FIN Midterm
Which one of the following statements is correct? Multiple Choice Arbitration is a formal legal process for settling disputes related to brokerage accounts. Churning is the preferred method of providing deep-discount brokerage services. Discount brokers only provide order execution services. Most brokerage agreements require disputes be settled in a court of law. Full service brokers frequently provide financial planning services to clients.
Full service brokers frequently provide financial planning services to clients.
Dow theory is a method of predicting future market movements based on which of the following Dow Jones averages? I. industrial II. transportation III. utilities IV. commodities Multiple Choice III and IV only I, II, and III only II and III only I and II only I and IV only
I and II only
Which of the following are impediments to the correction of a security's mispricing? I. sentiment-based risk II. implementation costs III. firm-specific risk IV. noise trader risk Multiple Choice II and IV only I, III, and IV only II, III, and IV only II only I, II, III, and IV
I, II, III, and IV
Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements Multiple Choice II, III, and IV only I and IV only I, II, and III only I, II, III, and IV I and III only
I, II, III, and IV
Which of the following have the same meaning as the term "economic value added"? I.abnormal earnings II. residual income III. value created by a firm in period t IV. EPSt - Bt-1 × k Multiple Choice I, II, III, and IV III and IV only I and II only II, III, and IV only I, II, and III only
I, II, III, and IV
Which of the following sources of information are used by informed traders? I. financial statements II. inside information III. internet reports IV. analysts reports Multiple Choice I, III, and IV only I and IV only II and III only III and IV only I, II, III, and IV
I, III, and IV only
You currently have $5,000 in cash in your brokerage account. You decide to spend $8,000 to purchase shares of stock and borrow $3,000 from your broker to do so. Which type of brokerage account do you have? Multiple Choice Asset allocation Wrap Margin Short Cash
Margin
Which one of the following statements is correct? The call money rate is the rate of interest brokerage firms charge on margin loans. A margin loan is treated as an asset on an account balance sheet. The spread is the fee a deep-discount broker charges to execute a trade. The percentage of a purchase paid for with borrowed funds is referred to as the margin. Margin is equal to account equity divided by the value of the securities owned.
Margin is equal to account equity divided by the value of the securities owned.
If the market is semistrong-form efficient, then which one of the following statements is true? Multiple Choice Technical analysts have the ability to earn excess profits but fundamental analysts cannot. Fundamental analysts can earn excess profits but technical analysts cannot. Neither technical nor fundamental analysis leads to abnormal profits. No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns. Both technical and fundamental analysts earn excess profits based on their research.
Neither technical nor fundamental analysis leads to abnormal profits.
Which one of the following statements is correct? Multiple Choice Professional money managers outperformed the Vanguard 500 Index Fund on an annual basis more than half the time for the period 1986-2014. Purchasing and holding a broad-based index fund is a highly recommended means of investing. In an efficient market, there is no need for professional money managers. The survivorship bias lowers the returns earned by professional money managers as a group. The number of general equity mutual funds has decreased over the past 20 years due to their underperformance as compared to index funds.
Purchasing and holding a broad-based index fund is a highly recommended means of investing.
Which one of the following describes a short position? Multiple Choice Selling a security that you do not own Purchasing a security on margin Selling a security that you originally purchased on margin Loaning a security to your broker to cover a margin call Having less equity than required in your margin account
Selling a security that you do not own
Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that: Multiple Choice Stock A has a positive excess return. Stock A represents the smallest-sized firm. Stocks B and C represent firms that are in the process of merging. Stock A is overpriced. the market return is 9.75 percent.
Stock A has a positive excess return.
Which one of the following is correct concerning the two-stage dividend growth model? Multiple Choice The discount rate considers the risk-free rate of return. The discount rate is based on the coupon rate a firm pays on its outstanding bonds. The time value of money is ignored. The first growth rate must be higher than the second growth rate. The discount rate ignores the risks associated with an individual firm.
The discount rate considers the risk-free rate of return.
Which one of the following statements related to the price-earnings (P/E) ratio is correct? Multiple Choice The earnings for the past twelve months is the method analysts prefer for computing earnings for the P/E ratio. The P/E ratio shown in The Wall Street Journal is based on next year's estimated earnings per share. The earnings yield is the inverse of the P/E ratio. The P/E ratio is equal to the market price per share divided by total net income. The P/E ratio varies directly with earnings per share.
