Investments Chapters 1-4 Test 1
A stock sold for $25 at the beginning of the year. The end of year stock price was $25.70. What is the amount of the annual dividend if the total return for the year was 7.7 percent?
$1.23
A Roth IRA:
A.invests after-tax dollars.
Contingent deferred sales charges:
Can be avoided.
A fee that is charged at the time mutual fund shares are purchased by an investor is called a:
front-end load.
You short sold 700 shares of a stock at $25 a share. The initial margin requirement is 75 percent and the maintenance margin is 35 percent. What is the amount of your total liability for this transaction as initially shown on your account balance sheet?
$17,500
Suppose you purchase 5,000 shares of a closed-end mutual fund at its initial public offering; the offer price is $10 a share. The offering prospects disclosures that the fund promoter gets a fee of 8 percent from the offering. If this fund sells at a discount of 7 percent to NAV the day after the initial public offering, what is the value of your investment?
$42,780 NAV at IPO= $10 (1-0.08) = $9.20 Day 1 price = (P-9.20)/9.20= -0.07. P=$8.56 Investment Value= 5,000*8.56= $42,780 One day loss= 42,780- (5000*10)= -$7,220
Vivian purchased 700 shares of Aldridge, Inc. stock at what turns out to be the lowest price during the past year. How much has the value of her shares changed since she made this investment?
$420
The Blue Star Fund has assets with a market value of $10.6 million and liabilities of $607,000. What is the net asset value if there are 185,000 shares outstanding?
$54.02
Baker Company has 136,000 shares of stock outstanding and a PE ratio of 18. What was the net income for the most recent four quarters?
$590,089
The Latest Trend Fund has $2,648,900 in assets, and $1,878,400 in liabilities. How many shares are outstanding if the NAV is $10.07?
$76,514
The High Yield Money Market Fund returned 6.60 percent for the last year. Currently, you own 8,901.1 shares of this fund. If you invested in this fund one year ago, what was the amount of your original investment?
$8,350.00
Offering price 47.10 a share. Front end load fund is 5%. Back end load is 2%. Appreciate 8% in 2016. Expense ratio is 1.95 percent. What is your total return on investment?
-1.27% Initial NAV= $47.10(1-0.05)=$44.75 Final NAV= $44.75 [1+ (0.08-0.0195)]=$47.45 Sale proceeds per share: $47.45 (1-0.02) = $46.50 Total Return: (46.50-47.10)/ 47.10 = -0.0127 or -1.27%
Today, you sold 800 shares of DeSoto Inc., for $57.60 a share. You bought the shares one year ago at a price of $61.20 a share. Over the year, you received a total of $500 in dividends. What is your capital gains yield on this investment?
-5.88 percent
One year ago, you purchased 421 shares of a mutual fund when both the offering price and the NAV were $10.80 a share. Today, the NAV is $10.64 after today's distribution of $1.48 per share in short-term gains. There is no long-term gain distribution. What is your rate of return?
12.22 percent
At the beginning of the year, you invested $5,000 in a no-load mutual fund with a NAV of $25.00. At the end of the year, the fund distributed $1.10 per share in short-term earnings and $3.10 per share in long-term earnings. The end of year NAV was $24.60. What was your annual rate of return on this investment?
15.20 percent
Which one of the following is classified as a fixed-income security?
2-year U.S. Treasury security
You purchased a stock for $25.50 a share, received a dividend of $0.70 per share, and sold the stock after one year for $28.55 a share. What was your dividend yield on this investment?
2.75%
One year ago, you purchased 200 shares of Southern Foods common stock for $39.50 a share.Today, you sold your shares for $35.40 a share. During this past year, the stock paid $1.25 in dividends per share. What is your dividend yield on this investment?
3.165 percent
Tate Industries stock is selling for $20 a share. You would like to purchase as many shares of this stock as you can. Your margin account currently has available cash of $4,500 and the initial margin requirement is 75 percent. What is the maximum number of shares you can buy?
300 shares Explanation: Maximum purchase = $4,500 / 0.75 = $6,000 Maximum number of shares = $6000 / $20 = 300 shares, rounded down to the last full share
You invest $4,300 in a money market fund at the beginning of the year. The fund's assets appreciate by 3.2 percent over the year. How many shares of the fund do you own at the end of the year?
