INVESTMENTS - MIDTERM
The primary emphasis of the profitability ratios is a determination of the firm's ability to pay off short-term obligations as they come due.
False
The stock price of an acquiring company generally changes parallel to that of the target.
False
The valuation process begins with an industry analysis
False
To be guilty of insider trading, one must be an officer of the company involved.
False
Treasury stock represents shares of common stock that have been authorized but not issued.
False
Under the Securities Act of 1933, the SEC can certify that a stock is fairly priced.
False
When an investment bank sells securities on a best efforts basis, it assumes all risk of the offering.
False
The valuation process begins with an industry analysis
False, empieza con el Economic Analysis
peak; decline
The week-end effect indicates that stocks tend to ___________ on Friday and ___________ on Monday.
true
There is concern by the SEC and Congress that dark pools create a two-tier market.
The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.
True
The combined earnings and dividend model considers the present value of dividends, plus the present value of a future P/E ratio times future projected earnings.
True
The first step in using the income-statement method of estimating earnings per share (EPS) is to develop an accurate sales forecast.
True
When monopolies exist, they are almost always found in mature industries.
True
The strong form of the efficient market hypothesis states that:
a market is more than highly efficient; it is actually perfect.
A type of index that weighs each company by its total market value as a percentage of the total market value for all firms is:
a value-weighted index.
According to Z score analysis, the higher the Z score, the greater the firm's bankruptcy potential.
False
According to insider trading rules of the SEC, securities analysts and financial writers may not trade on insider information, but these rules do not extend to relatives and friends.
False
An increase in reserve requirements by the Federal Reserve would decrease the money supply.
False
Assets must be currently producing income in order to give a company value.
False
Cash flows from operating activities would include the payment of cash dividends.
False
Companies in mature industries still have a dramatic need for internal cash flows to finance future growth.
False
Purchasing securities in open-market operations by the Federal Reserve has the same effect as increasing reserve requirements.
False
The idea that stock prices tend to move in trends that persist for long periods, and that these trends can be detected in charts, are basic assumptions of fundamental analysis.
False
Which of the following is true of over-the-counter markets?
-Trading takes place by telephone or electronic network -It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers -Government securities of the U.S. Treasury provide the largest dollar volume.
The weak form of the efficient market hypothesis can be tested by utilizing
-tests of independence -trading rule tests.
cash account; margin account
A ____________ requires full payment for the purchase of securities, while a _____________ allows the investor to borrow a portion of the purchase price from the brokerage firm.
The weak form of the efficient market hypothesis can be tested by utilizing
A and C Answers: tests of independence. trading rule tests.
high, low, and closing stock price on a daily basis
A bar chart is used to demonstrate:
the quality of fund management
A closed-end fund might trade at a premium due to:
money market fund
A fund investing in T-bills, Eurodollar deposits, commercial paper, and repurchase agreements is probably a:
represents a retail brokerage firm and transacts business on the floor for customers of that firm.
A house broker is one who:
low-quality bonds have returns much higher than high-quality bonds.
A low Barron's Confidence Index means that:
an index fund
A mutual fund in which the portfolio is weighted exactly like the Standard and Poor's 500 Index, or any other market measure is called:
true
A shelf registration enables an investment banker to sell a small portion of an issue without forming a syndicate.
___________ has two major functions: to handle special orders, such as purchases with a price contingency, and to maintain continuous, liquid, orderly markets.
A specialist
Financial assets; real assets
A(n) _____ is a legally documented claim on an asset, while a(n) _____ is an actual, tangible asset which may be seen, felt, held, or collected.
true
Abnormal returns refer to gains beyond what the market would normally provide after adjustment for risk.
false
Acceptance of the weak form of the EMH would indicate that charting can lead to profits.
False
According to insider trading rules of the SEC, securities analysts and financial writers may not trade on insider information, but these rules do not extend to relatives and friends.
negative real GDP growth
According to the traditional definitions, a recession is two or more quarters of:
true
All dividend valuation models are based on the present value of a future income stream.