The earnings yield is the inverse of the P/E ratio.
Which one of the following statements concerning beta is correct? Multiple Choice The beta assigned to the overall market is zero. The higher the beta, the higher the discount rate used for the dividend discount models. Beta is applied to the T-bill rate when computing the discount rate used for the dividend discount models. A stock with a beta of 1.2 earns a higher risk premium than a stock with a beta of 1.3. A stock with a beta of 0.5 has 50 percent more risk than the overall market.
The higher the beta, the higher the discount rate used for the dividend discount models.
Which one of the following sentences is correct concerning fixed-income securities? Multiple Choice The coupon rate on a fixed-income security is equal to the current yield. The price of a fixed-income security is inversely related to the current yield. Fixed-income securities are default free. Fixed-income securities include all debt instruments issued by the U.S. government. Fixed-income securities tend to be more liquid than money market securities.
The price of a fixed-income security is inversely related to the current yield.
Which one of the following statements is correct concerning the dividend yield and the total return? The dividend yield can be zero while the total return must be a positive value. The total return must be greater than the dividend yield. The total return plus the capital gains yield is equal to the dividend yield. The total return can be negative but the dividend yield cannot be negative. The dividend yield exceeds the total return when a stock increases in value.
The total return can be negative but the dividend yield cannot be negative.
Which one of the following statements is correct regarding prospect theory? Multiple Choice Typical investors tend to react irrationally only when focusing on total portfolio value. Average investors tend to lose more money than they earn from investing. Typical investors feel that losing $1 is twice as painful as the pleasure derived from making $1. Investors should focus on gains and losses in individual securities rather than their portfolio's total value. Average investors tend to prefer higher levels of risk.
Typical investors feel that losing $1 is twice as painful as the pleasure derived from making $1.
Which one of the following had the narrowest bell curve for the period 1926-2015? long-term government bonds small-company stocks long-term corporate bonds large-company stocks U.S. Treasury bills
U.S. Treasury bills
Which one of the following will increase the current residual income of a firm? Multiple Choice a decrease in future earnings per share a decrease in the required return on the firm's equity an increase in the firm's beginning book equity per share an increase in required earnings a decrease in the current earnings per share
a decrease in the required return on the firm's equity
Which one of the following will increase the current residual income of a firm? Multiple Choice an increase in required earnings a decrease in the current earnings per share a decrease in future earnings per share an increase in the firm's beginning book equity per share a decrease in the required return on the firm's equity
a decrease in the required return on the firm's equity
A fixed-income security is defined as: Multiple Choice long-term debt issued solely by a federal or state government. a long-term debt obligation that pays scheduled fixed payments. a debt obligation that pays a fixed rate of return for a one-year period of time. common or preferred stock that pays a fixed annual dividend. any security originally issued as either debt or equity that pays a fixed, pre-set payment.
a long-term debt obligation that pays scheduled fixed payments.
How is a sustainable dividend growth rate defined? Multiple Choice a rate of growth that does not exceed two percent of the annual increase in revenue a rate of dividend growth that is equal to the discount rate used to value the firm's stock a constant rate at which dividends increase a rate of growth that is set equal to one-half of the average growth rate of a firm's earnings a rate that can be supported over time by a company's earnings
a rate that can be supported over time by a company's earnings
Which one of the following returns is computed as the observed return minus the expected return? Multiple Choice visible abnormal distinct efficient subjective
abnormal
Money market instruments issued by a corporation: Multiple Choice can only be resold to the original issuer. are less liquid than those issued by the government. are default-free. must be held by the original purchaser until maturity. are risk-free.
are less liquid than those issued by the government.
Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding? Multiple Choice issue primary option ask bid
ask
If the markets are efficient, then why is asset allocation still considered important? Multiple Choice because market timing is critical in efficient markets because individual security selection is the key to the markets being efficient because the risk-return relationship must still be considered because the majority of market gains tend to occur only over long periods of time because asset allocation combines market timing with individual security selection
because the risk-return relationship must still be considered
Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support? Multiple Choice crash aversion inversion cloud bear market bubble
bubble
Market timing is the: Multiple Choice staggering of either buy or sell orders to mask the total size of a large transaction. period of time between the placement of a short sale and the covering of that sale. placing of an order within the last half-hour of trading for a day. buying and selling of securities in anticipation of the overall direction of the market. placing of trades within the last half-hour prior to the commencement of daily trading.
buying and selling of securities in anticipation of the overall direction of the market.