4,437.60 shares
The mean plus or minus one standard deviation defines the ________ percent probability range of a normal distribution.
68
One year ago, you invested $7,000 in the no-load Triple A Money Market Fund. You have neither added to this account nor received any funds from this account since that time. The fund earned a 5.2 percent rate of return for the past year. How many shares of this fund do you currently own?
7,364.00
You invested $9,000 in a mutual fund when the offering price was $31.50 and the NAV was $30.20. This purchase was made one year ago today. Today, the fund distributed a total of $1.55 in long-term gains and $0.85 in short-term gains. The current offering price is $33.42 and the NAV is $32.08. What is your return for the year?
9.46 percent
The risk premium is defined as the rate of return of:
A risky asset minus the risk-free rate
Money market instruments issued by a corporation:
Are less liquid than those issued by the government.
Martin has an investment account with William, who is a broker with City Brokerage. Martin believes that William has mishandled his account by churning it. If he files a complaint against William seeking compensation, the case will most likely be decided by:
An arbitration panel
Brooke has decided to invest 55 percent of her money in large company stocks, 40 percent in small company stocks, and 5 percent in cash. This is a(n) _____ decision.
Asset Allocation
If you want the right, but not the obligation, to buy a stock at a specified price you should:
Buy a call
If you want the right, but not the obligation, to sell a stock at a specified price you should:
Buy a put
The net asset value of a money market mutual fund:
is dependent upon the value of the fund's assets.
Which of the following statements is correct? A.The standard deviation of the returns on Treasury bills is zero. B.Large-company stocks are historically riskier than small-company stocks. C.The standard deviation is a means of measuring the volatility of returns on an investment. D.A risky asset will always have a higher annual rate of return than a riskless asset. E.There is an indirect relationship between risk and return.
C. The standard deviation is a means of measuring the volatility of returns on an investment.
Futures contracts:
Can be resold
An investment company that issues a fixed number of shares which can only be resold in the open stock market is called a(n) ________ fund.
Closed-end
Which one of the following represents a residual ownership interest in the issuer?
Common stock
Which one of the following costs can a mutual fund shareholder avoid by holding shares for an extended period of time?
Contingent deferred sales charge
Which one of the following statements related to common stock is correct?
Corporations have the right to discontinue paying dividends.
If you benefit when a security decreases in value, you have a ________ position in the security.
Covered
The annual interest payment divided by the current price of a bond is called the:
Current Yield
A financial asset that represents a claim on another financial asset is classified as a ________ asset.
Derivative
Which one of the following decisions falls under the category of asset allocation?
Determining that thirty percent of a portfolio should be invested in bonds
Which one of the following should be used to compare the overall performance of three different investments?
Effective annual return
Tom recently inherited a large sum of money that he wants to invest in the stock market. Since he has no investment experience, he has decided that he would like to work with a professional who can explain the market to him and also manage his funds for him. Ted most likely needs the services offered by a(n):
Full-service broker
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:
Futures Contract
The average compound return earned per year over a multi-year period is called the:
Geometric average return
Kay plans to retire in two years and wishes to liquidate her account at that time. Kay has a ________ constraint.
Horizon
Sam purchased 500 shares of Microsoft stock which he has pledged to his broker as collateral for the loan in his margin account. This process of pledging securities is called
Hypothecation
An investment company will be treated as a "regulated investment company" by the Internal Revenue Service provided that it: I. invests almost all of its assets in bonds, stocks, and other securities. II. invests solely in U.S. securities. III. does not invest more than two percent of its assets in any one security. IV. passes all its realized investment income through to its shareholders.
I and IV only
Which of the following are generally included in a standardized futures contract?
I, II, III, and IV
Assume a mutual fund is a pure no-load fund. Which of the following costs should an investor still expect to incur? I. contingent deferred sales charge II. management fee III. trading costs IV. redemption fee
II and III only
An investor with a long position in a security will make money:
If the price of the security increases
The dividend yield is defined as the annual dividend expressed as a percentage of the:
Initial stock price
The amount of common stock held in short positions is referred to as the short:
Interest
A mutual fund is created by which one of the following parties?
