Introduction to Investment For Final MCQ TF
Shareholders have the option of selling their rights granted via a rights offering. True False
T (The rights are usually transferable, which means that shareholders who do not wish to purchase shares of the spinoff can sell their rights in the open market and investors were not shareholders of the parent can participate in the rights offering by buying rights in the marketplace. )
A portfolio that offers the lowest risk for a given level of return is known as an efficient portfolio. [True or False]
T (Yes, it is efficient portfolio because it give the lowest risk for a given level of return)
From the information given below use the capital assets pricing model (CAPM) to find the required rate of return for the following securities Security Risk-free Rate Market Return Beta K 4% 8% 1.3 L 9% 13% 0.9 M 7% 12% -0.70 N 12% 15% 1.00 O 8% 10% 0.60 Answer accordingly Example answer 2%,3%,4%,5%,6%
9.2%,12.6%,3.5%,15%,9.2% ( K 9.2% [4%+1.3(8%-4%] L12.6% [9%+0.9(13%-9%] M 3.5% [7%+-0.7(12%-7%] N 15% [12%+1.0(15%-12%] O 9.2% [8%+0.60(10%-8%] Required rate of return = Risk free rate + Beta x [Expected Market return - Risk free Rate] )
Debt securities issued by the Federal Home Loan Bank, the Student Loan Marketing Association and the Government National Mortgage Association are known as: A) Agency Bonds B) Organizational Bonds C) Municipal Bonds D) Treasury Bonds
A
One drawback of investing in mutual funds is the A) annual management fee B) lack of liquidity of fund shares C) amount required for the initial investment D) lack of information of the performance of the fund
A
Stocks are a(n) ______ investment representing ______ of a business. (A) direct; ownership (B) direct; debt (C) indirect; ownership (D) indirect; debt
A
Systematic risks: Select one answer : A) are forces that affect all investment categories. B) can be eliminated by investing in a variety of economic sectors. C) are unique to certain investment vehicles. D) result from random firm-specific events.
A
The adage "the sooner one receives a return on a given investment, the better," reflects the financial concept known as the: A. Time value of money. B. Total Return concept C. Historical dividend theory. D. Expected yield factor..
A
The main purpose of a bond ladder is to A) lessen the effects of changes in interest rate B) achieve the highest level of capital gains possible C) maintain a highly liquid portfolio D) offset the effects of bond duration
A
The price an institutional investor will pay to purchase a stock in the OTC market is the A) ask price. B) spread. C) bid price. D) broker price.
A
Which one of the following statements about common stock is true? A) common stock can provide attractive capital appreciation opportunities. B) Dividends generally provide the greatest rate of return on common stocks C) Common stocks generally have a negative rate of return over ten-year period D) The DJIA is the best indicator of the overall performance of common stock
A
Which one of the following types of risk cannot be effectively eliminated through portfolio diversification? Select one answer : A) inflation risk. B) labor problems. C) materials shortages. D) product recalls.
A ( Systematic risk [AKA Market risk, aggregate risk, nondiversifiable risk ] interest rate changes, inflation, recessions and wars all represent sources of systematic risk because they affect the entire market] [ )
A& B Research Corp specializes in the development of new products. These products often are complete failure in the marketplace. However, if a product is successful, it is normally a phenomenal success. The stock of A&B Research is classified as a : A) Speculative Stock B) Cyclical Stock C) Defensive Stock D) Income Stock
A ( A stock with a high degree of risk. A speculative stock may offer the possibility of substantial returns to compensate for its higher risk profile )
To obtain the maximum reduction in risk, an investor should combine assets that: Select one answer : A) have a correlation coefficient of negative one. B) have a correlation coefficient of positive one. C) are uncorrelated. D) are negatively correlated.
