Finance ch 8-10
103. A stock has an expected return of 12% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 15%. Given this data, which of the following statements is correct? A. The two assets have the same coefficient of variation. B. The stock investment has a better risk-return trade-off. C. The bond investment has a better risk-return trade-off. D. Both investments have the same diversifiable risk.
A
13. An agent who arranges a transaction between a buyer and a seller of equity securities is called a: A. broker. B. floor trader. C. capitalist. D. principal. E. dealer.
A
14. This is the term for portfolios with the highest return possible for each risk level. A. efficient portfolios B. modern portfolios C. optimal portfolios D. total portfolios
A
15. Which of the following makes this a true statement: The shape of the efficient frontier implies that A. diminishing returns apply to risk-taking in the investment world. B. increasing returns apply to risk-taking in the investment world. C. returns are not impacted by risk-taking in the investment world. D. None of these complete the sentence to make it true.
A
18. An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a: A. floor trader. B. exchange customer. C. specialist. D. floor broker. E. market maker.
A
19. We commonly measure the risk-return relationship using which of the following? A. coefficient of variation B. correlation coefficient C. standard deviation D. expected returns
A
23. Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time. A. executive stock options B. privately held information C. restricted stock D. stock market bubble
A
3. This is a measure summarizing the overall past performance of an investment. A. average return B. dollar return C. market return D. percentage return
A
31. Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.
A
41. Hardy Lumber has a capital structure which includes bonds, preferred stock, and common stock. Which of the following rights have most likely been granted to the preferred shareholders? I. right to share in company profits prior to other shareholders II. right to elect the corporate directors III. right to vote on proposed mergers IV. right to all residual income after the common dividends have been paid A. I only B. I and III only C. I and IV only D. II, III, and IV only E. I, II, III, and IV
A
48. Which one of the following statements related to the NYSE is correct? A. Commission brokers work on behalf of brokerage firm clients. B. Shareholders of NYSE Group, Inc. own "seats" on the exchange. C. Specialists buy at the asked price. D. The NYSE is primarily a dealer's market. E. Floor brokers earn income in the form of a bid-ask spread.
A
6. This is a measure of risk to reward earned by an investment over a specific period of time. A. coefficient of variation B. market deviation C. standard deviation D. total variation
A
7. This model includes an equation that relates a stock's required return to an appropriate risk premium: A. asset pricing B. behavioral finance C. beta D. efficient markets
A
73. Which of the following statements is correct? A. A single stock has a lot of diversifiable risk. B. A single stock has more market risk than a diversified portfolio of stocks. C. Bonds and stocks have a high correlation because they are both financial assets. D. None of these statements are correct.
A
74. US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct? A. This is an example of a market overreaction. B. This is an example of a market underreaction. C. This is an example of a semi-strong efficient market. D. None of these statements are correct.
A
74. Which of the following statements is correct? A. A dominant portfolio has the best risk-return relationship as compared to other portfolios. B. It is not necessarily true that when an investment achieves a high return that it is risky. C. A low standard deviation means that the investment is less likely to achieve high returns; which means that is more risky. D. None of these statements are correct.
A
76. Jane Adams invests all her money in the stock of one firm. Which of the following must be true? A. Her return will have more volatility than the return in the overall stock market. B. Her return will have less volatility than the return in the overall stock market. C. Her return will have the same volatility as the return in the overall stock market. D. There is no relationship between her return and the return in the overall stock market.
A
77. Which of the following statements is incorrect? A. The capital market line shows the relationship between return and risk as measured by the standard deviation. B. The Efficient Market Hypothesis states that security prices fully reflect all available information. C. The security market line shows the relationship between return and risk as measured by beta. D. None of these statements are correct.
A
78. Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? A. Stock A is riskier. B. Stock B is riskier. C. The stocks have the same risk. D. We would need to know if the markets are efficient to answer this question.
A
80. Which of the following is correct regarding the total risk of a company? A. A company can change its risk level over time. B. Some firms are riskier because they offer many different products and/or services. C. Companies can change their risk by reducing the amount of money they have borrowed. D. None of these statements are correct.