Independent deviations from rationality: Multiple Choice are the actions taken by rational arbitrage traders. prevent the markets from ever being efficient. do not exist in an efficient market. only exist when the overall market is overvalued. can create an efficient market.
can create an efficient market.
The financing provided for new ventures that are frequently high-risk investments is referred to as "venture _______". Multiple Choice capital investing risk funds funding leverage
capital
Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session? Multiple Choice trade barriers order flows market timers circuit breakers crash helmets
circuit breakers
The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics? Multiple Choice diversification excess trading risk aversion overconfidence clustering illusion
clustering illusion
Which one of the following is the tendency to believe that random events that occur in clusters are not really random? Multiple Choice gambler's fallacy clustering illusion sequential clustering random grouping representativeness heuristic
clustering illusion
Which one of the following represents a residual ownership interest in the issuer? Multiple Choice municipal bond corporate bond preferred stock U.S. Treasury bond common stock
common stock
Representativeness heuristic is best explained as: Multiple Choice the process of assuming events are random even when they are not. believing that random events that occur in clusters are truly random. concluding that casual factors cause random events when in fact they do not. the creation of patterns in planned events. overconfidence in one's own skills as an investor.
concluding that casual factors cause random events when in fact they do not.
According to the theory of recency bias, investors tend to believe the financial markets will: Multiple Choice continue to perform as they have over the past couple of years. gravitate to their long-term average rates of return. react over the next year in direct opposition to the performance of the prior year. have a maximum of three years of positive annual returns before declining somewhat. tend to reverse direction at least every five years.
continue to perform as they have over the past couple of years.
Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency? Multiple Choice identifying patterns that occur over time in the pricing of a particular security ascertaining how historical prices relate to current stock prices correctly determining the correct risk-adjustment procedure determining what undocumented information existed on any particular trading day determining whether a market reaction was appropriate or overstated
correctly determining the correct risk-adjustment procedure
Which one of the following is the best definition of a money market instrument? Multiple Choice corporate debt that matures in 90 days or less investment issued by a financial institution that matures in 30 days or less bank savings account debt issued by the government or a corporation that matures in one year or less investment issued by a financial institution that matures in one year or less
debt issued by the government or a corporation that matures in one year or less
How will the price of a stock be affected if the dividend growth rate is decreased? Multiple Choice increase either increase or no change no change either decrease or no change decrease
decrease
Based on the dividend discount model, an increase in which of the following will lower the current value of a stock? amount of the next dividend dividend growth rate discount rate
discount rate
The January effect: Multiple Choice is unaffected by institutional investors. occurs every year but only for small-company stocks. is unique to the United States. does not occur in the domestic market every year. occurs every year but only for large-company stocks.
does not occur in the domestic market every year.
The net income per share divided by the market price per share is called the: Multiple Choice profit margin. income ratio. profit yield. market yield. earnings yield.
earnings yield.
Which one of the following states that investors cannot consistently earn positive excess returns? Multiple Choice market return hypothesis efficient market hypothesis risk-return theory current market hypothesis excess theory
efficient market hypothesis
Last week, Newtown Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n): Multiple Choice pre-activity action. over-reaction and correction. post-activity reaction. efficient market reaction. delayed reaction.
efficient market reaction.
The tendency to overvalue an item because you own it is referred to as which one of the following? Multiple Choice myopic loss aversion endowment effect regret aversion sunk cost fallacy money illusion
endowment effect
Yesterday, Krista stated that Overland stock was only worth $12 a share and since it was selling for $15 a share, she declared it overpriced and refused to buy any shares. This morning, she learned that she is inheriting 3,500 shares of Overland stock from her grandmother. Suddenly, she is saying that Overland stock is a great buy at $15 and is probably worth at least $17 a share. This is an example of which one of the following? Multiple Choice regret aversion money illusion myopic loss aversion sunk cost fallacy endowment effect
endowment effect
The price-book ratio is computed as the market value per share divided by the per share book value of: Multiple Choice total assets. equity. long-term debt. net working capital. long-term debt plus equity. Incorrect
equity.