In the comparative international arena of real GDP growth rates, which country has had the highest growth in real GDP over the years 1993 to 2005?
China
________ have a fixed supply of shares, which often trade at a discount from the market value of assets held.
Closed-end funds
the secondary market
Creating prices for securities and allowing for liquidity are functions of:
true
Every investment requires a total return comprised of a real rate of return, compensation for inflationary expectations, and a risk premium.
Studies generally show that the price-earnings ratio is a function of:
Expected changes in interest rates. Future estimated growth of earnings for the individual company. Expected changes in the required rate of return, Ke.
false
Extraordinary gains and losses are usually included in ratio analysis, since they reflect on the annual operating performance of a firm.
Good performance by a mutual fund in the past is highly indicative of good performance in the future.
False
Institutional investors often take advantage of the small firm effect.
False
Investment advisory recommendations are part of the smart money rules.
False
It is always a safe bet to invest in companies in growing industries.
False
It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.
False
LIFO accounting tends to increase inventory profits.
False
Leading indicators tend to give longer warnings before peaks than troughs.
False
Liquidity refers to how little the sales price of an asset has decreased from its cost.
False
Money market funds are usually load funds.
False
Mutual funds are a form of direct equity claims.
False
Oligopolistic industries are characterized by many competitors and few barriers to entry.
False
On average, mutual funds tend to outperform the market over the long run.
False
Since all companies must operate under generally accepted accounting principles, equal earnings per share for company A and B mean exactly the same thing to an investor.
False
The Federal Open Market Committee (FOMC) determines the monetary policy for the U.S. economy.
False
The Small Firm Effect asserts that there is a positive correlation between market capitalization and risk-adjusted returns.
False
The composite index of leading indicators has shown little variation in its ability to predict.
False
The indexes of The New York Stock Exchange, American Exchange, and NASDAQ are all price-weighted.
False
The margin requirement on stock is currently 30%.
False
The relative importance of each of the five basic competitive forces is the same for almost every industry.
False
A(n) _____ is a legally documented claim on an asset, while a(n) _____ is an actual, tangible asset which may be seen, felt, held, or collected.
Financial asset; real asset
true
Firms with P/E ratios higher than the overall market ratio are expected to provide greater than normal returns with equal or less risk.
spending and taxing plans
Fiscal policy concerns the implementation of the government's
Reliable sources of information about mutual funds include all of the following, except:
Forbes. Lipper. Morningstar.
false
Good performance by a mutual fund in the past is highly indicative of good performance in the future.
Growth rates are highest in which of the industry life cycle stages?
Growth
A rotational investor will rotate through stocks that perform well in different stages of the economy in which order (from trough to peak)?
Household durable goods; consumer cyclical; consumer non-cyclical; basic materials
true
In an efficient and informed capital market environment, those investments with the greatest return tend to have the greatest risk.
China
In the comparative international arena of real GDP growth rates, which country has had the highest growth in real GDP over the years 1993 to 2005?
true
In the last few years (since 2006), the trade deficit has increased dramatically.
true
Index funds are created to imitate a popular stock index such as the S&P 500 Index.
False
Institutional investors often take advantage of the small firm effect.
false
It is thought that historical growth rates have more impact on an individual company's P/E ratio than expected future growth rate.
The Nikkei average relates to stock movements in what market?
Japan
A __________ order sets the price at which an investor is willing to buy or sell and assures the investor that he/she will pay no more or receive no less than the agreed-upon price.
Limit
false
Long-term capital gains are taxed as ordinary income
When using the top-down approach to company valuation, which is the proper order for an analyst to use?
Macro-economic environment, industry analysis, company analysis
true
Mathematically, the price-earnings ratio (P/E) is simply the price per share divided by earnings per share.
false
Money market funds are usually load funds.
