Deck 16: Investment Concepts

Question 1

An order that specifies the price at which a market order is initiated is called a ____ order.

A) Fill or kill
B) Stop
C) Limit
D) Day
E) None of the above.

Answer 1

Stop

Question 2

A brokerage firm that offers a variety of services to its clients, including research information about stocks and bonds, monthly publications that contain investment recommendations, and investment advisory services is called a(n)

A) Discount Brokerage Firm.
B) Investment Banker.
C) Financial Intermediary.
D) Full-service brokerage firm.
E) None of the above.

Answer 2

Full-service brokerage firm.

Question 3

The proportion of funds invested in various categories of assets, such as money market instruments, long-term debt, stocks, and real estate is referred to as

A) Investment portfolio summation.
B) Asset allocation.
C) Risk tolerance level.
D) Expected return.
E) None of the above.

Answer 3

Asset allocation.

Question 4

Organizations that help investors trade securities created by corporations and the government are called

A) Financial intermediaries.
B) Brokerage firms.
C) Federal Reserve Boards.
D) Banks.
E) None of the above.

Question 5

An order that gives instructions to cancel the order if the price conditions are not met by the end of the trading day is called a ____ order.

A) Market
B) Stop
C) Limit
D) Day
E) Fill or kill

Question 6

Which of the following is not a common reason given for investing?

A) Retirement planning.
B) Supplement current income.
C) Shelter current income from taxes.
D) Eliminate slack from current budget.
E) To achieve future goals, such as purchasing a house.

Question 7

All of the following are reasons to monitor your investment portfolio except to

A) Ensure the goals are being met.
B) Take advantage of changes in economic and legal conditions.
C) Adjust the portfolio with respect to a change in risk attitude.
D) Capture additional transaction costs.
E) None of the above.

Question 8

An order to execute a trade at the best price available as soon as the transaction reaches the market is called a ____ order.

A) Market
B) Stop
C) Limit
D) Day
E) Fill or kill

Question 9

An order that gives instructions to cancel the order if the price conditions are not met when the order reaches the market is called a ____ order.

A) Market
B) Stop
C) Limit
D) Day
E) Fill or kill

Question 10

The costs associated with trading securities, which include the costs of time, effort, and phone calls, as well as brokered commissions are called

A) Arbitrage.
B) Economies of scale.
C) Transaction costs.
D) Portfolio management.
E) Taxes.

Question 11

The ____ index measures the aggregate return for the 30 largest industrial firms in the United States.

A) S&P 500
B) Dow Jones Industrial
C) NYSE composite
D) AMEX
E) NASDAQ small cap

Question 12

The total return earned from the time an investment is purchased until it is liquidated is called a(n) ____.

A) Ask yield
B) Current yield
C) Holding period return
D) Coupon rate
E) Dividend yield rate

Question 13

People who view investments as instruments that produce growth over a long period of time are referred to as

A) Speculators.
B) Investors.
C) Brokers.
D) Analysts.
E) None of the above.

Question 14

Income securities are used primarily to

A) Invest in retirement planning.
B) Supplement current income.
C) Shelter current income from taxes.
D) Defer interest income to a later date.
E) None of the above.

Question 15

A middleman, or agent, who helps investors trade financial instruments such as stocks, bonds, and derivatives is called a(n)

A) Analyst.
B) Broker.
C) Investment banker.
D) Speculator.
E) None of the above.

Question 16

When one investor borrows stock from another investor and then immediately sells it in the market, but with a promise to replace the stock at some later date, he or she has executed a transaction that is called ____.

A) Margin trading
B) Short selling
C) A hypothecation arrangement
D) "Going long"
E) An irregular transaction

Question 17

An investor's ability and willingness to accept risk is termed:

A) Risk aversion.
B) Risk seeking.
C) Risk tolerance level.
D) Risk-free rate of return.
E) None of the above.

Question 18

Individuals who try to make a quick profit based on short-term market adjustments are referred to as

A) Speculators.
B) Investors.
C) Brokers.
D) Analysts.
E) None of the above.

Question 19

All of the following are basic categories of financial assets except

A) Money market securities.
B) Stocks (equity).
C) Deeds (titles).
D) Bonds (debt).
E) All of the above represent financial assets.