When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting. Multiple Choice Dutch auction guaranteed sale full-fledge firm commitment best efforts
firm commitment
Great Lakes Farm agreed this morning to sell General Mills 25,000 bushels of wheat six months from now at a price per bushel of $9.75. This is an example of a: Multiple Choice call option. put option. money market security. forward contract. fixed-income security.
forward contract.
Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information? Multiple Choice technical analysis fundamental analysis discounted valuation prediction valuation conceptual analysis
fundamental analysis
A call option is an agreement that: Multiple Choice presets a price but not a time period. gives the buyer the right to purchase an asset at some point in the future. obligates both the buyer and seller to a future transaction. grants the seller the right, but not the obligation, to sell an asset. grants the seller the right to buy a security at a predetermined price.
gives the buyer the right to purchase an asset at some point in the future.
The constant perpetual growth model assumes the: Multiple Choice dividends are paid for a stated number of years only. net income is all paid out in dividends. dividends are constant in amount. discount rate increases at a constant rate. growth rate is less than the discount rate.
growth rate is less than the discount rate.
Growth stocks are frequently described as having which one of the following characteristics? Multiple Choice low cash flows per share high dividends high P/E ratios low retention ratios a value orientation
high P/E ratios
Technical analysis studies which of the following as the basis for trading? Multiple Choice financial statements systematic risk dividend growth historical prices investor's required return
historical prices
Kay plans to retire in two years and wishes to liquidate her account at that time. Kay has a _____ constraint. Multiple Choice tax resource liquidity special circumstances horizon
horizon
An investor with a long position in a security will make money: only if the security has been purchased on margin. if the price of the security remains stable. if the price of the security declines. only by shorting the security. if the price of the security increases.
if the price of the security increases.
An increase in the retention ratio will: Multiple Choice increase the dividend growth rate. increase the value of a firm's stock. decrease a firm's sustainable rate of growth. increase the dividends per share. decrease the equity of a firm.
increase the value of a firm's stock.
If you opt to purchase shares of stock on margin rather than with cash, you will: guarantee yourself a profit. eliminate any potential profit. decrease your maximum potential rate of return. increase your maximum potential rate of return. have equal rates of return regardless of how the purchase is made.
increase your maximum potential rate of return.
You will earn a profit as the owner of a call option if the price of the underlying asset: Multiple Choice decreases. remains constant or decreases. increases. remains constant or increases. remains constant.
increases.
Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis? Multiple Choice informed inside normal block public
informed
Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n): Multiple Choice initial public offering. break-out issue. public service offering. open-end sale. initial trial issue
initial public offering.
The dividend yield is defined as the annual dividend expressed as a percentage of the: initial stock price. ending stock price. average stock price. total annual return. capital gain.
initial stock price
Which one of the following best describes a broker? Multiple Choice trader who transacts business on behalf of a securities issuer firm which charges a commission for arranging a transaction person who buys securities for his or her own account on an exchange floor trader who buys and sells from his or her inventory intermediary who arranges trades between a buyer and a seller
intermediary who arranges trades between a buyer and a seller
A firm that specializes in arranging financing for companies is called a(n): Multiple Choice marketing firm. private broker. investment dealer. investment banking firm. floor broker.
investment banking firm.
The term "independent deviations from rationality" implies that: Multiple Choice irrational investors are absent from an efficient market. arbitrage traders act together to offset the actions of rational investors. arbitrage traders act independent of each other. irrational investors behave differently from one another. markets must be inefficient.
irrational investors behave differently from one another.
Preferred stock: Multiple Choice is listed in the liabilities section of a balance sheet. is a type of corporate debt. is treated like equity for both tax and accounting purposes. has a stated dividend but no stated liquidation value. is treated like debt for tax purposes.
is treated like equity for both tax and accounting purposes.
Four of the last five stocks your investment adviser recommended have outperformed the market.Thus, you believe that if you continue to follow her advice, that 80 percent of your investments will outperform the market over the long term. This belief is based on the: Multiple Choice clustering illusion. law of small numbers. gambler's fallacy. positive performance illusion. law of large numbers.
law of small numbers.