A
10. This is the portion of total risk that is attributable to overall economic factors. A. firm specific risk B. market risk C. modern portfolio risk D. total risk
B
82. Which of the following statements is correct? A. If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. B. There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. C. The Efficient Market Hypothesis states that security prices will be based on their expected return. D. None of these statements is correct.
A
87. How might a small market risk premium impact people's desire to buy stocks? A. Investors with high risk aversion will be less willing to invest in stocks. B. Investors with high risk aversion will be more willing to invest in stocks. C. It will only impact the share prices. D. None of these statements is correct.
A
87. Which of the following is incorrect? A. It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification. B. Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio. C. The optimal portfolio is the one with the lowest amount of risk. D. All of these statements are correct.
A
9. This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. A. firm specific risk B. market risk C. modern portfolio risk D. total risk
A
94. Which of the following statements is correct? A. Penny stocks are the stocks of small companies that are priced below $1 per share. B. Restricted stocks are shares of stock issued to executives that have limitations on voting rights. C. The Capital Market Line graphs the relationship between return and risk (beta). D. All of these statements are correct.
A
95. Modern portfolio theory is ________________. A. a concept and procedure for combining securities into a portfolio to minimize risk B. a concept and procedure for combining securities into a portfolio to maximize return C. a concept and procedure for combining securities into a portfolio to maximize volatility D. a concept and procedure for combining securities into a portfolio to maximize dollar return
A
97. Which of the following is incorrect? A. Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. B. Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. C. It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. D. None of these statements are incorrect.
A
1. This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment. A. average return B. dollar return C. market return D. portfolio
B
1. What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend
B
10. The use of debt to increase an investment position. A. behavioral finance B. financial leverage C. probability D. stock market bubble
B
105. From 1950 to 2007, the average return in the stock market, as measured by the S&P500, was 13.2% and a standard deviation of 17%. Given this information, which of the following statements is correct? A. With an average return this high, it is unlikely that an investor will lose money in the stock market in the next year or two. B. With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period. C. This investment is not very good since the standard deviation is greater than the average return. D. All of these statements are correct.
B
11. Which of these is the line on a graph of return and risk (standard deviation) from the risk- free rate through the market portfolio? A. Capital Asset Pricing Line B. Capital Market Line C. Efficient Market Line D. Efficient Market Hypothesis
B
12. A measure of the sensitivity of a stock or portfolio to market risk. A. behavioral finance B. beta C. efficient market D. hedge
B
12. This is the concept and procedure for combining securities into a portfolio to minimize risk. A. firm specific theory B. modern portfolio theory C. optimal portfolio theory D. total portfolio theory
B
14. The owner of one of the 1,366 trading licenses for the NYSE is called a: A. broker. B. member. C. agent. D. specialist. E. dealer.
B
16. This is a measurement of the co-movement between two variables that ranges between -1 and +1. A. coefficient of variation B. correlation C. standard deviation D. total risk
B
17. To find the percentage return of an investment, A. multiply the dollar return by the investment's value at the beginning of the period. B. divide the dollar return by the investment's value at the beginning of the period. C. multiply the dollar return by the investment's value at the end of the period. D. divide the dollar return by the investment's value at the end of the period.
B
18. Which statement is true? A. The larger the standard deviation, the lower the total risk. B. The larger the standard deviation, the higher the total risk. C. The larger the standard deviation, the more portfolio risk. D. The standard deviation is not an indication of total risk.
B
19. Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists? A. OTCDOT B. SuperDOT C. Instinet D. Internet E. Floornet
B
2. This is the average of the possible returns weighted by the likelihood of those returns occurring. A. efficient return B. expected return C. market return D. required return
B
21. The study of the cognitive processes and biases associated with making financial and economic decisions. A. asset pricing model B. behavioral finance C. efficient market hypothesis D. stock market bubble
B
24. The constant growth model assumes which of the following? A. That there is privately held information. B. That the stock is efficiently priced. C. That there are executive stock options available to managers. D. That there is no restricted stock.
B
28. Which one of the following is an underlying assumption of the dividend growth model? A. A stock has the same value to every investor. B. A stock's value is equal to the discounted present value of the future cash flows which it generates. C. A stock's value changes in direct relation to the required return. D. Stocks that pay the same annual dividend have equal market values. E. The dividend growth rate is inversely related to a stock's market price.
