilitates the exchange of cash for securities.

Trade settlement consists of two processes. Clearing refers to all activities taken from the arrangement of the trade until the settlement. The most important clearing activity is the confirmation, which establishes the exact terms of the trade. Settlement consists of the final exchange of cash for securities. Once the trade is settled, the settlement agent reports the trade to the company's transfer agent, which maintains a registry of who owns the company's securities.

The order of activity for trade clearing and settlement is: a. confirmation of terms, reporting to transfer agent, and exchange of cash for securities. b. reporting to transfer agent, confirmation of terms, and exchange of cash for securities. c. confirmation of terms, exchange of cash for securities, and reporting to transfer agent.

Trade settlement consists of two processes. Clearing refers to all activities taken from the arrangement of the trade up until the settlement. The most important clearing activity is the confirmation. Settlement consists of the final exchange of cash for securities. Once the trade is settled, the settlement agent reports the trade to the company's transfer agent, which maintains a registry of who owns the company's securities.

An investor has dinner with a personal friend who is the CEO of a publicly traded company. The friend tells the investor he has just learned that his company is about to be acquired by another company at a substantial premium to the current stock price and that this information will be released to the general public in one week. The investor buys a large block of the company's stock the following day. This scenario is an example of: a. insider trading. b. risk transfer. c. securitisations.

Trading based on material non-public information is known as insider trading.

If the price of the underlying stock increases, then holding other factors constant, the value of the call option and the value of the put option on the stock, respectively, will most likely: a. increase and increase. b. decrease and increase. c. increase and decrease.

When the price of the underlying stock increases, holding other factors constant, the value of the call option on the stock will increase, whereas the value of the put option on the stock will decrease.