You want to sell shares of stock at the current price. Which type of order should you place? Multiple Choice post short market limit stop
market
If you multiply the number of shares outstanding for a stock by the price per share, you are computing the firm's: Multiple Choice time value. market share. equity ratio. total book value. market capitalization.
market capitalization.
Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released? Multiple Choice private, non-material information public information material public information material non-public information abnormal information
material non-public information
Money market instruments: Multiple Choice tend to be illiquid. may be sold on a discount basis. cannot be resold. are quoted in terms of a spread. are generally sold in small denominations.
may be sold on a discount basis.
If you ignore a margin call, your broker: may sell some of your securities to repay the margin loan. will close your account. will seize all the assets in your account. may place a short sale on your behalf to cover the amount of the call. will increase both your margin loan and the rate of interest on that loan.
may sell some of your securities to repay the margin loan.
What is beta? Multiple Choice measure of a stock's risk relative to the stock market average the rate of dividend growth a rate of return measure the percentage of net income paid out as a dividend the return on a stock relative to the overall market
measure of a stock's risk relative to the stock market average
Which one of the following is a trader whose trades are not based on meaningful financial analysis or information? Multiple Choice noise trader sentiment trader specialist arbitrageur market maker
noise trader
The price paid to purchase an option contract is called the: Multiple Choice exercise price. option premium. future premium. strike price. current yield.
option premium.
Dover Lumber announced last week that its unpopular CEO had resigned. In response to this announcement, the firm's stock price increased from $17 a share to $23 a share. The following day the price declined to $21 a share and has remained constant at that level. This is an example of a(n): Multiple Choice underpricing. over-reaction and correction. pre-activity action. efficient market reaction. delayed reaction.
over-reaction and correction.
The retention ratio is the: Multiple Choice percentage of net income paid out to shareholders. net income divided by the number of shares outstanding. percentage of net income held by a firm for future growth. net income divided by total equity. inverse of the dividend payout ratio.
percentage of net income held by a firm for future growth.
Blume's formula is used to: convert an arithmetic average return into a geometric average return. convert a geometric average return into an arithmetic average return. predict future rates of return. compute the historical mean return over a multi-year period of time. measure past performance in a consistent manner.
predict future rates of return.
What is the market value of a share of stock divided by the net income per share called? Multiple Choice price-earnings ratio earnings yield value-earnings ratio earnings per share market multiple
price-earnings ratio
A firm's current stock price divided by the firm's revenue per share is referred to as which one of the following ratios? Multiple Choice price-earnings price-sales price-income price-cash flow price-book
price-sales
Bright Detergent is issuing new shares of stock which will trade on NASDAQ. If Sally purchases 300 of these shares, the trade will occur in which one of the following markets? fourth third over-the-counter secondary primary
primary
A security originally sold by a business or government to raise money is called a(n): Multiple Choice futures contract. derivative. primary debt. primary asset. option contract.
primary asset.
Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern? Multiple Choice dispersed flow deviated pattern random walk efficient movement overreaction and correction
random walk
A preliminary document provided to investors who are interested in a stock offering is called a(n): Multiple Choice inquiry form. prospectus. draft offer. green shoe. red herring.
red herring.
Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment. Peter is suffering from: Multiple Choice regret aversion. risk-taking. mental accounting. frame dependence. money illusion.
regret aversion.
How should cumulative abnormal returns react in an efficient market? Multiple Choice relatively constant with no breaks remain constant at zero steadily decreasing relatively constant, sharp break, relatively constant steadily increasing
relatively constant, sharp break, relatively constant
Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio? Multiple Choice perpetual dividend growth two-stage growth residual income supernormal growth perpetual cash flow
residual income
The maximum price at which a security is expected to trade is called the: Multiple Choice stop limit. support level. resistance level. relative point. fourth wave.
resistance level.
The portion of net income that is held by a firm, for future growth, comprises which one of the following balance sheet accounts? Multiple Choice common stock internal earnings net earnings retained earnings capital surplus
retained earnings
What is the percentage of a firm's net income which is reinvested in the firm to support future growth called? Multiple Choice equity ratio retention ratio payout ratio equity reinvestment distribution percentage
retention ratio
The additional return earned for accepting risk is called the: riskless rate. risk premium. inflated return. capital gains yield. real return.
risk premium.