B
3. The set of probabilities for all possible occurrences. A. probability B. probability distribution C. stock market bubble D. market probabilities
B
34. Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true? A. The dividend must be constant. B. The stock has a negative capital gains yield. C. The dividend yield must be zero. D. The required rate of return for this stock increased over the year. E. The firm is experiencing supernormal growth.
B
4. This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium. A. required return B. risk-free rate C. risk premium D. market risk premium
B
42. Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: A. must always show a current liability of $2,400, ($2.40 1,000), for dividends payable. B. must still declare each dividend before it becomes an actual company liability. C. is obligated to pay $2.40 per share each year in perpetuity. D. will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. E. has a liability that must be paid at a later date should the company miss paying an annual dividend payment.
B
5. A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called? A. democratic B. cumulative C. straight D. deferred E. proxy
B
73. US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct? A. This is an example of a market overreaction. B. This is an example of a market underreaction. C. This is an example of a semi-strong efficient market. D. None of these statements are correct.
B
78. Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information? A. This investment newsletter is most likely correct because they most likely have some special knowledge about the stock. B. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet." C. It is common for individual stocks to double the return of the S&P500 and still be a "safe bet." D. None of these statements are correct.
B
8. The asset pricing theory based on a beta, a measure of market risk. A. Behavioral Asset Pricing Model B. Capital Asset Pricing Model C. Efficient Markets Asset Pricing Model D. Efficient Market Hypothesis
B
80. Stock A has a required return of 12%. Stock B has a required return of 15%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? A. Stock A is riskier. B. Stock B is riskier. C. The stocks have the same risk. D. We would need to know if the markets are efficient to answer this question.
B
83. IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct? A. The market risk premium for Apple must be larger than the market risk premium of IBM. B. If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM. C. Apple's expected rate of return must be three times as large as IBM's. D. None of these statements is correct.
B
83. Interest rates, inflation and economic growth are economic factors that are examples of ______________________. A. Firm-specific risks that can be diversified away B. Market risk C. External factors that are neither firm specific risk nor market risk D. None of these statements are correct
B
85. Which of the following statements is correct? A. Uncorrelated assets have a correlation of -1.0. B. Most common stocks are positively correlated with each other because they are impacted by the economic factors. C. We can typically add many stocks together to fully eliminate the market risk in a portfolio. D. None of these statements are correct.
B
86. In 2000, the S&P500 Index earned 11% while the T-bill yield was 4.4%. Given this information, which of the following statements is correct with respect to the market risk premium? A. The market risk premium must have been negative. B. The market risk premium must have been positive. C. The market risk premium must have been zero. D. Unable to answer without more information.
B
88. How might a large market risk premium impact people's desire to buy stocks? A. Investors with high risk aversion will be less willing to invest in stocks. B. Investors with high risk aversion will be more willing to invest in stocks. C. It will only impact the share prices. D. None of these statements is correct.
B
9. In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. A. efficient market B. market portfolio C. probability distribution D. stock market bubble
B
90. Sally wants to invest in only two stocks. Which pair of stocks should Sally select? A. Stocks A and B move downward at the same time. B. Stocks C and D move in opposite directions at the same time. C. Stocks E and F move upward at the same time. D. Stocks G and H move randomly at the same time.
B
93. Which of the following is the correct ranking from least risky to most risky? A. Long-term Treasury bonds, Stocks, Treasury Bills B. Treasury Bills, Long-term Treasury Bonds, Stocks C. Stocks, Long-term Treasury Bond, Treasury Bills D. Stocks, Treasury Bills, Long-term Treasury Bonds
B
96. The total risk of the S&P500 Index is equal to ____________________. A. diversifiable risk B. nondiversifiable risk C. modern portfolio risk D. efficient frontier risk
B
33. Which one of the following represents the capital gains yield as used in the dividend growth model? A. D1 B. D1/P0 C. P0 D. g E. g/P0
D
104. A stock has an expected return of 15% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 11%. Given this data, which of the following statements is correct? A. The two assets have the same coefficient of variation. B. The stock investment has a better risk-return trade-off. C. The bond investment has a better risk-return trade-off. D. Both investments have the same diversifiable risk.
