Question

MULTIPLE CHOICE

1) Which of the following is NOT an investment as defined in the text? A) a certificate of deposit issued by a bank B) a new automobile C) a United States Saving Bond D) a mutual fund held in a retirement account

2) Which of the following is NOT traded in the securities markets? A) stocks B) bonds C) derivatives D) real estate

3) The governmental agency that oversees the capital markets is the A) Federal Trade Commission. B) Federal Reserve. C) Securities and Exchange Commission. D) Fair Trade and Banking Agency.

4) Stocks purchased in the secondary market are purchased A) directly from the issuing corporation. B) from other investors. C) from small, little-known brokerages. D) indirectly through financial institutions.

5) Which of the following are associated with bull markets? I. investor pessimism II. government stimulus III. economic recovery IV. low inflation A) I and II only B) II and III only C) I, II and III only D) II, III and IV only

6) Including foreign investments in a portfolio A) increases the overall risk 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. 3Copyright © 2017 Pearson Education, Inc.

7) Michael purchased 1000 shares of stock at a price of $16 a share. He utilized his 50% margin account to make the purchase. What is Michael's initial equity in this investment? A) -$16,000 B) $16,000 C) $8,000 D) -$8,000

8) Which one of the following is a major advantage of margin trading? A) increase in potential diversification B) increase in potential profits on a percentage basis C) possibility of increased gains on a dollar basis D) interest free loans

9) The Internet provides I. educational sites for financial investing. II. the ability to trade securities on-line. III. current information on stocks and bonds. IV. analysts reports on individual stocks. A) II and III only B) III and IV only C) I, II and III only D) I, II, III and IV

10) Stock market averages and indexes are commonly used to measure the A) specific behavior of companies. B) general behavior of stock prices. C) specific behavior of alternative investments. D) specific behavior of the economy.

11) Assume that the S&P 500 composite stock index closes at 2,000. This means that A) the average stock in the index is selling for $20.00. B) an investor would have to pay $2,000 to purchase one share of each of the stocks represented in the index. C) The average value of a company reflected in the Index has doubled from when the Index was at 1000. D) the share prices of the stocks in the index have risen 20 times since the 1941-1943 base period.

12) Which one of the following indexes reflects a large sample of small, medium sized and large companies? A) NYSE composite B) DJIA C) Russell 3000 D) Value Line composite 4Copyright © 2017 Pearson Education, Inc.

13) Which is the correct order of events when an individual buys a stock through a brokerage firm? I. The order is transmitted to the main office of the brokerage firm. II. The customer places the order with their local stockbroker. III. The confirmation of the order is sent to the broker placing the order. IV. The order is sent to the floor of the exchange. A) I, II, III, IV B) II, I, III, IV C) II, IV, I, III D) II, I, IV, III

14) When an investor places a ________ order, he agrees to buy or sell at the best available price when the trade is executed. A) market B) limit C) stop D) stop-limit

15) McDonald's stock is now selling for $92 per share. Kim wants to buy 100 shares but only if she can do so at $90 or less. She should place a(n) A) stop order. B) market order. C) limit order. D) odd-lot order.

16) The most predictable component of stock returns is A) capital gains. B) capital losses. C) inflation adjusted return. D) dividend income.

17) Kelly bought a stock at a price of $22.50. She received a $1.75 dividend and sold the stock for $24.75. What is Kelly's capital gain on this investment? A) $4.00 B) $3.75 C) $2.25 D) $1.75

18) Which of the following investments may be impacted by government actions? A) stocks B) corporate bonds C) government bonds D) all of the above 5Copyright © 2017 Pearson Education, Inc.

19) The present value of $10,000 discounted at 5% per year and received at the end of 5 years is A) $10,000/1.25. B) $10,000(1.05)5. C) $10,000/(1.05)5. D) $10,000 (1.05)1/5.

20) Bob's house has doubled in value since he bought it 30 years ago. The house's value has increased by an annual rate of A) 2.34%. B) 3.33%. C) 6.67%. D) 100%.

21) Christopher invests $400 today at a 4% rate of return which is compounded annually. What is the future value of this investment after four years? A) $342 B) $416 C) $464 D) $468

22) Camille purchased a bond 5 years ago for $1,050. The bond paid $50 in annual interest and returned the $1,000 principal at the end of the fifth year. Camille used the interest payment to pay for college textbooks. A) Her internal rate of return was exactly than 5%. B) Her internal rate of return was greater than 5%. C) Her internal rate of return was less than 5%. D) Her internal rate of return cannot be determined.