A ( Assets with +1 correlation eliminate no risk Assets with less than +1 correlation eliminate some risk Assets with less than 0 correlation eliminate more risk Assets with -1 correlation eliminate all risk If the correlation is ρ = +1 then the portfolio risk is the weighted average of the risk of the portfolio components. If the correlation is ρ = -1 then the portfolio risk can be diversified away to zero When ρ < +1 then not all the total risk of each investment is non-diversifiable. Some of it can be diversified away It is also known that although assets with -1 correlation eliminate all risk , it give low return as well and predictable vice versa assets with +1 correlation reduce no risk but give high return and unpredictable )
A $1000 par value, 12-year annual bond carries a coupon rate of 7%. If the current yield of this bond is 7.995%, its market price to the nearest dollar is ? A) $876 B) $925 C) $1,075 D) $1.125
A ( Current yield = Annual interest income/ current market price of the bond 0.07995 = {1000 x 0.07} / Price Price = {1000 x 0.07} / 0.07995 = $875.55 = $876 )
The price an individual investor will pay to sell in the OTC market is the A) ask price. B) spread. C) bid price. D) broker price.
A ( Individual sell = ask Individual buy = bid Institutional sell = bid price institutional buy = ask institutional ask small do you want to sell it Individual ask if you want to buy it Institutional say bid to buy my stock. Individual bid to buy the the stock from institutional )
Question No. 27 Jessica bought a stock at a price of $11.50. She received a $.75 dividend and sold the stock for $12.50. What is Jessica's income gain on this investment? Select one answer : A) $0.75 B) $1.00 C) $0.25 D) $1.75
A ( Please take note it's *Income gain* )
A type of fund that invests in real estate and/or mortgages is known as : A) REIT B) ETF C) Sector fund D) Hedge fund
A ( Real Estate Investment Trusts REIT Closed-end investment company that invests in mortgages and various types of real estate investments Provide high dividends along with capital appreciation potential )
The required return on a bond is equal to: A) the real rate of return plus a risk premium plus an expected inflation premium B) the real rate of return plus the coupon rate plus an inflation rate C) the risk-free rate plus a risk premium plus an expected inflation premium D) the real rate plus a risk premium
A ( Required return on a bond = *Risk free rate + Risk premium* Or *Real rate + Expected inflation premium + Risk premium* )
When a company, working with an underwriter, offers the investing public a certain numbers of shares of its stock at a certain price, the company is making what is known as : A) Public Offering B) Rights Offering C) Stock Spin-off D) Treasury Offering
A ( Right offering is an issue of rights to a company's *existing shareholders *that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period )
Which stage of an industry's growth cycle offers the greatest opportunity for an investor who is Select one answer : A) rapid expansion B) stability or decline C) mature growth D) initial development
A ( initial development - you are new and high risk therefore not willing to take the risk Rapid expansion - investors become very interested since your product acceptance is growing Mature Growth - Everyone know and already have you Stability or decline - Investor tried to avoid you )
Risk can be defined as the possibility that (A) a negative return can be expected. (B) actual returns can vary from expected returns. (C) expected returns will vary from past returns. (D) actual returns will exceed past returns.
A (It is called risk for a reason )
Inflation tends to have a *favourable impact* on: A. Real Estate B. Common Stock C. Preferred Stock D. Bonds E. Options
A (Yes favourable impact)
Bonds with one of the top four rating (Aaa through Baa, or AAA through BBB) are designated as: A) Split Bonds. B) Investment grade bonds C) illiquid bonds D) high-yield bonds
B
Inflation tends to have a particularly *negative impact* on the price of A. Real Estate. B. Bonds C. Gold D. Crude Oil
B
Investors in hedge funds have the legal status of: A) shareholders B) limited partners C) general partners D) trustees
B
Mutual fund investors are primarily exposed to ______ and ______ risks. A) market; financial B) market; inflation C) business; financial D) business; inflation
B
Stock which has been issued and subsequently reacquired by the issuing corporation is called A) Letter Stock B) Treasury Stock C) Classified Stock D) Book Stock
B
The _major source of risk faced by investors who purchase bonds is: A) Purchasing Power Risk B) Interest Rate Risk C) Liquidity Risk D) Event Risk
B
The governmental agency that oversees the capital markets is the A) Federal Trade Commission. B) Securities and Exchange Commission. C) Federal Reserve. D) Fair Trade and Banking Agency.