The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the: risk premium. risk-free rate. market rate of return. expected rate of return. deflated rate of return.
risk-free rate
Patrick is a contestant on a game show. At this point in the game, he can either accept $500 or spin a wheel for a chance of winning $100,000. Which type of behavior is he displaying if he spins the wheel? Multiple Choice risk-taking prospective risk-adverse forward-looking introspective
risk-taking
Which one of the following best describes heuristics? Multiple Choice grouping herding representativeness clustering rules of thumb
rules of thumb
Main Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n): Multiple Choice after-market underwriting. seasoned equity offering. initial public offer. market expansion offer. supplemental offering.
seasoned equity offering.
Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets? Multiple Choice third secondary fifth primary fourth
secondary
Walter is trying to decide whether he wants to purchase shares in General Motors, Ford, or Honda, all of which are auto manufacturers. Walter is making a(n) _____ decision. active strategy security selection tax-advantaged risk aversion asset allocation
security selection
If you are willing to buy a stock and you wish to receive the option premium you should: Multiple Choice sell a call. buy a put. either sell a call or buy a put. sell a put. buy a call.
sell a put.
A European put option grants the holder the right to: Multiple Choice sell the underlying security at the strike price on or before the expiration date. buy the underlying asset at the exercise price on the expiration date. buy the underlying security at a stated price at any time up to and including the expiration date. buy the underlying asset at or below the exercise price on or before the expiration date. sell the underlying asset at the strike price only on the expiration date.
sell the underlying asset at the strike price only on the expiration date.
Which one of the following risks is related to irrational beliefs? Multiple Choice sentiment-based industry-specific systematic market firm-specific
sentiment-based
This morning, Josh sold 800 shares of stock that he did not own. This sale is referred to as a: Multiple Choice long position. short sale. hypothecated sale. wrap trade. margin sale.
short sale.
Which one of the following had the highest risk premium for the period 1926-2016? U.S. Treasury bills small-company stocks large-company stocks long-term government bonds intermediate-term government bonds
small-company stocks
The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the: Multiple Choice firm commitment. underwriting capital. spread. margin. offer differential.
spread.
An order to sell that involves a preset trigger point is called a _____ order. Multiple Choice limit market short day stop
stop
The amount of money per share that will be received when a put option on stock is exercised is called the _____ price. Multiple Choice obligated future market strike stock
strike
Which one of the following is a characteristic of the self-attribution bias? Multiple Choice believing that your recent performance is an indication of your future performance placing too much weight on information which you can gather easily taking credit for the wins and blaming the losses on bad luck believing what you wish to believe believing that other investors agree with your thinking
taking credit for the wins and blaming the losses on bad luck
Arbitrage traders: Multiple Choice tend to be irrational investors. sell only relatively inexpensive stocks. tend to be well-capitalized. are dominated by irrational investors in an efficient market. lower the efficiency level of a market.
tend to be well-capitalized.
The method of valuing a stock based on the present value of the future income derived from that stock is called: Multiple Choice constant valuation. the basic stock valuation method. the dividend discount model. technical analysis. compound dividend analysis.
the dividend discount model.
The risk-free rate is: the rate of return on a riskless investment. another term for the dividend yield. the rate of return earned on an investment in a firm that you personally own. defined as the total of the capital gains yield plus the dividend yield. defined as the increase in the value of a share of stock over time.
the rate of return on a riskless investment.
Which one of the following is a requirement of the two-stage dividend growth model? Multiple Choice both growth rates must be less than the discount rate the first growth rate must equal the discount rate the first growth rate must exceed the second growth rate one of the two growth rates must exceed the discount rate the second growth rate must be less than the discount rate
the second growth rate must be less than the discount rate
At the time a futures contract is written: Multiple Choice the current market price of the underlying asset becomes the contract price. the buyer is granted the right, but not the obligation, to exercise the contract. the underlying asset is specifically identified. the current market price of the underlying asset must be less than the agreed upon futures price. the buyer pays a good faith deposit to the seller.
the underlying asset is specifically identified.
When stocks are held in an index in proportion to their total company market value, the index is: Multiple Choice back-weighted. dollar-weighted. front-weighted. price-weighted. value-weighted.
value-weighted.