Which stock market exchange has the most restrictive listing requirements?
NYSE New York Stock Exchange
The _______________ has/have the most restrictive listing requirements.
New York Stock Exchange
The ____________ suggests watching the small investor, who is right most of the time but misses key market turns, and then doing the opposite.
Odd-lot theory
False
Oligopolistic industries are characterized by many competitors and few barriers to entry.
expanding into markets overseas
One way some U.S. companies have increased sales growth is by:
their commissions are lower than full-service or discount brokers.
Online brokers have become popular because:
true
Professors Fama and French maintain that the ratio of book value to market value is more important than either the size effect or the P/E effect in explaining superior stock performance.
Which of the following is not an Asset-utilization ratio:
Quick Ratio
Which of the following is not an Asset-utilization ratio:
Quick ratio
Lipper, Forbes, Morningstar
Reliable sources of information about mutual funds include all of the following
Which of the following best describes the function of an investment banker selling an issue on a "best efforts" basis?
Return unsold securities to the firm
What is market capitalization?
Shares outstanding multiplied by the market value of the stock
When ranking security returns, the data shows that the annualized returns are as follows (ranked from highest return to lowest return):
Small stocks, large stocks, long-term corporate bonds, long-term government bonds, treasury bills.
money supply (M2), consumer expectations, and stock prices (S&P 500)
Some of the major leading indicators would be:
Which of the following stages does not belong in the industry life cycle?
Stagnation
True
Stocks traded over-the-counter, like through NASDAQ, have no centrally located market location.
Exchange-traded funds (ETFs) are similar to index mutual funds, but they trade on stock exchanges like common stock.
TRUE
______________ analysis focuses on charts and graphs based on internal market data, while _____________ analysis emphasizes earnings reports, management capabilities, and new product development.
Technical; fundamental
true
The Dow Theory puts emphasis on long-run trends.
True
The Intercontinental Exchange (ICE) is now operating 24 hours per day using a computerized trading system.
Japan
The Nikkei average relates to stock movements in what market?
true
The S&P 500 Index and Gross Domestic Product (GDP) seem to have similar long-term growth paths.
odd-lot theory
The ____________ suggests watching the small investor, who is right most of the time but misses key market turns, and then doing the opposite.
New York Stock Exchange
The _______________ has/have the most restrictive listing requirements.
true
The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.
economic variables, industry variables, financial statements
The basis of stock valuation includes an analysis of
Which of the following is NOT a characteristic of a growth company?
The company usually pays a dividend equal to 40-50% of earnings
false
The composite index of leading indicators has shown little variation in its ability to predict.
that the discount rate must be greater than the dividend growth rate
The constant growth dividend valuation model assumes
false
The divisor in the Dow Jones Industrial Average equals 30.
When a company repurchases shares of their own common stock,
The earnings per share will rise. The dividends paid out in total will decline. The earnings per share growth rate will rise. All of the other items will happen (Answer)
The NEW York Stock Exchange
The exchange with the largest dollar volume in major companies and which has the most restrictive listing requirements is:
Chicago Mercantile Exchange (CME)
The first exchange to become a publicly traded company was the:
equity growth funds and aggressive growth
The growth fund category of funds would include:
False
The indexes of The New York Stock Exchange, American Exchange, and NASDAQ are all price-weighted.
true
The intent of dollar-cost averaging is to avoid buying high and selling low.
Why would an investor want to use the rotational investing method?
The investor is attempting to profit from movements in the economic cycle
true
The more saturated an industry gets with competitors, the further along the life cycle it will probably be.
a declining stock price
The success of a short investment position depends on:
true
The support level is the stock price that generates new demand, while the resistance level is the price at which investors begin to sell in order to take a profit.
Profitability Ratios
The type of ratio that allows the analyst to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital is:
false
Treasury stock represents shares of common stock that have been authorized but not issued.