B
When the Capital Asset Pricing Model is depicted graphically, the result is the: Select one answer : A) alpha-beta line. B) security market line. C) coefficient of variation line. D) standard deviation line.
B
Which of the following are advantages of owning bonds? I Diversification properties II higher long-term returns than equity holdings. III current income IV relatively low risk A) I and II only B) I, III and IV only C) I, II and III only D) I, II, III and IV
B
Which one of the following is a major advantage of margin trading? A) interest free loans B) increase in potential diversification C) increase in potential profits on a percentage basis D) possibility of increased gains on a dollar basis
B
Some investment analysts believe that the market processes new information so well and so quickly that securities trade very close to their intrinsic values at all times. These analysts are said to be advocates of: Select one answer : A) fundamental analysis B) the efficient market hypothesis C) sector analysis D) the prevailing price hypothesis
B ( *processes new information so well* and so quickly that securities trade *very close to their intrinsic values * )
The approach that first creates forecasts for the economy, then for industries, and finally for companies is known as the ________ approach. Select one answer : A) macroeconomic B) top-down C) bottom-up D) technical rule
B ( Going more specific from economy, then for industries, and finally for companies )
The intrinsic value of a security is based on the: I. amount of risk. II. current market value of the security. III. discount rate applicable to the security. IV. estimated future cash flows from the security Select one answer : A) I and III only B) I, III and IV only C) III and IV only D) I, II and III only
B ( It has value in future that why you bought it )
Liquidity risk is defined as the risk of: A. Having to trade a security in a broad market. B.Not being able to sell an investment conveniently and at a reasonable price. C. Having inflation erode the purchasing power of your investment. D. Having declining price levels affect the reinvestment rate of your current income steam.
B ( One Good Example is Property, you cannot sell it very conveniently and at reasonable price. )
The Sachem Berhad issued a 6% bond three years ago a par value. The market interest rate on comparable bonds today is 5%. The Sachem Berhad Company bond currently pays _______ a year in interest and the bond sells at a ______ A) $60; discount B) $60; premium C) $50; discount D) $50; premium
B ( Par value = 1000 Issued price = 6 % of Par value = Rm 60 Interest rate = 5% Premium bond has a market value that is above par value Occur when market interest rates are below bond's coupon rate Discount bond has a market value that is below par value Occur when market interest rates are above bond's coupon rate when compared with the current interest rates, if the bond is offering a *higher rate than current interest rate*, it will sell *at a premium*. A *lower than current interest rate* gets the *bond at discount*. )
Question No. 27 Jessica bought a stock at a price of $11.50. She received a $.75 dividend and sold the stock for $12.50. What is Jessica's capital gain on this investment? Select one answer : A) $0.75 B) $1.00 C) $0.25 D) $1.75
B ( Please take note it's *Capital Gain* )
You own 100 shares with a market value of Rm80 each, The company declares a 4 for 1 split. As a results A) Your total market value will be Rm 2,000 B) The market price will be approximately Rm 20 per share C) You will own 25 shares D) The company will reduce its retained earning by Rm 8,000
B ( 4 New Share for 1 Old Share Market Price per new share = {Old Market Value per share * Old Share Exchanged}/New Share Exchanged} {Rm 80 * 1} / 4 = Rm20 Total Share available = {Amount of Old Share/Old Share Exchanged} * New Share Exchanged {100 shares/1}*4 = 400 shares The new market price for new share is Rm 20 and you will own 400 shares with the total market value of Rm 8,000 )
Stocks and bonds are traded in A) securities and exchange commissions. B) capital markets. C) money markets. D) federal trade commissions.