Investment advisory firm
A short sale:
Involves the borrowing of securities
An annualized return:
Is computed as (1 + holding period percentage return)m, where m is the number of holding periods in a year.
The geometric mean return on large-company stocks for the 1926-2015 period:
Is less than the arithmetic mean return.
Which one of the following had the smallest standard deviation of returns for the period 1926-2015?
Long-term corporate bonds
Which of the following are three key advantages of mutual funds?
Low initial investments, professional management, diversification
The minimum equity that must be maintained at all times in a margin account is called the:
Maintenance margin
A brokerage account in which purchases can be made using credit is referred to as which type of account?
Margin
When your equity position in a security is less than the required amount, your brokerage firm will issue a:
Margin call
If you multiply the number of shares outstanding for a stock by the price per share, you are computing the firm's
Market Capitalization
Money market instruments
May be sold on a discount basis
An open-end fund which invests solely in short-term debt obligations is called a(n) ________ mutual fund
Money market
Riverview Chemical recently issued some debt that had an original maturity of nine months. This debt is best classified as a(n):
Money market instrument
Which one of the following statements is correct concerning mutual funds?
Mutual funds generally pay no taxes.
The value of a load mutual fund's assets less its liabilities, divided by the number of shares outstanding is referred to as the fund's:
Net asset value
A frequency distribution, which is completely defined by its average (mean) and variance or standard deviation, is referred to as a(n):
Normal Distribution
Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2016?
Only small-company stocks
An investment company that will repurchase shares at any time is called a(n) ________ fund.
Open-end
An agreement that grants the owner the right, but not the obligation, to buy or sell a specific asset at a specified price during a specified time period is called a(n) ________ contract.
Option
The price paid to purchase an option contract is called the:
Option Premium
Which one of the following is considered the best method of comparing the returns on various-sized investments?
Percentage Return
A security originally sold by a business or government to raise money is called a(n):
Primary asset
A contract that grants its buyer the right, but not the obligation, to sell an asset at a specified price is called a:
Put option
The additional return earned for accepting risk is called the:
Risk Premium
The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the:
Risk-free rate
The determination of which individual stocks to purchase within a particular asset class is referred to as:
Security selection
If you are willing to sell a stock and you wish to receive an option premium you should:
Sell a call
Which one of the following describes a short position?
Selling a security that you do not own
This morning, Josh sold 800 shares of stock that he did not own. This sale is referred to as a:
Short Sale
Which one of the following had the greatest volatility of returns for the period 1926-2015?
Small-company stocks
Which one of the following had the highest average return for the period 1926-2016?
Small-company stocks
Which one of the following had the highest risk premium for the period 1926-2016?
Small-company stocks
Alfonso purchased 600 shares of Crosswinds, Inc., stock on 60 percent margin when the stock was selling for $37 a share. The stock is currently selling for $32 a share. What is his current equity position?
The right answer is B ($10,320) Explanation: Margin loan = 600 × $37 × (1 - 0.60) = $8,880 Current equity = (600 × $32) - $8,880 = $10,320
Assume a semi-annual coupon bond matures in 3 years, has a face value of $1,000, a current market price of $989, and a 5 percent coupon. Which one of the following statements is correct concerning this bond?
The current yield exceeds the coupon rate.
Which one of the following statements is correct based on the historical returns for the period 1926-2016?
The inflation rate exceeded the rate of return on Treasury bills during some years.
What is the maximum loss you can incur if you have a long position on a stock in a cash account?
The initial investment
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 percentage of the purchase that was paid in cash.
Which one of the following sentences is correct concerning fixed-income securities?
The price of a fixed-income security is inversely related to the current yield.
One year ago, you purchased $8,000 worth of a mutual fund at an offering price of $41.40 a share. Today, the fund distributed $0.20 per share in short-term gains and $1.04 per share in long-term gains. The current offering price is $46.60. The fund has a front-end load of 5 percent and total annual operating expenses of 1.25 percent. What is your rate of return on this investment?