23) If the present value of an investment's benefits equals the present value of the investment's costs, then the investor would earn a A) return equal to the discount rate. B) negative rate of return. C) 0% rate of return. D) return greater than the discount rate.

24) The markets in general are paying a 2% real rate of return. Inflation is expected to be 3%. ABC stock commands a 6% risk premium. What is the expected rate of return on ABC stock? A) 2% B) 5% C) 8% D) 11% 6Copyright © 2017 Pearson Education, Inc.

25) A holding period return is calculated by adding the current income to the capital gains and dividing this sum by the A) average investment value. B) beginning investment value. C) total income received. D) selling price of the investment.

26) The Sorka Corp. has paid annual dividends of $0.60, $0.63, $0.65, $0.68 and $0.72, respectively, over the past five years. What is the dividend growth rate? A) 4.7% B) 5.2% C) 5.4% D) 5.9%

27) 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 stream.

28) A petroleum refinery in the Gulf region is forced to shut down for several months because of hurricane damage. This is an example of A) market risk. B) speculation. C) event risk. D) business risk.

29) Congress considers a bill that would eliminate the mortgage interest deduction for individuals. For the housing industry, this is an example of A) tax risk. B) interest rate risk. C) business risk. D) event risk.

30) An investment produced annual rates of return of 4%, 8%, 14% and 6%, respectively, over the past four years. What is the standard deviation of these returns? A) 3.7% B) 4.1% C) 4.3% D) 4.6% 7Copyright © 2017 Pearson Education, Inc.

31) 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. A) I and IV only B) II and III only C) I, III and IV only D) I, II and III only

32) The expected rate of return and standard deviations, respectively for four stocks are given below: OPQ 11%, 8% RST 11%, 9% UVW 12%, 10% XYZ 12%, 8% Which stock is clearly most desirable? A) OPQ B) RST C) UVW D) XYZ

33) Melissa owns the following portfolio of stocks. What is the return on her portfolio? A) 8.0% B) 9.0% C) 9.8% D) 10.9%

34) The stock of a technology company has an expected return of 15% and a standard deviation of 20% The stock of a pharmaceutical company has an expected return of 13% and a standard deviation of 18%. A portfolio consisting of 50% invested in each stock will have an expected return of 14 % and a standard deviation A) less than the average of 20% and 18%. B) the average of 20% and 18%. C) greater than the average of 20% and 18%. D) the answer cannot be determined with the information given.

35) If there is no relationship between the rates of return of two assets over time, these assets are A) positively correlated. B) negatively correlated. C) perfectly negatively correlated. D) uncorrelated.

36) American depositary shares (ADS) are A) shares of foreign companies traded on the U.S. markets. B) shares of American companies traded on foreign markets. C) foreign currency deposits in American banks. D) American currency deposits in foreign banks.

37) Which one of the following types of risk cannot be effectively eliminated through portfolio diversification? A) inflation risk B) labor problems C) materials shortages D) product recalls

38) Systematic risks A) can be eliminated by investing in a variety of economic sectors. B) are forces that affect all investment categories. C) result from random firm-specific events. D) are unique to certain types of investment.

39) The beta of the market is A) -1.0. B) 0.0. C) 1.0. D) undefined.

40) When the stock market has bottomed out and is beginning to recover, the best portfolio to own is the one with a beta of A) 0.0. B) +0.5. C) +1.5. D) +2.0.

Answer 1

1]

B) a new automobile. This is not an investment but a depreciating asset.

The rest are investments because they generate returns.

2]

D) real estate is not traded in the securities market.  

The others are traded in the securities market.

3]

C) Securities and Exchange Commission - This is the regulatory body for capital markets.

Federal Reserve oversees the banking system.  Federal Trade Commission is a consumer protection body.  Fair Trade and Banking Agency is not a regulatory body.

4]

B) from other investors. The secondary market is an exchange market where securities that are already issued are exchanged between investors.

A is incorrect - this is a primary market.

C is incorrect - The secondary market is a marketplace for investors, and various brokerages, big and small, facilitate the exchange of securities.

D is incorrect - The secondary market is an exchange market where securities that are already issued are exchanged between investors.