Question 20

A firm that offers clients only the basic services associated with trading securities is called a(n)

A) Discount Brokerage Firm.
B) Investment Banker.
C) Financial Intermediary.
D) Full-service brokerage firm.
E) None of the above.

Question 21

Tristar Growth Mutual Fund reported annual holding period returns of 22 percent in 2010, 25 percent in 2011, and 31 percent in 2012.What was the simple arithmetic average return generated by Tristar for the period 2010 through 2012?

A) 31.0%
B) 33.3%
C) 26.0%
D) 28.0%
E) 25.0%

Question 22

Use the information below to solve for the earnings per share for Adobe.

A) $4.38
B) $2.18
C) $3.29
D) $3.10
E) None of the above.

Question 23

A bond with an annual coupon rate of 12 percent and face value of $1,000.00 was purchased for $990.00 and sold two years later for $1,050.00.What was the holding period return?

A) 15.1%
B) 18.2%
C) 30.3%
D) 28.5%
E) 30.0%

Question 24

At the beginning of 2010, Steve purchased ACME stock on margin.The initial margin requirement is 50 percent and the broker loan rate is 8 percent.Steve invested $15,000 of his own funds and margined the maximum amount allowed by the broker to purchase ACME stock.At the time, the purchase price of the stock was $25 a share.No dividends were paid during the year, and the stock was sold for $32 a share at the end of the 2010.What is the one-year holding period return for this investment?

A) 28.0%
B) 56.0%
C) 24.0%
D) 40.0%
E) 48.0%

Question 25

Staci purchased a stock on April 12 for $78.00 and sold it on October 13 the same year, for $76.75.What is Staci's holding period return assuming she received a dividend of $2.20 per share on June 14, which was not reinvested?

A) −1.6%
B) 4.4%
C) 1.2%
D) 9.0%
E) 2.4%

Question 26

Angela Johnson bought Microsoft stock many years ago when the company was very young; so, clearly, she has done very well with her investment.Now that Microsoft is more established, its stock price has started to falter somewhat.Angela really thinks that Microsoft will continue to be a good investment in the future, so she plans to stay in the stock for the time being.However, at the same time, she wants to protect the profits she has already amassed.She follows the market every day, so she is confident she can initiate a sell order when necessary to ensure she receives the gains she has realized to this point.Unfortunately, Angela is leaving the country for an extended vacation in China, where she will be out of touch with the investment world, and she is worried that something might happen to Microsoft during the time she is gone that will substantially decrease the "paper" profits she now has.Given that Angela believes Microsoft will continue its upward movement but she also wants to protect her "paper" profits, which of the following orders should she place with her broker before she leaves for China?

A) Market sell
B) Stop (sell)
C) Limit (sell)
D) Fill or kill
E) Margin sell

Question 27

Steve purchased a bond for $975.00.Ninety days later he received interest income of $40.00, and then immediately sold the bond for $990.00.What is the annualized rate of return Steve earned on this investment?

A) 5.6%
B) 22.6%
C) 16.4%
D) 10.1%
E) 12.3%

Question 28

Use the following information to compute the simple arithmetic average return for Topwater Boats for the period from 2007 through 2012?

A) 28.0%
B) 17.2%
C) 20.6%
D) 16.3%
E) None of the above.

Question 29

Your brokerage firm allows market trading with an initial margin requirement equal to 60 percent plus an 8 percent broker loan rate.You have $6,000 to invest.How many shares of ABC can you purchase on margin? ABC stock currently sells for $50 a share.

A) 100
B) 200
C) 92
D) 194
E) 108

Question 30

A long-term investment strategy where investors purchase securities with the intent to keep them for a long period before liquidation is called

A) Speculation.
B) Shorting the stock.
C) Buy-and-hold.
D) Margin trading.
E) Option trading.

Question 31

Use the information below to solve for the earnings per share for Landstar.

A) $1.03
B) $0.38
C) $0.98
D) $1.05
E) None of the above.