The right answer E (9.93 percent) Po=41.4P1=46.6*(.95)=44.27 D=(.2)+1.04=1.24 R=(44.27+1.24)/41.4=9.93%
A European put option grants the holder the right to:
sell the underlying asset at the strike price only on the expiration date
A stock was purchased for $45 a share and sold ten months later for $48 a share. If the shares were purchased totally with cash the holding period return would be ________ percent as compared to ________ percent if the purchase was made using 70 percent margin. Ignore trading costs and margin interest.
The right answer is B (5.56; 7.94) Explanation: HPR without margin = ($48 - $45) / $45 = 5.56 percent HPR with margin = ($48 - $45) / ($45 × 0.70) = 7.94 percent
You recently purchased 800 shares of Southern Timber stock for $35 a share. Your broker required a cash payment of $19,600, plus trading costs, for this purchase. What was the initial margin requirement?
The right answer is B (70%) Explanation: Purchase cost = 800 × $35 = $28,000 Initial margin percentage = $19,600 / $28,000 = 70 percent
You purchased 1,000 shares of stock at $42 a share. The stock is currently selling for $45 a share. The initial margin was 70 percent and the maintenance margin is 30 percent. What is your current margin position?
The right answer is B (72%) Explanation: Margin loan = 1,000 × $42 × (1 - 0.70) = $12,600 Current equity = (1,000 × $45) - $12,600 = $32,400 Margin position = $32,400 / (1,000 × $45) = 72.00 percent
Which one of the following statements is correct concerning the dividend yield and the total return?
The total return can be negative but the dividend yield cannot be negative.
Which one of the following is not included in the fee table found in a mutual fund prospectus?
Turnover rate
Which one of the following had the narrowest bell curve for the period 1926-2015?
U.S. Treasury bills
A fixed-income security is defined as:
a long-term debt obligation that pays scheduled fixed payments.
The turnover for a mutual fund refers to:
a measure of trading activity
To be considered liquid, a security must:
be able to be sold quickly with little, if any, price concession.
Harvest Fields sold ten September futures contracts on oats. Harvest Fields will:
both receive payment and deliver in September.
Market timing is:
buying and selling of securities in anticipation of the overall direction of the market.
1. The total dollar return on a share of stock is defined as the:
capital gain or loss plus any dividend income.
Which one of the following is the best definition of a money market instrument?
debt issued by the government or a corporation that matures in one year or less
A call option is an agreement that:
gives the buyer the right to purchase an asset at some point in the future.
The wider the distribution of an investment's returns over time, the ________ the expected average rate of return and the ________ the expected volatility of those returns.
higher; higher
Mutual fund trading costs:
increase in direct relation to the turnover rate.
Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could:
increase the standard deviation of the portfolio.
Money market mutual funds do which one of the following?
invest in short-term securities
Preferred Stock
is treated like equity for both tax and accounting purposes.
A mutual fund is owned by:
its shareholders
Which one of the following best describes the term "initial margin"?
mount of cash that must be paid to purchase a security on margin
An investor who follows a fully active strategy will:
move money between asset classes as well as try to select the best performers in each class.
Which one of the following is a derivative asset?
option contract
An investment company:
pools funds from individual investors
The arithmetic average is the:
return earned in an average year over a multi-year period.
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
security selection
The risk-free rate is:
the rate of return on a riskless investment
A 12b-1 fee is a fee charged by a mutual fund:
to cover marketing costs.
A futures contract is an agreement:
to exchange goods on a specified date in the future at a price that is agreed upon today.
The maximum loss you can incur on a short sale is:
unlimited
The standard Deviation is a measure of:
volatility
On August 8 of this year, Brent sold 500 shares of ADO stock for $24 a share. On September 6 of this year, he purchased 500 shares of ADO stock to cover his position. The transaction on August 8:
was a short sale.
For the period 1926-2015, long-term government bonds had an average return that ________ the average return on long-term corporate bonds while having a standard deviation that ________ the standard deviation of the long-term corporate bonds.
was less than; exceeded
For the period 1926-2016, the annual return on large-company stocks:
was unpredictable based on the prior year's performance.
Capital gains are included in the return on an investment:
whether or not the investment is sold.
Cole's Jewelers purchased a futures contract on 200 ounces of gold to be exchanged 3-months from now. As the contract holder, Cole's Jewelers:
will profit if the price of gold is higher three months from now