A limit order can ensure that you will not pay above a given price in purchasing a stock or sell below a given price in selling a stock.
True
A stop order is similar to a limit order, except that the order turns into a market order once the stop price is hit.
True
All dividend valuation models are based on the present value of a future income stream.
True
All things being equal, the more rapid growth a firm enjoys, the higher the P/E ratio.
True
An important consideration with an open-end fund is whether it is a load fund or a no-load fund.
True
An investor in a mutual fund can incur capital gains even if no shares are sold.
True
At the end of 2009, approximately 43% of U.S. households owned shares in mutual funds.
True
Beta measures a security's return relative to the market.
True
Between 1977 and 2007, the U.S. government budget has showed a surplus in only a few years.
True
Cash flows from financing activities would include the repurchase of debt and equity.
True
Closed-end funds have a fixed number of shares; open-end funds do not.
True
Common stock represents a direct equity claim.
True
Dividend valuation models are best suited for firms in the expansion or maturity phase of their life cycle.
True
Every investment requires a total return comprised of a real rate of return, compensation for inflationary expectations, and a risk premium.
True
Exchange-traded funds (ETFs) are similar to index mutual funds, but they trade on stock exchanges like common stock.
True
Financial ratios are meaningless unless they are compared to a company standard or historical or industry data.
True
Firms with P/E ratios higher than the overall market ratio are expected to provide greater than normal returns with equal or less risk.
True
Fiscal policy involves government spending and taxation policies.
True
If a stock is held for less than 12 months, any gain in value is taxed as ordinary income.
True
If the DJIA declines by 10% in the time between 2:00-2:30 PM, a 30 minute halt to trading occurs.
True
In an efficient and informed capital market environment, those investments with the greatest return tend to have the greatest risk.
True
In the formula P0 = D1/(Ke - g), if g decreases, the price of the stock will go down.
True
In the last few years (since 2006), the trade deficit has increased dramatically.
True
Index funds are created to imitate a popular stock index such as the S&P 500 Index.
True
Large, established companies make up the Dow Jones Industrial Average.
True
Load funds, which charge a commission, generally perform no better than no-load funds.
True
Morningstar Mutual Fund Survey is considered one of the leading authorities on mutual fund performance.
True
OTC stocks may not uphold the semi-strong form of the efficient market hypothesis, while listed stocks generally do.
True
One characteristic of efficient markets is that prices adjust rapidly to new information.
True
Return on assets can be stated to equal (net income/sales) x (sales/total assets).
True
Shares of a closed-end fund trade on an exchange, just like stocks.
True
Specialists buy and sell for their own account.
True
Stock prices plummet as industries move across the crossover point, because price-earnings ratios collapse as analysts lower growth expectations.
True
Stocks traded over-the-counter, like through NASDAQ, have no centrally located market location.
True
Tax rates that apply to income within a given tax bracket are referred to as marginal tax rates.
True
Technical analysis assumes that many chart patterns tend to repeat themselves.
True
The Dow Theory puts emphasis on long-run trends.
True
The Gramm-Leach-Bliley Act essentially repealed many of the prohibitions of the Glass-Steagall Act, which restricted commercial banks from also being in the investment banking business.
True
The Ibbotson study showed that high-risk investments generate high returns.
True
The Intercontinental Exchange (ICE) is now operating 24 hours per day using a computerized trading system.
True
The Value Line Average contains stocks from several exchanges or markets.
True
The intent of dollar-cost averaging is to avoid buying high and selling low.
True
The riskiness of an investment is measured by the dispersion of possible outcomes.
True
The support level is the stock price that generates new demand, while the resistance level is the price at which investors begin to sell in order to take a profit.
True
There is concern by the SEC and Congress that dark pools create a two-tier market.
True
Trading through an online broker is generally cheaper than trading through a discount broker.
True
Under the weak form of the efficient market hypothesis, stock prices are considered to be independent over time.