B (Capital Market are financial markets for the buying and selling of long-term debt or equity-backed securities)
Top-down security analysis Select one answer : A) starts with the fundamental analysis of a firm. B) includes economic, industry, and fundamental analysis. C) concentrates on the competency of the senior management of a firm. D) centers on the past performance of a firm.
B (From top to bottom which mean First Economic then to certain industry for example food industry then to specific firm )
The holding period is a useful way to compare investments because it considers: Select one answer : A) the time value of money. B) both income and capital gains or losses. C) only capital gains, but not income. D) the relative size of investments being compared.
B (HPR = [*Income*+[*End value* - *Initial Value*]/*initial Investment* )
Which is the following are characteristic of short selling? I. Borrowing shares of stock form a brokerage firm or other investors. II. Selling shares of stock you do not own. III. Betting the stock price will increase. IV. Limiting losses per shares to the prices at which the stock was sold. A. I,II,III only B. I, II and IV only. C. III and IV only D. I and III Only
B (If stock price increase, you have to buy the stock at higher price when you return the stock to its rightful owner)
The over-the-counter (OTC) market is a: A. Centrally located auction market. B. Telecommunications network connecting dealers. C. Market solely for institutional traders. D. geographically dispersed auction market.
B (Over-the-counter {OTC} or off-exchange trading is done directly between two parties, without any supervision of an exchange.)
Which of the following risks are included in the risk premium? I) Interest rate risk II) liquidity risk III) Financial risk IV) Purchasing Power Risk A) I and II only B) II and III only C) III and IV only D) I and IV only
B (The risk premium is the excess return above the risk-free rate that investors require as compensation for the higher uncertainty associated with risky assets Which included Business Risk Financial Risk Liquidity Risk Exchange-rate Risk Country-specific Risk )
The purchase of stock with cash in the hope or earning a capital gain is known as : A. Short, margined position in the stock. B. Long position in the stock, C. Long, margined position in the stock D. Short position in the stock
B (They didn't mention about margin plus purchase of stock with cash)
A single bond issue with multiple maturity dates is called a: A) callable bond B) premium bond C) serial bond D) term bond
C
An individual stock generally provides a Select one answer : A) dividend payment that ensures total protection from purchasing power risk. B) refuge from event risk. C) lower current income than that available from other types of investments. D) predictable annual rate of return.
C
Collateralized mortgage obligations are relatively safe investments except: A) When interest rate rise. B) when inflation is high C) When home prices decline. D) When mortgage holders refinance frequently
C
Companies with strong earnings but limited growth opportunities: A) do not generally pay any dividends B) Are called blue-chip stocks C) Generally pay high-dividend D) Are speculative stock
C
Investors are generally well advised to avoid mutual funds with: A) highly rated fund managers B) low fees and high tax efficiency C) Consistently poor historical performance D) good performance in both up and down markets.
C
Most investors are risk-averse, which means they A) refuse to accept any financial risk. B) gain satisfaction from the excitement of risk. C) require an increase in return for any increase in risk. D) invest only in government insured securities.
C
The price an individual investor will pay to purchase a stock in the OTC market is the A) ask price. B) spread. C) bid price. D) broker price.
C
The price an institutional investor will sell a stock in the OTC market is the A) ask price. B) spread. C) bid price. D) broker price.
C
The yield curve depicts the relationship between a bond's yield to maturity and its: A) duration B) term to call C) term to maturity D) volatility
C
Which stage of an industry's growth cycle is most influenced by economic events? Select one answer : A) initial development B) initial development C) mature growth D) rapid expansion
C
Security A has a beta of .99, security B has a beta of 1.2, and security C has a beta of -1.0. This information indicates that: Select one answer : A) security C would be the best investment if a strong bull market is expected. B) security C has the highest degree of market risk. C) security B has 20% more systematic risk than the market. D) security A has the highest degree of market risk.