C
11. This is another term for market risk. A. firm specific risk B. modern portfolio risk C. nondiversifiable risk D. total risk
C
13. Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation. A. Market Risk Line B. Probability Market Line C. Security Market Line D. Stock Market Line
C
13. This is the investor's combination of securities that achieves the highest expected return for a given risk level. A. efficient portfolio B. modern portfolio C. optimal portfolio D. total portfolio
C
16. A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a: A. floor trader. B. floor post. C. specialist. D. floor broker. E. commission broker.
C
16. The stocks of small companies that are priced below $1 per share. A. bargain stocks B. hedge fund stocks C. penny stocks D. stock market bubble stocks
C
17. A floor broker on the NYSE does which one of the following? A. supervises the commission brokers for a financial firm B. trades for his or her personal inventory C. executes orders on behalf of a commission broker D. maintains an inventory and takes the role of a specialist E. is charged with maintaining a liquid, orderly market
C
17. A theory that describes the types of information that are reflected in current stock prices. A. asset pricing B. behavioral finance C. efficient market hypothesis D. public information
C
19. This has not been released to the public, but is known by few individuals, likely company insiders. A. audited financial statements B. restricted stock C. privately held information D. insider trading
C
2. Which one of the following is computed by dividing next year's annual dividend by the current stock price? A. yield to maturity B. total yield C. dividend yield D. capital gains yield E. growth rate
C
20. The stream of customer orders coming in to the NYSE trading floor is called the: A. paper trail. B. trading volume. C. order flow. D. bid-ask spread. E. commission trail.
C
22. A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market? A. auction B. private C. over-the-counter D. regional E. electronic network
C
22. Shares of stock issued to employees that have limitations on when they can be sold. A. executive stock options B. privately held information C. restricted stock D. stock market bubble
C
24. National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A. basically worthless as it offers no growth potential. B. equal in value to the present value of $1 paid one year from today. C. priced the same as a $1 perpetuity. D. valued at an assumed growth rate of one percent. E. worth $1 a share in the current market.
C
26. High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders. A. market price B. dividend yield C. capital gains yield D. total return E. The answer cannot be determined based on the information provided.
C
29. Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: A. an increase in all stock values. B. all stock values to remain constant. C. a decrease in all stock values. D. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E. dividend-paying stocks to increase in price while non-dividend paying stocks decrease in value.
C
47. Which of the following apply to a specialist who trades on the floor of the NYSE? I. provides liquidity for an individual security II. partially being replaced by SuperDOT III. pays an annual fee for a trading license IV. acts as a dealer A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV
C
5. This is the reward investors require for taking risk. A. required return B. risk-free rate C. risk premium D. market risk premium
C
55. You are the sole shareholder of a small corporation. Presently, you wish to diversify your holdings and thus want to sell a portion of your shares but do not want to incur the costs associated with SEC filings. Which one of the following markets, if any, might be conducive to this sale? A. NASDAQ B. OTCBB C. Pink Sheets D. NYSE E. None of the above
C
6. You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected under these conditions? A. democratic B. cumulative C. straight D. deferred E. proxy
C
7. This index tracks 500 companies which allows for a great deal of diversification. A. Nasdaq B. Fortune 500 C. S&P 500 D. Wall Street Journal
C
79. Which of the following is correct regarding the coefficient of variation? A. It measures the amount of standard deviation for each one percent of covariance. B. It measures the amount of return achieved for each one percent of risk taken. C. It measures the amount of risk taken for each one percent of return achieved. D. None of these statements are correct.
C
8. This is defined as a combination of investment assets held by an investor. A. bundle B. market basket C. portfolio D. All of these
C
8. What are the distributions to shareholders by a corporation called? A. retained earnings B. net income C. dividends D. capital payments E. diluted profits
C
82. Which of the following statements is correct regarding total risk? A. The coefficient of variation is a measure of the firm's total risk. B. All firms have the same amount of total risk because they are all exposed to the same market risk. C. Conglomerates will have less total risk than a firm that has one line of business. D. None of these statements are correct.