True
Under-pricing of new stock issues helps ensure the investment banker that the issue will be fully subscribed to at the initial market price.
True
When investment bankers underwrite a security, they usually guarantee purchase of the securities at a fixed price for the selling firm.
True
true
Under the weak form of the efficient market hypothesis, stock prices are considered to be independent over time.
Municipal bonds
Wealthy investors may prefer the favorable tax treatment of investments such as:
$32.10
What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.
true
When short sellers are bearish, it is though to be a bullish signal.
false
When you short a security you are actually selling a security that no one owns.
The automobile industry
Which of the following industries is a good example of an industry in the maturity stage?
Generic Drugs
Which of the following is the most significant detriment to the future profitability of the pharmaceutical industry?
It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers Trading takes place by telephone or electronic network It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers Government securities of the U.S. Treasury provide the largest dollar volume.
Which of the following is true of over-the-counter markets?
the Dow Jones Industrial Average
Which of then following is not all value-weighted indexes,:
Breadth of the market
While the Dow Jones Industrial Average may be weighted toward large firms, a __________ indicator may be used to examine all stocks on an exchange.
A specialist
___________ has two major functions: to handle special orders, such as purchases with a price contingency, and to maintain continuous, liquid, orderly markets.
The success of a short investment position depends on:
a declining stock price.
The difference between a cash account and a margin account is:
a margin account allows the investor to borrow a percentage of the purchase price from the brokerage firm.
The value of common stock can be viewed as:
a present value of a dividend stream, plus a market price at the end of the dividend stream.
The semi-strong form of the efficient market hypothesis maintains that:
all public information is already impounded into the value of a security.
An unexpected earnings surprise refers to the situation where:
announced earnings were better or worse than the analysts' forecast number.
The reason price-earnings ratios and inflation are related is because:
as inflation increases, the required return in the market rises, pushing down the prices of securities.
As the ratio of specialist short sales to total short sales increases, technicians consider the market to be:
bearish
The most widely used tool of the Federal Reserve is:
buying and selling securities for its own portfolio.
A ____________ requires full payment for the purchase of securities, while a _____________ allows the investor to borrow a portion of the purchase price from the brokerage firm.
cash account; margin account
The Dow Theory uses _________ to follow three major types of market movements.
charting
The first step in any stock valuation is
economic analysis.
Advantages of mutual funds include:
efficient diversification.
The growth fund category of funds would include:
equity growth funds and aggressive growth.
Investment company shares that trade on stock exchanges just like common stock and are essentially funds that mimic some index are:
exchange-traded funds.
One way some U.S. companies have increased sales growth is by:
expanding into markets overseas.
The Small Firm Effect is the theory that:
firms with small market capitalization outperform the market.
The study by Fama and French maintains that the lower the ratio of market value to book value, the:
higher the potential return on the stock.
The statement of cash flows tells us
how cash was created.
A stop order is similar to a limit order, except that once the set price is reached, the stop order
immediately becomes a market order.
The major device for measuring the profitability of a firm over a defined period of time is the
income statement.
If the Treasury bill rate (RF) increases, then Ke will
increase
In general, the P/E ratio of a stock _______________ as inflation _____________.
increases; decreases
All of the following are smart money rules except:
investment advisory recommendations.
Federal income tax on investment income and capital gains of a mutual fund:
is not required of the fund if it distributes at least 90% of its net investment income and capital gains.
Dual trading creates the following benefit:
it improves liquidity of a security.
The ability of the investor to convert an investment into cash in a short period of time is called:
liquidity
The ability of the investor to convert an investment into cash in a short period of time is called:
liquidity.
The tax rate that specifically applies to each new dollar of income is the:
marginal tax rate.
The primary tools used to stimulate economic activity are:
monetary and fiscal policies.