C ( The beta for the market is 1.00 Stocks may have positive or negative betas. Nearly all are positive. Stocks with betas greater than 1.00 are more risky than the overall market. Stocks with betas less than 1.00 are less risky than the overall market. Negative Beta move invert Stocks with betas less than -1.00 are more risky than the overall market. Stocks with betas greater than -1.00 are less risky than the overall market Beta 2.00 or -2.00 *Twice as responsive as the market* Beta 1.00 or -1.00 *Same response as the market* Beta 0.50 or -0.50 *Half response as the market* Beta 0 * Unaffected by market movement* Beta is a measure of *nondiversifiable risk [also known as Systematic Risk]* )
Question No. 25 The market rate of return increased by 8% while the rate of return on XYZ stock increased by 4%. The beta of XYZ stock is: Select one answer : A) -2.0. B) -0.40. C) 0.50. D) 2.0.
C ( The changes of return? 50% which is 0.50 beta Tips Ignore the beta with the same amount as whether beta is positive 2 or negative 2 . it's the same )
Risk-seeking investors seeking maximum capital appreciation with little, if any current income, should invest in: A) value funds B) growth funds C) aggressive growth funds D) equity-income funds
C ( Value Funds - A mutual fund that invests in companies which it determines to be underpriced by *fundamental measures*. Believing that company's share price will not remain undervalued indefinitely, the fund looks to make money by buying before the expected upturn. Growth funds - A diversified portfolio of stocks that has capital appreciation as its primary goal )
Which one of the following statements is true? Select one answer : A) Monetary policy includes adjusting interest rates and determining the level of government taxation. B) Inflation has little, if any, impact on the economy or the financial markets. C) Both consumer spending and business investment are key components of the economy. D) Restrictive fiscal policy tends to increase economic activity.
C ( not monetary policy because it doesn't involved in government taxation {that one is fiscal policy monetary government adjust interest rate to adjust supply of money } Inflation have huge impact on economy Restrictive fiscal policy tends to decrease economic activity )
One characteristic of mid-cap stocks is that they Select one answer : A) are generally new firms with high growth potential. B) tend to be highly volatile. C) are fairly good-sized companies that offer attractive return opportunities D) are traded primarily through pink sheet bids
C ( they are already in mid-cap surely not a new firm average volatile , new firm has high volatile )
Stock which has been issued and subsequently reacquired by the issuing corporation is called: Select one answer : A) book stock B) classified stock C) treasury stock D) letter stock
C ( firm will reacquired back the stock when they think the stocks are undervalued)
Which of the following are associated with bear markets? I. investor pessimism II. rising profits III. economic slowdown IV. rising security prices A) I, II and III only B) II and III only C) I and III only D) II, III and IV only
C (Bear sleep, bull rush)
One of the basic premises of security analysis, and in particular fundamental analysis, is that Select one answer : A) a stock's price is based on its past cash flows rather than on anticipated future cash flows. B) market sectors do not move in concert with business cycles. C) all securities have an intrinsic value that their market value will approach over time. D) a security's risk has relatively little effect on the security's return.
C (Fundamental analysis)
Including foreign investment in portfolio: A. Decrease the overall diversification of the portfolio B. Reduces the potential rate of return C. Provides potential benefits from changes in currency values. D. Limits the diversification amongst industries
C (If you choose B, you shouldn't go invest)
Which of the following are benefits related to stock ownership? I. ease of trading II. attractive inflation-adjusted rates of return III. guarantee of long-term positive returns IV. Affordability Select one answer : A) II and IV only B) II, III and IV only C) I, II and IV only D) I and III only
C (It cannot guarantee long-term positive returns if so everyone already bought it right ? )
The beta of the market is: Select one answer : A) -1.0 B) 0.0 C) 1.0 D) Unpredictable
C (The beta for the market is 1.00)
Over the long term, a portfolio consisting of an S&P 500 index and an EAFE index will generally produce ________ returns and have ________ risk than a portfolio comprised solely of the S&P 500 index. Select one answer : A) lower; less B) lower; more C) higher; less D) higher; more
C (Will have higher return due to investing on two company and have lower risk due to diversification)
*Debt* represents funds loaned in exchange for (A) dividend income and the repayment of the loan principal. (B) dividend income and an ownership interest in the firm. (C) interest income and a partial ownership interest in the firm. (D) interest income and the repayment of the loan principal.