C
89. The optimal portfolio for you will be ______________________. A. the one that offers the lowest correlation B. the one that offers the highest returns C. the one that reflects the amount of risk that you are willing to take D. the one that offers the most diversification
C
90. Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n) ___________________. A. Financial meltdown B. Irrational behavior C. Stock market bubble D. None of these
C
92. Which of the following is most correct? A. In an efficient market, investors will buy overvalued stock which will drive its price down. B. In an efficient market, investors will sell undervalued stock which will drive its price down. C. In an efficient market, investors will sell overvalued stock which will drive its price down. D. None of these statements is correct.
C
93. Which of the following statements is incorrect? A. The Security Market Line shows the relationship between risk and return for any stock or portfolio. B. The y-intercept of the Security Market Line represents the return on the risk-free asset. C. The measure of risk used in creating the Security Market Line is the standard deviation. D. None of these statements are incorrect.
C
96. You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference? A. One source used weekly data and another used monthly data. B. One source used the S&P500 for a market proxy and the other used the Dow Jones Industrial Average. C. One used regression analysis and the other used geometric analysis. D. All of these are correct explanations for the difference.
C
10. Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets? A. private B. auction C. exchange floor D. secondary E. primary
E
101. Which of the following is correct? A. Over a long time frame, stocks have performed better than Long-term Treasury Bonds. B. Average stock returns are not an indication of what an investor may earn in any ONE year. C. In some years, Long-term Treasury Bonds performed better than stocks. D. All of these statements are correct.
D
102. Which of the following is correct? A. Total risk is measured by the standard deviation. B. There is a positive relationship between risk and return. C. If you observe a high variability in a stock's returns you can infer that the stock is very risky. D. All of these statements are correct.
D
11. The secondary market is best defined by which one of the following? A. market in which subordinated shares are issued and resold B. market conducted solely by brokers C. market dominated by dealers D. market where outstanding shares of stock are resold E. market where warrants are offered and sold
D
14. Which of these is the measurement of risk for a collection of stocks for an investor? A. beta B. efficient market C. expected return D. portfolio beta
D
15. Which of the following is NOT a necessary condition for an efficient market? A. Many buyers and sellers. B. No prohibitively high barriers to entry. C. Free and readily available information available to all participants. D. No trading or transaction costs.
D
18. This is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc. A. audited financial statements B. generally accepted accounting principles C. privately held information D. public information
D
2. This is the dollar return characterized as a percentage of money invested. A. average return B. dollar return C. market return D. percentage return
D
20. Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices. A. behavior finance B. efficient market C. privately held information D. stock market bubble
D
21. The counter area on the floor of the NYSE where a specialist operates is called a: A. pit. B. hot spot. C. seat. D. post. E. DOT.
D
23. An ECN is best described as: A. an electronic network which transmits orders directly to the floor of the NYSE. B. the network used in the primary market for selling newly issued shares. C. the international trading network of the NYSE. D. a website that allows individual investors to trade directly with one another. E. a computerized network used by independent brokers.
D
25. An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate A. I and II only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV
D
3. Which one of following is the rate at which a stock's price is expected to appreciate? A. current yield B. total return C. dividend yield D. capital gains yield E. coupon rate
D
30. Which one of the following statements is correct concerning the two-stage dividend growth model? A. G1 cannot be negative. B. Pt = Dt/R. C. G1 must be greater than G2. D. G1 can be greater than R. E. R must be less than G1 but greater than G2.
D
32. Supernormal growth is a growth rate that: A. is both positive and follows a year or more of negative growth. B. exceeds a firm's previous year's rate of growth. C. is generally constant for an infinite period of time. D. is unsustainable over the long term. E. applies to a single, abnormal year.
D
35. The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A. pay an increasing dividend for a period of time and then cease paying dividends altogether. B. increase the dividend amount every other year. C. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. E. pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.
D
37. Which one of the following rights is never directly granted to all shareholders of a publicly-held corporation? A. electing the board of directors B. receiving a distribution of company profits C. voting either for or against a proposed merger or acquisition D. determining the amount of the dividend to be paid per share E. having first chance to purchase any new equity shares that may be offered
D
38. Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? A. Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board. B. If straight voting applies, Jen is assured a seat on the board. C. If straight voting applies, Jen can control all of the open seats. D. If cumulative voting applies, Jen is assured one seat on the board. E. If cumulative voting applies, Jen can control all of the open seats.