Which form of market efficiency exists if the market is efficient only in regard to historical information? Multiple Choice semistrong-form historical-form strong-form mild-form weak-form
weak-form
Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish? Multiple Choice 1 -1 100 0 50
1 (MSI is calculating bearish against bullish. 0-1 is the range. 1 being bearish, they feel the market will go down)
The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution. 90 82 68 95 50
68
Anita wants to buy $10,000 of securities in her margin account. Her advisor has informed her that she must pay a minimum of $7,000 in cash and maintain a minimum equity position of 30 percent. The initial margin requirement is _____ percent and the maintenance margin is _____ percent. 30; 70 70; 70 70; 30 30; 30 70; 50
70; 30
Which one of the following statements related to common stock is correct? Multiple Choice Common stock is a form of corporate debt. Corporations are required to pay annual dividends to its common stockholders. Common stock has a pre-defined liquidation value. Corporations pay dividends at the discretion of the firm's president. Corporations have the right to discontinue paying dividends.
Corporations have the right to discontinue paying dividends.
Which one of the following decisions falls under the category of asset allocation? Adopting a passive investment strategy Determining that thirty percent of a portfolio should be invested in bonds Deciding to use an online broker Purchasing Ford stock rather than General Motors stock Deciding to actively analyze individual securities
Determining that thirty percent of a portfolio should be invested in bonds
When the price of newly issued shares is determined by competitive bidding the underwriting is known as a _____ underwriting. Multiple Choice Dutch auction market-priced rights seasoned best efforts
Dutch auction
You analyze a firm's financial statements and invest based upon the results of this analysis. Which form of market efficiency must exist if you are able to earn excess profits on these investments? Multiple Choice semi-strong form mild-form historical-form weak-form full-form
weak-form
Capital gains are included in the return on an investment: Multiple Choice only if the investment incurs a loss in value or is sold. when either the investment is sold or the investment has been owned for at least one year. whether or not the investment is sold. only if the investment is sold and the capital gain is realized. whenever dividends are paid.
whether or not the investment is sold.
Kay just purchased $5,000 worth of stock. She paid $3,000 in cash and borrowed $2,000. In this example, the term margin refers to: the total amount of the purchase. any future increase in the value of the stock. the percentage of the purchase paid with borrowed funds. the percentage of the purchase that was paid in cash. any future decrease in the value of the stock.
the percentage of the purchase that was paid in cash.
What is the purpose of a margin call? Multiple Choice to advise you that the interest rate on your loan has changed to let you know the amount of funds that are now available for you to borrow to demand funds to increase your margin position to remind you of the upcoming monthly payment due on your margin loan to inform you that your margin loan is due and payable
to demand funds to increase your margin position
A futures contract is an agreement: Multiple Choice to exchange goods on a specified date in the future at a price that is agreed upon today. to deliver goods today in exchange for an agreed upon payment to be paid on a specified date in the future. that obligates a corporation to issue additional securities at a specified date in the future. to exchange a specified quantity of goods on a specified date in the future at the current market price. to exchange financial assets on a specified date in the future with the price determined on that date.
to exchange goods on a specified date in the future at a price that is agreed upon today.
What is the primary purpose of Dow theory? Multiple Choice to eliminate market corrections to analyze daily market movements to identify and measure market waves to signal changes in the market's primary direction to measure the level of investor optimism and pessimism
to signal changes in the market's primary direction
A securities dealer is a(n): Multiple Choice trader who transacts business on behalf of a securities issuer. person who buys securities for his or her own account on an exchange floor. intermediary who arranges trades between a buyer and a seller. firm which charges a commission for arranging a transaction. trader who buys and sells from his or her inventory
trader who buys and sells from his or her inventory
Market timing tends to lead to: Multiple Choice increasing profits as experience is gained. superior returns but only if you are a professional money manager. underperforming the overall market. a rate of return roughly equal to that of the overall market. fairly consistent abnormal returns.
underperforming the overall market.
The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called: Multiple Choice securing. brokering. underwriting. capitalizing. deploying.
underwriting.
The maximum loss you can incur on a short sale is: Multiple Choice zero. limited to your initial margin. limited to your initial equity. limited to the margin loan plus interest. unlimited.
unlimited.
An unwillingness to take a risk after a loss describes: Multiple Choice over-confidence. the clustering illusion. the illusion of knowledge. loss aversion. the snakebite effect.
the snakebite effect.
