Q&A Hero

Q: Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion. A. I, II, and IV only B. I, II, and III only C. II, III, and IV only D. I, II, III, and IV

Q: Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk A. I only B. II only C. I and III only D. I, II, and III

Q: An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0

Q: The measure of risk used in the capital asset pricing model is ___________. A. specific risk B. the standard deviation of returns C. reinvestment risk D. beta

Q: The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? A. 11.6% B. 13% C. 15.3% D. 19.5%

Q: The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock? A. .2% B. 1.5% C. 3.6% D. 4%

Q: The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock? A. 8.7% B. 11.2% C. 13.8% D. 15.2%

Q: The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock? A. 10% B. 11.5% C. 13.6% D. 14%

Q: Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%? A. .0% B. 1% C. 2% D. 3%

Q: What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001? A. The tick size increased in 1997 but decreased in 2001. B. The tick size increased in both cases. C. The tick size decreased in 1997 but increased in 2001. D. The tick size decreased in both cases.

Q: According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration. A. 1 year B. 2 years C. 3 years D. 4 years

Q: You find that the bid and ask prices for a stock are $10.25 and $10.30, respectively. If you purchase or sell the stock, you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars? A. $50 B. $25 C. $30 D. $55

Q: Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled? A. $39.75B. $40.25C. $40.375D. $40.25 or less

Q: You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________. A. limit buy order B. limit sell order C. market order D. stop-loss order

Q: Which of the following is (are) true about dark pools? I. They allow anonymity in trading. II. They often involve large blocks of stocks. III. Trades made through them might not be reported. A. I and II only B. II and III only C. I and III only D. I, II, and III

Q: The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make A. I and II only B. II and III only C. I and III only D. I, II, and III

Q: The NYSE has lost market share to ECNs in recent years. Part of the NYSE's response to the growth of ECNs has been to: I. Purchase Archipelago, a major ECN, and rename it NYSE Arca II. Enable automatic trade execution through its new Market Center III. Impose a tighter limit on bid-ask spreads A. I only B. II and III only C. I and II only D. I, II, and III

Q: The bid-ask spread exists because of _______________. A. market inefficiencies B. discontinuities in the markets C. the need for dealers to cover expenses and make a profit D. lack of trading in thin markets

Q: The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the _________. A. market spread B. bid-ask spread C. bid-ask gap D. market variation

Q: The _________ price is the price at which a dealer is willing to sell a security. A. bid B. ask C. clearing D. settlement

Q: The _________ price is the price at which a dealer is willing to purchase a security. A. bid B. ask C. clearing D. settlement

Q: Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange. A. 50% B. 25% C. 60% D. 75%

Q: The NYSE Hybrid Market allows _____. A. individuals to send orders directly to a specialist B. individuals to send orders directly to an electronic system C. brokers to send orders directly to a specialist D. brokers to send orders either to an electronic system or to a specialist

Q: The fully automated trade-execution system installed on the NYSE is called _____. A. FAX B. Direct + C. NASDAQ D. SUPERDOT

Q: The __________ system enables exchange members to send orders directly to a specialist over computer lines. A. FAX B. Direct Plus C. NASDAQ D. SUPERDOT

Q: The inside quotes on a limit order book can be found ______. A. at the top of the list B. at the bottom of the list C. by taking the averages of the bid and ask prices on the list D. only by direct contact with the specialist who maintains the book

Q: The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market. A. NYSE; NASDAQ B. NASDAQ; NYSE C. CME; OTC D. AMEX; NYSE

Q: In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price. A. best-efforts B. firm-commitment C. private placement D. none of these options

Q: Specialists try to maintain a narrow bid-ask spread because: I. If the spread is too large, they will not participate in as many trades, losing commission income. II. The exchange requires specialists to maintain price continuity. III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit. A. I only B. I and II only C. II and III only D. I, II, and III

Q: According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term. A. bad; good B. bad; bad C. good; good D. good; bad

Q: Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market. A. overpriced B. correctly priced C. underpriced D. mispriced, but without any particular bias

Q: The bulk of most initial public offerings (IPOs) of equity securities goes to ___________. A. institutional investors B. individual investors C. the firm's current shareholders D. day traders

Q: The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________. A. interest building B. book building C. market analysis D. customer identification

Q: When matching orders from the public, a specialist is required to use the _______. A. lowest outstanding bid price and highest outstanding ask price B. highest outstanding bid price and highest outstanding ask price C. lowest outstanding bid price and lowest outstanding ask price D. highest outstanding bid price and lowest outstanding ask price

Q: The __________ was established to protect investors from losses if their brokerage firms fail. A. CFTC B. SEC C. SIPC D. AIMR

Q: Advantages of ECNs over traditional markets include all but which one of the following? A. Lower transactions costs B. Anonymity of the participants C. Small amount of time needed to execute and order D. Ability to handle very large orders

Q: On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security? A. $1,375 B. $500 C. $275 D. $1,450

Q: If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level. A. stop-buy; stop-loss B. market; limit C. stop-loss; stop-buy D. limit; market

Q: The term latency refers to _____. A. the lag between when an order is placed on the NYSE and when it is executed. B. the amount of time it takes to accept, process, and deliver a trading order. C. the time it takes to implement new rules and procedures for stock exchanges and computer trading systems. D. the lag between when an order is executed and when the investor takes possession of the securities.

Q: The term inside quotes refers to _____. A. the difference between the lowest bid price and the highest ask price in the limit order book. B. the difference between the highest bid price and the lowest ask price in the limit order book. C. the difference between the lowest bid price and the lowest ask price in the limit order book. D. the difference between the highest bid price and the highest ask price in the limit order book.