D
Which of the following are advantages offered by mutual funds? I) professional portfolio managmeent II) Dividend investment III) consistent returns in excess of the overall market rate of return IV) modest capital outlay for investors A) I and II only B) I and IV only C) II, III and IV only D) I, II and IV only
D
Which of the following represent investment goals? I. setting aside enough money to meet emergencies and basic needs II. sheltering income from taxes III. increasing current income IV. saving funds for retirement A) I and IV only B) III and IV only C) I, III and IV only D) II, III and IV
D
Which one of the following statements concerning the primary market is correct? A) A transaction in the primary market is between two private stockholders. B) The first public sale of a company's stock in the primary market is called a seasoned new issue. C) A rights offering is a direct sale of stock to an institution that participates in the primary market. D) The first public sale of a company's stock is called an IPO
D
Which one of the following statements concerning the *primary market* is correct? A. A transaction in the primary market is between two private stockholders. B. The first public sale of a company stock in a primary market is called a seasoned new issue. C. A private placement occurs in the primary market D. A rights offering is a direct sale stock to an institution that participates in the primary market.
C ( The First Public sales of a company stock is called IPO Initial Public Offering { Investors tend to joke it as It Probably Overvalued } Private placement - The sale of securities to a relatively small number of select investors as a way of raising capital Private placement is the opposite of a public issue Private placements also occur within the primary market, which are offerings of securities to institutions and sophisticated/professional investors. Rights offering - An issue of rights to a company's existing shareholders that entitles them to buy additional shares directly from the company The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering Initial Public Offering which also known as IPO )
Westlake industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding. If the company has 250,000 shares of common stock outstanding. It''s book value per share would be: A) $32.33 B) $33.60 C) $43.20 D) $52.60
C ( Book value = { Net profit after tax*{A-L} *- Preferred stock }/Common stock outstanding {$42.5m-$29.3m-$2.4m}/0.25m= $10.8m/0.25m = $43.20 )
The Capital Asset Pricing Model (CAPM) is a mathematical model that depicts the : A) positive relationship between risk and return. B) standard deviation between a risk premium and an investment's expected returns. C) exact price that an investor should be willing to pay for any given investment D) Difference between a risk-free return and the expected rate of inflation
C ( Model that links the notions of risk and return *Helps investors define the required return on an investment* As beta increases, the required return for a given investment increases )
The Common stocks of the oral company have a book value of $10.80 and market value of $ 14.30. The company pays $0.14 in dividends each quarter. What is the dividend yield? A) 1.0% B) 1.3% C) 3.9% D) 5.2%
C ( Quarter = 3 months = $0.14 *4 = $0. 56 Dividend Yield = Dividend / Market Price $0.56/$14.30 =3.92% )
When the market rate of return exceeds the coupon rate, a bond will sell at: A) Par B) Face value C) A premium D) A discount
D ( Par value for a bond is typically $1,000 The face value is The nominal value or dollar value of a security stated by the issuer rate of return is the interest rate If market rate exceed coupon rate which mean in order to sell the bond, the bond has to be sell at discount rate or else no one will buy it it work vice versa In short coupon rate exceed market rate sell premium Market rate exceed coupon rate sell at discount )
Question No. 10 Rob owns 300 shares of Blackwood common stock valued at $9 a share. Blackwood has declared a 3-for-1 stock split effective tomorrow. After the split, Rob will own Select one answer : A) 100 shares valued at about $27 a share. B) 100 shares valued at about $3 a share. C) 900 shares valued at about $27 a share. D) 900 shares valued at about $3 a share.
