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Finance
Q:
Under the present margin requirements, at least ____ percent of an investor's invested funds must be paid in cash.
a. 20
b. 30
c. 40
d. 50
e. None of these are correct.
Q:
____ may facilitate stock transactions by taking positions in specific stocks.
a. Board members
b. Capstone members
c. Market makers
d. None of these are correct.
Q:
Which of the following is incorrect with regard to taxes imposed on stock transactions?
a. Stock transactions are subject to dividend and capital gains tax at the federal level and may be subject to state income tax as well.
b. Stocks have to be held for at least one year to qualify for the long-term capital gains tax.
c. The maximum federal tax on dividends and long-term capital gains is 14 percent.
d. Higher tax rates are imposed on the dividends and capital gains of individuals in high tax brackets.
Q:
Mark uses his own funds to purchase a stock priced at $70. He thinks he can sell the stock for $100 after one year. What is Marks estimated return on the stock?
a. 30.00 percent
b. -42.86 percent
c. -30.00 percent
d. 42.86 percent
e. None of these are correct.
Q:
A ____ is a trading platform on a computer website that allows investors to trade stocks without the use of a broker.
a. direct access broker
b. program trader
c. market maker
d. communication network
Q:
Traders that engage in high frequency trading commonly close out their positions in
a. one day.
b. one month.
c. three months.
d. one year.
Q:
To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap evidence.
a. dark pool trading
b. naked short selling
c. insider trading
d. accounting fraud
Q:
A ____ order to buy or sell a stock means to execute the transaction at the best possible price.
a. market
b. limit
c. stop-loss
d. stop-buy
Q:
The Division of ____ of the SEC requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities.
a. Corporation Finance
b. Enforcement
c. Administration
d. Trading and Markets
Q:
On May 6, 2010, the __________ occurred, when stocks on the New York Stock Exchange declined by more than 9 percent on average before reversing and recovering most of those losses on that same day. Much of the trading occurred within a half hour.
a. credit default crisis
b. swap crisis
c. specialist crash
d. flash crash
Q:
Kayla would like to purchase a stock priced at $30. The stock is not expected to pay any dividends in the coming year. She thinks she can sell the stock for $36 after one year. Her estimated return on the stock would be ____ percent.
a. 6
b. 10
c. 15
d. 20
Q:
Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?
a. It requires firms to disclose relevant information broadly to investors at the same time.
b. It requires firms to file all relevant information with the SEC before disclosing it to analysts.
c. Some critics suggest that the regulation has caused firms to disclose less information than before to ensure that they do not violate the regulation.
d. It prohibits firms from communicating with analysts after a news announcement is made to all investors.
e. It requires firms to file all relevant information with the SEC before disclosing it to analysts AND it prohibits firms from communicating with analysts after a news announcement is made to all investors.
Q:
A(n) ____ from a broker requires the investor to put up additional collateral.
a. maintenance margin
b. initial margin
c. margin call
d. trading halt
Q:
Short selling a stock refers to
a. poor performance from purchasing an overvalued stock.
b. the new issuance of low-priced stocks by firms.
c. the new issuance of stocks by financially weak firms.
d. the borrowing of stock owned by someone else and selling it in the market.
Q:
International trading of stocks has been facilitated by reductions in
a. transaction costs.
b. information costs.
c. exchange rate risk.
d. transaction costs AND information costs.
Q:
The ____ the trading volume of a stock, the ____ the spread.
a. larger; wider
b. larger; narrower
c. lower; narrower
d. None of these are correct.
Q:
Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is
a. 60 percent.
b. 44 percent.
c. 30 percent.
d. 69 percent.
Q:
The strategy of combining the use of futures or options contracts on a stock index with program trading is known as
a. trading with algorithms.
b. downside insurance.
c. portfolio insurance.
d. spread the risk trading.
Q:
Which of the following statements about program trading is incorrect?
a. It represents a computerized response by institutional investors to either buy or sell a large basket of stocks in response to movements in a particular stock index.
b. It may involve the purchase of stocks that have become "underpriced."
c. It may involve the sale of stocks that have become "overpriced."
d. It is designed to capitalize on Federal Reserve monetary policy announcements.
e. None of these are correct.
Q:
When investors buy stock with borrowed funds, this is sometimes referred to as
a. use of proxy.
b. purchasing stock on margin.
c. a margin call.
d. a margin residual claim.
Q:
A short interest ratio of 20 or higher indicates that many investors
a. believe that the stock price is currently overvalued.
b. believe that the stock price is currently undervalued.
c. are selling the stock short.
d. believe that the stock price is currently overvalued AND are selling the stock short.
Q:
The transaction costs associated with international trading of stocks have been reduced by
a. the consolidation of stock exchanges.
b. extensive computerization of stock exchanges.
c. the Eurolist system.
d. All of these are correct.
Q:
____ may execute transactions on a stock exchange for their clients.
a. Board members
b. Capstone members
c. Floor brokers
d. None of these are correct.
Q:
Dark pools
a. are computerized platforms used by institutional investors that operate like private stock markets.
b. are stocks issued by firms that have disclosed very limited financial information.
c. are stock option contracts that cover positions in stocks.
d. are contracts used to bet against the default of a debt instrument.