A fund investing in T-bills, Eurodollar deposits, commercial paper, and repurchase agreements is probably a:
money market fund
Wealthy investors may prefer the favorable tax treatment of investments such as:
municipal bonds
A back-end load fund has:
no charge upon purchase, and a declining charge, based on time owned, on sale.
The week-end effect indicates that stocks tend to ___________ on Friday and ___________ on Monday.
peak; decline
Some of the major coincident indicators would be:
personal income, employees on nonagricultural payrolls, and industrial production.
The purpose of a syndication for Investment Bankers is:
reducing or spreading the underwriting risk
From the investment banker's point of view, the major reason syndicates are formed in the distribution of large issues is for the purpose of:
reducing the underwriter's risk.
A house broker is one who:
represents a retail brokerage firm and transacts business on the floor for customers of that firm.
The constant growth dividend valuation model assumes
that the discount rate must be greater than the dividend growth rate.
The following are all value-weighted indexes, except:
the Dow Jones Industrial Average.
The exchange with the largest dollar volume in major companies and which has the most restrictive listing requirements is:
the New York Stock Exchange.
The major device that indicates what the firm owns, and how these assets are financed, in the form of liabilities or ownership interest is:
the balance sheet.
By using dollar-cost averaging,
the investor invests a fixed amount at regular intervals, at current market prices.
By using dollar-cost averaging:
the investor invests a fixed amount at regular intervals.
Characteristics of mutual funds with a goal of investing in growth companies include everything except:
the money is invested in stable companies, with an objective of strong dividend income.
Financial ratios are used to weigh and evaluate:
the operating performance and capital structure of the firm.
A closed-end fund might trade at a premium due to:
the quality of fund management.
Online brokers have become popular because:
their commissions are lower than full-service or discount brokers.
Because most investors are risk averse,
they will require a higher rate of return for a riskier investment.
The purpose of stock valuation is
to determine whether the common stock's value is fairly represented by its market price.
All of the following are reasons why an investment banker may under-price a new stock issue, except:
to insure adequate demand in the secondary market.
gains in excess of the market risk-adjusted average.
"Special or abnormal returns" refer to:
What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.
$ 30.00
What is the value of a stock which has a current dividend (D0) of $1.50, and is growing at the rate of 7%? The investor's required rate of return is 12%.
$30.00
What would be the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3 dividend?
10%
Historically, the real rate of return in the U.S. economy has been:
2-3%.
What is the risk-free rate in an environment where the real rate is 3% and inflation is running at 3%? Use either method found in chapter one.
6.09% or just 6%
Which of the following is a characteristic of an unfriendly takeover?
All of the other answers are correct: Usually there is a high premium on stock price. An unacceptable suitor attempts to buy out the target company. The White Knight may succeed in rescuing the target company
return-on-equity to return-on-assets
An analyst can judge a company's level of debt by comparing these ratios:
false
An increase in reserve requirements by the Federal Reserve would decrease the money supply.
true
An investor in a mutual fund can incur capital gains even if no shares are sold.
capital gains
An investor will purchase shares of companies in the development stage for:
they will require a higher rate of return for a riskier investment.
Because most investors are risk averse,
True
Beta measures a security's return relative to the market.
true
Bond mutual funds can be divided into corporate, government, and municipal funds.
While the Dow Jones Industrial Average may be weighted toward large firms, a __________ indicator may be used to examine all stocks on an exchange.
Breadth of the market
An investor will purchase shares of companies in the development stage for:
Capital gains only
true
Cash flows from financing activities would include the repurchase of debt and equity.
The Dow Theory uses _________ to follow three major types of market movements.
Charting
The first exchange to become a publicly traded company was the:
Chicago Mercantile Exchange
True
Common stock represents a direct equity claim
The first step in any stock valuation is
Economic analysis
The January upward stock movement effect is often linked to:
tax considerations.
The _________ of the efficient market hypothesis suggests that there is little or nothing to be gained from studying past stock price trends.
weak form