D ( 3 for 1 means 3 new stock traded for 1 old stock Price of new stock = {Price per old stock x old stock traded}/New Stock Traded = { $9 x 1}/3 = $3 Amount of share after split = { Total Amount of old shares/Old stock traded } x New Stock Exchanged = {300 / 1} x 3 = 900 shares )
Which one of the following statements about common stock is correct? Select one answer : A) Each share of stock has a specified maturity date. B) Common stock gives stockholders first title to a share of the company's earnings, prior to other corporate obligations. C) Common stock typically provides higher levels of current income than do similar grade corporate bonds. D) Each share of common stock entitles the holder to an equal ownership position and an equal vote in the corporation
D ( B} debenture received , preference stock then lastly common stock owner C} Corporate bonds provide higher level of current income but preference share higher )
When a corporation declares a stock split, it usually does so because: A) the firm's retained earning are excessive B) There are too many share outstanding C) Investors sometimes require nontaxable returns. D) The stock price is too high
D ( If you choose B think about this, if you already have too much share why you want to further split it ? )
A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5. What is the return on assets? Select one answer : A) 3.6% B) 4.5% C) 8.1% D) 9.0%
D ( Return on Assets = Net Profit Margin x Total Asset Turn Over Net profit margin = Net profit after tax / Total Revenue 23000 / 640000 = 0.0359375 ROA = 0.0359375 x 2.5 = 0.08984375 = 0.089 = 9% or Total Assets = Annual Sales / Total Assets Turnover = 640,000 /2.5 = 256,000 ROA = Net Profit After Tax/ Total Assets = 23,000/256,000 = 0.08984375 = 0.09 = 9% )
The required rate of return on the Daisy Corporation's common stock is 11%, the current real rate of return in the market is 1%, and the market's risk-free rate of return is 4%. In this case, the risk premium associated with Daisy's stock is: Select one answer : A) 5%. B) 6%. C) 8%. D) 7%.
D ( Risk premium = Required rate of return - Risk-free rate of return = 11% - 4 % = 7% Required Rate of return = Real rate of return + Expected Inflation Premium + Risk premium or Required rate of return = Risk free Rate of return + Risk Premium Risk free rate of return = Real rate of return + Expected inflation premium )
Under which bond provision is the issuer required to retire portions of the bond issue prior to maturity? A) call feature B) refunding provision C) Subordination clause D) Sinking fund structure
D ( Sinking fund - stipulates how a bond will be paid off over time )
Which of the following statements about the standard deviation are correct? I. The standard deviation is a measure of relative dispersion. II. Standard deviations should be in conjunction with expected returns to compare investments. III. The standard deviation is calculated by taking the square root of the variance. IV. The higher the standard deviation of an investment, the lower its risk. Select one answer : A) I and IV only. B) II and III only. C) I, III and IV only. D) I, II and III only.
D ( The lower the standard deviation of an investment, the lower its risk The higher the standard deviation of an investment, the higher its risk ).
Based on a concept of bond duration , which one of the following statements is correct? A) Lower Coupons result in shorter duration B) Longer maturities mean shorter durations C) Higher yields (YTMs) lead to longer durations D) Longer durations mean greater volatility
D ( volatility refers to the amount of uncertainty or risk about the size of changes in a security's value)
The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of 13.2. In this case, the firm is Select one answer : A) generating less sales per dollar of inventory. B) selling its inventory slower than the industry. C) underperforming the industry. D) averaging less days of sales in inventory than the industry.
D ( it selling faster than industry as inventory turnover higher = sell faster Not "A" as it already mentioned firm is selling more Not "B" as it selling faster Not "C" as it's over perform in industry )
Combining uncorrelated assets should: Select one answer : A) Cause the other assets in the portfolio to become positively related. B) Not change to the overall risk level of a portfolio. C) Increase the overall risk level of portfolio. D) Decrease the overall risk level of a portfolio.
