Deck 3: Participating in the Market

Question 1

The S&P Indexes are often used by professionals because they are weighted by total market value of the companies in the index.

Answer 1

True

Question 2

The Value Line Average contains stocks from several exchanges or markets.

Answer 2

True

Question 3

Korean stock prices are measured by the Nikkei 225 average.

Answer 3

False

Question 4

The Standard & Poor's Indexes are price-weighted indexes.

Question 5

The Russell 2000 measures performance of the 2000 largest stocks,based on market value.

Question 6

Large,established companies make up the Dow Jones Industrial Average.

Question 7

The divisor in the Dow Jones Industrial Average equals 30.

Question 8

Good till canceled (GTC)orders expire automatically after a set period of time.

Question 9

The base period for the Standard & Poor's Stock Indexes is 1957-58.

Question 10

The Standard & Poor's 500 Stock Index is widely followed by professional money managers as a measure of broad stock market activity.

Question 11

The Value Line Average reflects changes in stock prices,rather than value of shares outstanding.

Question 12

The Wilshire 5000 index includes all stocks on the New York and American Stock Exchanges,and most active NASDAQ issues.

Question 13

A value-weighted index tends to give more importance to large companies than small companies.

Question 14

The indexes of The New York Stock Exchange,American Exchange,and NASDAQ are all price-weighted.

Question 15

The Value Line Average is an equal-weighted index.

Question 16

The Dow Jones Industrial Average is not adjusted for stock splits.

Question 17

The Dow Jones Composite index combines the Dow Jones Industrial,Transportation,and Utility averages into an index of 65 stocks.

Question 18

A change in a high-priced stock's value has a greater impact on the Dow Jones Industrial Average than a change in a low-priced stock.

Question 19

The Standard & Poor's Midcap Index is composed of 500 middle-sized firms.

Question 20

The Dow Jones Industrial Average is a value-weighted index.

Question 21

If you short a stock and the price goes up,your net equity value will go up.

Question 22

The NYSE sets margin requirements.

Question 23

All of the S&P measures are true indexes,in that they are linked to a base value.

Question 24

Long-term capital gains are taxed as ordinary income.

Question 25

Margin percentages are set by the Board of Governors of the Federal Reserve System.

Question 26

Novice investors should consider using full-service brokers.

Question 27

If a stock is held for less than 12 months,any gain in value is taxed as ordinary income.

Question 28

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.

Question 29

The margin requirement on stock is currently 30%.

Question 30

The Dow Jones Industrial Average is not the most accurate market measure,because of its blue-chip stock composition,and its bias toward high-priced stocks.

Question 31

Securities must be kept in the street name of the brokerage if a margin account is used.

Question 32

Tax rates that apply to income within a given tax bracket are referred to as marginal tax rates.

Question 33

You are said to be long in a security if you purchase the security.

Question 34

Trading through an online broker is generally cheaper than trading through a discount broker.

Question 35

Stocks may be used to satisfy margin requirements,rather than cash.

Question 36

When you short a security you are actually selling a security that no one owns.

Question 37

You can write off up to $5,000 in investment losses in any one year.

Question 38

For investors putting their funds in tax-deferred accounts,the capital gains tax provisions during the holding period are irrelevant.

Question 39

The margin requirement is associated with short selling.

Question 40

Long-term capital gains are taxed at a higher tax rate than dividends.

Question 41

Which of the following is NOT a characteristic of the Dow Jones Industrial Average?

A)It includes only very high quality common stock
B)It generally follows the trend of the market
C)The companies included comprise over 25% of the market value of companies listed on the New York Stock Exchange
D)It is a value-weighted average
E)Dividends require adjustments to the divisor

Question 42

A stop order is similar to a limit order,except that the order turns into a market order once the stop price is hit.

Question 43

Which of the following is NOT a characteristic of the Wilshire 5000 Equity Index?

A)It is most frequently used by individual investors
B)It represents the total dollar value of 5,000 stocks on a value-weighted basis
C)It contains all NYSE and AMEX issues,and most active NASDAQ issues
D)It is used as a measure of the broadest market performance index
E)It is a value-weighted index

Question 44

Companies having the greatest impact on the computation of the Dow Jones Averages and the Standard & Poor's Indexes have the ____________ and the ____________,respectively.

A)highest price;highest total market value
B)highest total market value;highest price
C)highest price;lowest liquidity
D)greatest number of shares outstanding;highest price

Question 45

Minimum maintenance standards require that a margined investor always maintains the initial margin position.

Question 46

________________ represents 75% of the total value of firms listed on the NYSE,while ____________________ includes 1,700 individual firms.

A)The Dow Jones Industrial Average;Value Line Average
B)Wilshire 5000;Russell 2000
C)The Value Line Average;Standard & Poor's Composite
D)The Dow Jones Composite Average;the Standard & Poor's Industrials
E)The Standard & Poor's 500 Index;Value Line Average

Question 47

The success of a short investment position depends on:

A)a level stock price.
B)a declining stock price.
C)an increasing stock price.
D)declining interest rates.
E)More than one of the above

Question 48

A stop order is similar to a limit order,except that once the set price is reached,the stop order

A)is executed after all limit orders at the same price.
B)becomes a limit order.
C)goes to the end of the execution cue.
D)immediately becomes a market order.

Question 49

The index which gives equal weight to every company included,and is therefore not dominated by any single company,is the:

A)Dow Jones Composite Average.
B)Standard & Poor's 400 Index.
C)The Value Line Average.
D)American Stock Exchange Index.
E)Dow Jones World Index.

Question 50

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.