Q: An order to buy or sell a security at the current price is a ______________. A. limit order B. market order C. stop-loss order D. stop-buy order

Q: Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers A. I only B. I and II only C. II and III only D. I, II, and III

Q: Which one of the following is a false statement regarding NYSE specialists? A. On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists. B. Specialists cannot trade for their own accounts. C. Specialists maintain limit order books, which contain the outstanding unexecuted limit orders. D. Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

Q: Which one of the following types of markets requires the greatest level of trading activity to be cost-effective? A. Broker market B. Dealer market C. Continuous auction market D. Direct search market

Q: Initial margin requirements on stocks are set by _________. A. the Federal Deposit Insurance Corporation B. the Federal Reserve C. the New York Stock Exchange D. the Securities and Exchange Commission

Q: Purchases of new issues of stock take place _________. A. at the desk of the Fed B. in the primary market C. in the secondary market D. in the money markets

Q: More than ______ of all trading is believed to be initiated by computer algorithms. A. 25% B. 40% C. 50% D. 75%

Q: Which one of the following is not an example of a brokered market? A. Residential real estate market B. Market for large block security transactions C. Primary market for securities D. NASDAQ

Q: As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks' prices change by more than _____ in a 5-minute period. A. 10% B. 20% C. 30% D. 40%

Q: Rank the following types of markets from least integrated and organized to most integrated and organized: I. Brokered markets II. Continuous auction markets III. Dealer markets IV. Direct search markets A. IV, II, I, III B. I, III, IV, II C. II, III, IV, I D. IV, I, III, II

Q: The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________. A. Archipelago; Instinet B. Instinet; Archipelago C. Island; Instinet D. LSE; Euronext

Q: The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss? A. 9% B. 15% C. 48% D. 57%

Q: Which one of the following statements about IPOs is not true? A. IPOs generally underperform in the short run. B. IPOs often provide very good initial returns to investors. C. IPOs generally provide superior long-term performance as compared to other stocks. D. Shares in IPOs are often primarily allocated to institutional investors.

Q: A level _____ subscriber to the NASDAQ system may enter bid and ask prices. A. 1 B. 2 C. 3 D. 4

Q: Private placements can be advantageous, compared to public issue, because: I. Private placements are cheaper to market than public issues. II. Private placements may still be sold to the general public under SEC Rule 144A. III. Privately placed securities trade on secondary markets. A. I only B. I and III only C. II and III only D. I, II, and III

Q: A red herring becomes a prospectus when ____. A. the preliminary registration statement is approved by the SEC B. the IPO is complete C. the offering is seasoned D. the lockup period expires

Q: Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue? A. $90,000 B. $1,290,000 C. $2,390,000 D. $1,690,000

Q: Explicit costs of an IPO tend to be around ______ of the funds raised. A. 1% B. 7% C. 15% D. 25%

Q: Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price. A. red herring B. issuing company C. initial stockholder D. underwriter

Q: Underwriting is one of the services provided by _____. A. the SEC B. investment bankers C. publicly traded companies D. FDIC

Q: The TED spread refers to A. the difference between the Treasury bond rate and the Treasury bill rate. B. the difference between the Treasury note rate and the Treasury bill rate. C. the difference between the LIBOR rate and the Treasury bill rate. D. the difference between the LIBOR rate and the Treasury bond rate.

Q: Which of the following mortgage scenarios will benefit the homeowner the most? A. Adjustable rate mortgage when interest rate increases. B. Fixed rate mortgage when interest rates falls. C. Fixed rate mortgage when interest rate rises. D. None of these options, as the banker's interest will always be protected.

Q: A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index? A. 5.78% B. 4.35% C. 6.16% D. 7.42%

Q: A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value? A. 960 B. 970 C. 975 D. 985

Q: The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index? A. 5.00 B. 4.85 C. 4.50 D. 4.75

Q: The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index? A. 23.43 B. 35.36 C. 40.33 D. 49.58

Q: A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket? A. 2.34% B. 2.68% C. 3.25% D. 4.92%

Q: An index computed from a simple average of returns is a/an _____. A. equal weighted index B. value weighted index C. price weighted index D. share weighted index

Q: A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket? A. 3.2% B. 3.68% C. 4.92% D. 5%

Q: What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%? A. 6.48% B. 7.25% C. 8.02% D. 9%

Q: All but which one of the following indices is value weighted? A. NASDAQ Composite B. S&P 500 C. Wilshire 5000 D. DJIA

Q: A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to the individual investor is _______. A. 3.96%; 5.1% B. 5.39%; 5.1% C. 6%; 6% D. 3.96%; 6%

Q: In a ___________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal. A. value-weighted index B. equally weighted index C. price-weighted index D. bond price index

Q: You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______. A. a value-weighted index B. an equally weighted index C. a price-weighted index D. a bond price index

Q: The Federal Reserve Board of Governors directly controls which of the following interest rates? A. Bankers' acceptances B. Brokers' calls C. Federal funds D. LIBOR

Q: Which of the following is not considered a money market investment? A. Bankers' acceptance B. Eurodollar C. Repurchase agreement D. Treasury note

Q: Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value? A. 300 B. 39 C. 43 D. 30

Q: A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share. A. $0.55 B. $1.80 C. $0.45 D. $1.25

Q: What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001? A. No change, as both yields will remain the same B. Increase, as the spread usually increases in response to a crisis C. Decrease, as the spread usually decreases in response to a crisis D. No change, as both yields will move in the same direction

Q: What are business firms most likely to use derivative securities for? A. Hedging B. Speculating C. Doing calculus problems D. Market making