D (Uncorrelated returns have no relationship to each other and have a correlation coefficient of close to zero. It is known that Assets with less than +1 correlation eliminate some risk Assets with less than 0 correlation eliminate more risk )
Stocks related to computers and the Internet are classified as Select one answer : A) blue-chip stocks B) income stocks C) cyclical stocks D) tech stock
D (duh, related to computers and the Internet )
Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm's assets. True or False
F
Business Risk is the risk associated with the amount of debt financing used by a firm. *[True or False]*
F ( Financial Risk )
Investors can be confidently predict future returns on an investment by studying its past performance. [True or False]
F ( Investors cannot confidently predict future returns on an investment by studying its past performance because market past performance doesn't ensure future performance )
Economic factors such as a weak dollar will have a negative impact on all industrial sectors. True False
F ( Weak dollar might be opportunities since your product is now cheaper therefore people from foreign market with higher currency than you will tend to buy from you )
The business cycle reflects economic changes only in the industrial sectors of the economy. True False
F ( the business cycle, which reflects changes in total economic activity over time )
According to the efficient markets hypothesis, securities can be substantially mispriced in the marketplace. True False
F (Although lecturer note mentioned rarely but No security analysis is capable of finding mispriced securities more frequently than using random chance )
Betas must be positive numbers. [True or False]
F (Beta can be either negative or positive)
Investors who limit themselves to risk free and low risk investments can avoid purchasing power risk. [True or False]
F (Even if you limit to risk free and low risk investment you still can't avoid purchasing power risk)
Diversifiable risk is also called systematic risk. [True or False]
F (It is called unsystematic risk)
An efficient portfolio maximizes the rate of return without consideration of risk. [True or False]
F (It is not efficient if you didn't make any consideration of risk )
The risk associated with a sudden and unforeseen happening that has a significant and usually immediate effect on a firm's financial condition is called : A. Market Risk B. Speculation C. Event Risk D. Business Risk
C ( Speculation - The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain - investment in stocks, property, or other ventures in the hope of gain but with the risk of loss market risk. [Share dropping and inflation] Event Risk - The risk due to unforeseen events partaken by or associated with a company. business risk. [possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit.])
Buying bonds is anticipation of an expected decline in interest rates is a risk strategy . True or False
T
Mid-cap stocks are generally classified as those with a market capitalization between $1 and $5 billion. True False
T
Stock splits may be used when a firm, believing the price of its stock is too high, wants to enhance the stock's trading appeal. True or False
T
Banks can use the times interest earned ratio as a measure of a borrower's ability to repay their loan. True False
T ( Bank can use that to determine your ability to pay back the loan )
Shares of publicly traded stock can be issued either through a public offering or a rights offering. True False
T ( Three Choices to Market Securities in Primary Market are Public offering, Rights offering,Private Placement )
The financial concept of time value of money is dependent upon the opportunity to earn interest over time. [True or False]
T ( Time value of money indicate the The sooner you receive a return on a given investment, the better A dollar received today is worth more than a dollar received in the future The sooner your money can begin earning interest, the faster it will grow )
The transfer agent for a mutual fund physically safeguards the securities being bought and sold by that firm. True or False
T ( Transfer agent keeps track of purchases and redemption requests from shareholders)
Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued. A) True B) False
T ( since you can earn from capital appreciation )
Investors should select mutual funds that match their personal investment goals and provide the service they desire True or False
T (If not choose the one didn't match your personal investment goals and provide the service you don't want ? Surely I believe you wouldn't do something like you want to eat fish but go chicken rice shop to buy it and complaint why you don't have fish )
Studies have shown that investing in different industries as well as different countries reduces portfolio risk [True or False]
T (Investing in different industries mean diversification which reduce portfolio risk)
A firm with a very low debt-equity ratio has a low risk of defaulting on its loans. True False
T (Low debt low risk lol)
Risk can be defined as uncertainty concerning the actual return that an investment will generate. [True or False]
T (Risk is uncertainty regarding the actual return that an investment will generate )