D
39. The Blue Marlin is owned by a group of 5 shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? A. 17 percent B. 20 percent plus one vote C. 25 percent plus one vote D. 50 percent plus one vote E. 51 percent
D
4. Which of these statements is true? A. When people purchase a stock, they know exactly what their dollar and percent return are going to be. B. Many people purchase stocks as they find comfort in the certainty for this safe form of investing. C. When people purchase a stock, they know the short-term return, but not the long term return. D. When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.
D
45. You own one share of a cumulative preferred stock which pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid. A. 0 B. 1 C. 2 D. 3 E. either 1, 2, or 3
D
49. Which one of the following transactions occurs in the primary market? A. purchase of 500 shares of GE stock from a current shareholder B. gift of 100 shares of stock to a charitable organization C. gift of 200 shares of stock by a mother to her daughter D. a purchase of newly issued stock from AT&T E. IBM's purchase of GE stock
D
5. This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. A. diversifiable risk B. market risk C. standard deviation D. total risk
D
50. Which one of the following statements currently applies to a NYSE broker? A. owns a "seat" on the exchange B. buys at the bid price C. remains at his or her specified post D. matches customer buy and sell orders E. trades for his or her personal account
D
52. Which one of the following players on the floor of the NYSE can be likened to part-time help because they are called to duty only when others are fully employed? A. floor trader B. specialist C. dealer D. floor broker E. commission broker
D
54. You own 600 shares of a NASDAQ listed stock that you wish to sell. Which of the following are options available to you for this purpose? I. sell the shares to a dealer at the dealer's bid price II. sell directly to another individual via an ECN III. offer the shares yourself on NASDAQ via an ECN IV. have a broker offer the shares for sale on the NYSE A. I and II only B. III and IV only C. II and III only D. I, II, and III only E. II, III, and IV only
D
56. You are an accountant and have been analyzing the financial statements of Euro Place Markets, which is a foreign retailer. While the firm's financials are not prepared according to GAAP, you have still been able to understand the firm's accounting practices and feel that this firm has a bright future. On which one of the following U.S. markets, if any, might you be able to purchase shares in this firm? A. NYSE B. NASDAQ C. OTCBB D. Pink Sheets E. No U.S. market will list this foreign security.
D
6. This is the reward for taking systematic stock market risk. A. required return B. risk-free rate C. risk premium D. market risk premium
D
75. Which of the following is incorrect? A. Technical analysis is expected to work if markets are weak-form efficient. B. If markets are strong-form efficient then they must also be weak-form efficient. C. It is not likely that the market is strong-form efficient. D. None of these statements are incorrect.
D
75. Which of the following statements is correct? A. The dollar return is a more useful measure to compare performance because it more accurately reflects the change in wealth of the investor. B. A dominant portfolio is one that has the highest risk and highest return within a set of portfolios. C. By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the market risk. D. None of these statements are correct.
D
76. Which of the following is correct? A. Hedge funds often sell stock they don't even own. B. Hedge funds maintain secrecy about their holdings, trading and strategies. C. Hedge funds are limited to sophisticated investors. D. All of these statements are correct.
D
77. Which of the following statements is correct with regards to diversification? A. Diversifying reduces the return of the portfolio. B. Diversifying reduces the market risk of the portfolio. C. Diversifying reduces the dollar return of the portfolio. D. None of these statements are correct.
D
81. Which of the following statements is correct regarding total risk? A. A conglomerate will have more total risk than a firm that has one line of business. B. All firms have about the same total risk because they are all exposed to the same market risk. C. Total risk can be quantified by measuring the covariance between the firm and the overall market. D. None of these statements are correct.
D
84. Which of the following statements is correct? A. For a few firms in completely different industries, it is possible to have a correlation that approaches -2.0. B. A correlation of -1.0 means that the two firms are uncorrelated or that they have no relationship. C. Most common stocks have low correlation with each other since they operate in different industries. D. None of these statements are correct.
D
86. Which of the following statements is correct? A. Stocks and long-term Treasury bonds are highly positively correlated. B. Stocks and Treasury bills are highly positively correlated. C. Stocks, long-term Treasury bonds and Treasury bills are all highly correlated. D. None of these statements is correct.