Q:
The bid-ask spread is negatively related to
a. order costs
b. inventory costs
c. risk
d. trading volume
Q:
Trading halts are intended to ensure that the market has complete information before trading on news.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
Q:
When the ratio of the number of shares of a stock sold short divided by the total number of shares outstanding is 3 percent or higher, this suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline.
a. True
b. False
Q:
Many high frequency traders are willing to serve as intermediaries (similar to market makers) by accommodating orders that they believe will ultimately result in profits.
a. True
b. False
Q:
When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it.
a. True
b. False
Q:
The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.
a. True
b. False
Q:
Under the SECs uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price.
a. True
b. False
Q:
It is not illegal for investors to take positions in a stock based on inside information that they received from an insider at the company, although it would be illegal for the insider to take a position based on that information.
a. True
b. False
Q:
The short interest ratio is commonly measured as the number of shares sold short divided by the number of shares that the firm has repurchased in the last quarter.
a. True
b. False
Q:
In naked short selling, short-sellers sell a stock short that they currently own.
a. True
b. False
Q:
Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients.
a. True
b. False
Q:
A market order is an order to buy or sell a stock at the best possible price.
a. True
b. False
Q:
When investors place a limit order, they can place it for the day only.
a. True
b. False
Q:
The SEC's Division of Trading and Markets assesses possible violations of the SEC's regulations and can take action against individuals or firms.
a. True
b. False
Q:
The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call.
a. True
b. False
Q:
A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the stock.
a. True
b. False
Q:
A trading halt prevents a stock from experiencing a loss in response to news.
a. True
b. False
Q:
The short interest represents the amount of interest that borrowers owe on loans used to purchase stock.
a. True
b. False
Q:
Trading halts are intended to prevent insider trading.
a. True
b. False
Q:
Electronic communications networks are primarily intended to prevent executives from using inside information when trading stocks.
a. True
b. False
Q:
Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.
a. True
b. False
Q:
Indicate whether the statement is true or false.A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock.a. Trueb. False
Q:
Technical analysis relies on the use of ____ to make investment decisions.
a. interest rates
b. inflationary expectations
c. industry conditions
d. recent stock price trends
Q:
The ____ index uses the standard deviation of a stocks return to measure the stocks risk-adjusted performance.
a. Sharpe
b. Treynor
c. arbitrage
d. margin
Q:
The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset.
a. prevailing risk-free rate
b. dividend growth rate
c. market return
d. covariance between the asset's return and the market return
e. All of these are factors used in the CAPM.
Q:
The standard deviation of a stock's returns is used to measure the stock's
a. volatility.
b. beta.
c. Treynor index.
d. risk-free rate.
Q:
Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is
a. 0.35.
b. 0.36.
c. 0.45.
d. 0.28.
e. None of these are correct.
Q:
The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.
a. Sharpe
b. Treynor
c. arbitrage
d. margin
Q:
The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to value the firm's stock.
a. firm's; industry
b. firm's; firm's
c. average industry; industry
d. average industry; firm's
Q:
Which of the following is NOT a limitation of the PE method of valuing stocks?
a. Stock buybacks can distort a firms earnings.
b. Using previous earnings may not be useful for a firm that is restructuring.
c. The earnings of firms in a cyclical industry may vary dramatically depending on whether the economy is strong or weak.
d. Creative accounting may distort a firms reported earnings.
e. All of the above are limitations of the PE method.
Q:
The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's
a. prevailing level of industry competition.
b. beta.
c. liquidity.
d. size (market capitalization).
Q:
Sorvino Company is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.
a. 4.06
b. 4.16
c. 40.63
d. 24.62
e. None of these are correct.
Q:
Which of the following is NOT commonly used as an estimate of a stock's volatility?
a. an estimate of its standard deviation of returns over a recent period
b. a time-series trend of historical standard deviations of returns over recent periods
c. the implied volatility derived from the stock option pricing model
d. an estimate of its option premium derived from the stock option pricing model
Q:
The general mood of investors represents
a. investor sentiment.
b. beta.
c. systematic risk.
d. unsystematic risk.
Q:
Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel's industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____.
a. 113.95
b. 111.32
c. 105.25
d. 130.72
Q:
If the returns of two stocks are perfectly correlated, then
a. their betas should each equal 1.0.
b. the sum of their betas should equal 1.0.
c. their correlation coefficient should equal 1.0.
d. their portfolio standard deviation should equal 1.0.
Q:
Holding other factors constant, an increase in the capital gains tax rate will have
a. more effect on the valuation of dividend-paying stocks than on stocks with high growth prospects.
b. less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects.
c. no effect on the valuations of stocks.
d. the same effect on the valuation of dividend-paying stocks and stocks with high growth prospects.
Q:
If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expected outcome.
a. 68; 4
b. 68; 8
c. 95; 8
d. 95; 6
e. None of these are correct.
Q:
Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.
a. 21.5
b. 6.5
c. 16.5
d. 14.0
e. None of these are correct.
Q:
As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
Q:
The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk.
a. True
b. False
Q:
Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a given confidence level.
a. True
b. False
Q:
A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.
a. True
b. False
Q:
Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta.
a. True
b. False
Q:
Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option pricing model, it is possible to derive the anticipated volatility level.
a. True
b. False
Q:
The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM).
a. True
b. False
Q:
Stock price volatility increased during the credit crisis.
a. True
b. False
Q:
When a firms announced earnings are lower than expected, investors will increase their valuation of the firms future cash flows and its stock.
a. True
b. False
Q:
When there is a sharp decline in the CBOE Volatility Index (VIX), stock prices also tend to decline.
a. True
b. False
Q:
If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.
a. True
b. False
Q:
Beta serves as a measure of risk because it can be used to derive a probability distribution of returns based on a set of market returns.
a. True
b. False
Q:
The dividend discount model states that the price of a stock should reflect the present value of the stock's future dividends.
a. True
b. False
Q:
Even though a foreign stock appears to be undervalued in its own country, the stock may not generate a reasonable return for a U.S. investor if the currency of that country depreciates against the U.S. dollar.
a. True
b. False
Q:
The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio.
a. True
b. False
Q:
A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.
a. True
b. False
Q:
For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model.
a. True
b. False