A)limit
B)stop
C)good 'til canceled
D)market

Question 51

An example of an equal-weighted index or average is the:

A)Russell 2000.
B)Dow Jones Industrial Average.
C)Value Line Average.
D)Russell 1000.
E)S&P 500.

Question 52

If a stock is sold short,the equity in the investor's account will go up if the stock

A)price goes down.
B)price goes up.
C)is split 2 for 1.
D)A and C

Question 53

Online brokers have become popular because:

A)they offer discounts on stock research reports.
B)their commissions are lower than full-service or discount brokers.
C)they specialize in the stock of low priced securities.
D)only online brokers can service self-directed individual retirement accounts.

Question 54

Which of the following are features of margin accounts?

A)They leverage returns (i.e. ,magnify the size of a gain or loss)
B)You must put up part of the purchase price in cash or other securities
C)Purchased securities are not delivered to the investor
D)The percentage of the total cost the investor must pay is set by the Federal Reserve Board
E)All of the above are features

Question 55

The NASDAQ 100 includes high tech firms such as:

A)IBM,Oracle,and Cisco Systems.
B)Microsoft,Intel,and Cisco Systems.
C)Hewlett Packard,Cisco Systems,and Compaq.
D)All of the above

Question 56

Performance in the bond market is usually gauged by:

A)indexes and averages.
B)interest rate movements.
C)yield curve changes.
D)B and C

Question 57

The Securities and Exchange Commission publishes a list of approved securities that may be borrowed against.

Question 58

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.

A)money market account;cash account
B)cash account;charge account
C)cash account;margin account
D)type 5 account;a type 2 account

Question 59

Commissions charged by stock brokers tend to vary among different classes of brokers.

Question 60

A margin represents the amount of money an investor may borrow to purchase securities.

Question 61

The amount of taxes paid,divided by taxable income,is called:

A)the marginal tax rate.
B)the average tax rate.
C)the implied tax rate.
D)None of the above

Question 62

An investor is in a 35% tax bracket for normal (ordinary)income.During the course of the year,he received $5,000 in dividends and had $15,000 capital gains on stock he had held for 19 months.How much will his total tax be on this investment-related income?

Question 63

Using the Table below,assume a single person has a taxable income of $40,000. (a)How much tax will be owed? (You will need to refer to the Table plus make your own calculations).
(b)What is the person's average tax rate?
(c)What is the person's marginal tax rate?

Question 64

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)an equal-weighted index.
B)a value-weighted index.
C)an equally-weighted index.
D)a price-weighted index.

Question 65

When an investor establishes a position in a security,

A)they are said to be long if they purchase the security for their account.
B)they are said to be long if they sell the security for their account.
C)they are said to be short if they sell the security for their account.
D)they are said to be short if they purchase the security for their account.
E)Both a and c

Question 66

The tax rate that is simply the amount of taxes paid,divided by taxable income is:

A)the marginal tax rate.
B)the average tax rate.
C)the short-term capital gains tax rate.
D)the long-term capital gains tax rate.

Question 67

Long-term capital gains treatment serves as encouragement for investors to buy:

A)high-yield stocks.
B)municipal bonds.
C)U.S.government bonds.
D)growth stocks.

Question 68

The tax rate that specifically applies to each new dollar of income is the:

A)marginal tax rate.
B)average tax rate.
C)short-term capital gains tax rate.
D)long-term capital gains tax rate.

Question 69

The Nikkei average relates to stock movements in what market?

A)Korea
B)Japan
C)Austria
D)Australia
E)China

Question 70

The minimum holding period to qualify for the long-term capital gains treatment is:

A)1 month.
B)12 months.
C)18 months.
D)24 months.
E)36 months.

Question 71

The difference between a cash account and a margin account is:

A)a margin account allows the investor up to five days to pay for the entire purchase.
B)a cash account gives the investor a 2% discount if they pay within 10 days,or the investor has to pay the entire amount within 30 days (2/10 net 30).
C)a margin account allows the investor to borrow a percentage of the purchase price from the brokerage firm.
D)a margin account is less risky to the investor.
E)a cash account requires the stock be kept registered in street name,and a margin account allows the securities to be delivered to the customer.

Question 72

Margin accounts are used by:

A)traders who think their long-run returns will be greater than the cost of borrowing.
B)speculators who think their long-run returns will be greater than the cost of borrowing.
C)investors who think their long-run returns will be greater than the cost of borrowing.
D)All of the above

Question 73

You buy 100 shares of stock at $50 per share on margin of 40 percent.If the price of the stock declines to $35,what is your percentage loss?

Question 74

You sell 100 shares of PGD short at a price of $50 per share.How much is your initial margin,given margin requirements of 40%? If the stock declines to $30 per share,what is your percentage gain or loss on the initial equity?

Question 75

You buy 100 shares of stock at $40 per share on margin of 40%.If the price of the stock rises to $60 per share,what is your percentage gain in equity? Disregard interest costs.

Question 76

Assume the following five companies are used in computing an index (there have been no stock splits during this time). (a)If the index is price-weighted,what will be the value of the index on Dec.31,2004?
(b)Using the same data from the above table,determine the index value if the index is calculated on a value-weighted basis.

Question 77

The following are all value-weighted indexes,except:

A)the S&P 500.
B)the Dow Jones Industrial Average.
C)midcap 400.
D)the S&P Industrials (400 stocks).
E)wilshire 5000.

Question 78

If an investor is in a 34% tax bracket and has held a stock for two years,the applicable tax rate that will apply to dividends is:

A)15%.
B)20%.
C)28%.
D)34%.

Question 79

An investor who is in a 33% tax bracket for normal (ordinary)income buys a stock for $5,000 and sells it for $9,000.How much will her tax obligation be if she holds the stock for:
(a)6 months?
(b)14 months?