D
88. The efficient frontier portfolios are __________________________. A. portfolios that risk adverse investors will select B. portfolios where all the market risk is diversified away C. portfolios where the correlation among assets is 0.0 D. portfolios that dominate all others
D
89. Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset? A. Unable to answer since there is no data to calculate the standard deviation. B. A very low number since it would have very low risk. C. 1 D. 0
D
91. All of the following are necessary conditions for an efficient market except _________. A. Low trading or transaction costs B. Many buyers and sellers C. Free and readily available information to market participants D. Low stock prices
D
91. Which of the following are investor diversification problems? A. Many employees hold mostly their employer's stocks as investments. B. Many households hold relatively few individual stocks—the median is three. C. Investors seem to prefer local firms thereby limiting diversification opportunities. D. All of these are investor diversification problems.
D
92. Which of the following describes what will occur as you randomly add stocks to your portfolio? A. The nondiversifiable risk will decrease. B. Both the diversifiable and nondiversifiable risk will decrease. C. The portfolio return will increase. D. The diversifiable risk will decrease.
D
94. Which of the following is correct? A. Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market. B. Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation. C. Your optimal portfolio is an efficient portfolio with your desired risk level. D. All of these statements are correct.
D
95. The study of the cognitive processes and biases associated with making financial and economic decisions is known as _______________. A. Efficient Thinking Hypothesis B. Financial Cognition C. Financial Leverage D. Behavioral Finance
D
98. Which of the following is a concern regarding beta? A. Using different market proxies will result in different estimates of beta. B. A company can alter its risk level which may make the beta estimate obsolete. C. Research indicates that a company's beta does not appear to predict its future return very well. D. All of these statements are valid concerns regarding beta.
D
99. Which of the following statements is incorrect regarding how beta is calculated? A. The company return is the independent variable. B. The market portfolio return is the dependent variable. C. Using the oldest data possible will yield the most accurate results. D. All of these statements are incorrect.
D
12. An agent who maintains an inventory from which he or she buys and sells securities is called a: A. broker. B. trader. C. capitalist. D. principal. E. dealer.
E
15. The person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): A. floor trader. B. dealer. C. specialist. D. executor. E. commission broker.
E
27. The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E
36. Which one of the following sets of dividend payments best meets the definition of two- stage growth as it applies to the two-stage dividend growth model? A. no dividends for 5 years, then increasing dividends forever B. $1 per share annual dividend for 2 years, then $1.25 annual dividends forever C. decreasing dividends for 6 years followed by one final liquidating dividend payment D. dividends payments which increase by 2, 3, and 4 percent respectively for 3 years followed by a constant dividend thereafter E. dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter
E
4. Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? A. dual class B. cumulative C. non-cumulative D. preferred E. common
E
40. Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A. negotiated settlement where each side is granted control over one of the open seats B. protracted legal battle over control of the board of directors C. arbitrated settlement where the arbitrator determines who will be elected to the board D. control of the board decided without your influence E. proxy fight for control of the board
E
43. Which one of the following statements related to corporate dividends is correct? A. Dividends are nontaxable income to shareholders. B. Dividends reduce the taxable income of the corporation. C. The Chief Executive Officer of a corporation is responsible for declaring dividends. D. The Chief Financial Officer of a corporation determines the amount of dividend to be paid. E. Corporate shareholders may receive a tax break on a portion of their dividend income.
E
44. Which one of these statements related to preferred stock is correct? A. Preferred shareholders normally receive one vote per share of stock owned. B. Preferred shareholders determine the outcome of any election that involves a proxy fight. C. Preferred shareholders are considered to be the residual owners of a corporation. D. Preferred stock normally has a stated liquidating value of $1,000 per share. E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.
E
46. Which of the following features do preferred shareholders and bondholders frequently have in common? I. lack of voting rights II. conversion option into common stock III. annuity payments IV. fixed liquidation value A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV
E
51. Who owns the NYSE? A. NYSE members B. specialists C. dealers D. floor brokers E. shareholders
E
53. Which one of the following statements applies to NASDAQ? A. a partner with the London exchange B. exchange floor is located in Chicago C. single market maker for each listed security D. broker's market E. comprised of three separate markets
E
7. You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A. altering B. cumulative voting C. straight voting D. indenture agreement E. voting by proxy
E
9. Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? A. senior bond B. debenture C. warrant D. common stock E. preferred stock
E