Question 32

At the beginning of 2010, Sally purchased Besham stock on margin.The initial margin requirement is 60 percent and the broker loan rate is 10 percent.Sally invested $15,000 of her own funds and margined the maximum amount allowed by the broker to purchase Besham stock.At the time, the purchase price of the stock was $50 a share.No dividends were paid during the year, and the stock was sold for $48 a share at the end of the 2010.What is the one-year holding period return for this investment?

A) 60.0%
B) 10.0%
C) 4.0%
D) 6.7%
E) 0.0%

Question 33

An investor purchased 1,000 shares of AZT stock on January 5, 2012 for $83.25 per share.On March 20, a dividend of $0.75 per share was paid.Fifty days later, on May 9, 2012, the stock was sold for $85.00.What is the holding period return? Assume the dividend is not reinvested.

A) 21.6%
B) 3.0%
C) 9.5%
D) 15.1%
E) 1.0%

Question 34

When the market is rising we call it a ____ market, which suggests the economy is performing well; when the market is falling we call it a ____ market, which suggests the economy is performing poorly.

A) Bull; bear
B) Growth; decline
C) Bear; bull
D) Boom; recession
E) Strong; moderate

Question 35

An investor receives a margin call because

A) the value of the stock that was sold short has decreased below a price specified by the broker.
B) the brokerage firm wants to provide her with information about a new public stock issue that it will be handling in the future.
C) interest rates in the financial markets have increased substantially, and the brokerage firm wants her to immediately repay the loan she has outstanding.
D) the Federal Reserve intends to sell a special issue of Treasury securities and it needs investors to subscribe to the issue as quickly as possible.
E) the price of the stock she purchased on margin has decreased enough so that the actual margin is below the maintenance margin.

Question 36

A stock purchased for $52 paid a dividend of $1 six days after it was purchased.The stock was sold for $51 ninety days after it was purchased.What is the annualized rate of return? Assume the dividend was not reinvested.

A) 3.9%
B) 0.0%
C) −7.7%
D) 15.7%
E) −15.7%

Question 37

An investor earned a holding period return equal to 10 percent on a stock that she purchased for $27.50.During the time she held the stock, the company paid a $2 dividend.For what price did the investor sell the stock?

A) $26.75
B) $26.25
C) $30.25
D) $29.50
E) $28.25

Question 38

You have an arrangement with your brokerage firm that allows you to purchase stock on margin with an initial margin requirement of 25 percent and a broker loan rate of 10 percent.What is the maximum amount of stock you can purchase on margin if you have $20,000 to invest?

A) $150,000
B) $72,000
C) $80,000
D) $22,000
E) $200,000

Question 39

Use the information below to solve for the dividend yield for Midas.

A) 0.23%
B) 0.41%
C) 1.60%
D) 0.92%
E) None of the above.

Question 40

Use the information below to solve for the dividend yield for Lowes.

A) 1.9%
B) 1.4%
C) 2.6%
D) 0.9%
E) None of the above.

Question 41

A ____ order is an order to execute at the best price available when the transaction reaches the market.

A) limit
B) stop
C) trade
D) market

Question 42

The expected return on a portfolio is

A) the sum of the square root of the expected returns on the individual stocks included in the portfolio times the beta of the individual stocks.
B) the simple arithmetic average of the expected returns on the individual stocks included in the portfolio.
C) the geometric average of the expected returns on the individual stocks included in the portfolio.
D) the weighted average of the expected returns on the individual stocks included in the portfolio.

Question 43

An investor earned a 5 percent holding period return on a stock he originally purchased for $50.The stock paid a dividend equal to $3.What was the price of the stock when it was sold?

A) $52.50
B) $50.50
C) $50.00
D) $49.50
E) $47.50

Question 44

To be broker or to trade securities you must

A) abide by ethical standards established by the SEC.
B) abide by any licensing or registration requirements of state in which you trade.
C) be licensed by the exchanges on which the traded securities are listed.
D) All of the above.

Question 45

The Securities Investor Protection Corporation insures the cash and securities held by the brokerage company from theft or loss of the security.Each investor is covered to a maximum of ____.

A) $100,000
B) $200,000
C) $500,000
D) $1,000,000

Question 46

A ____ order is an order to buy or sell a stock at no worse than a specified price.

A) price
B) limit
C) market
D) stop

Question 47

Use the following information to compute the geometric arithmetic average return for Topwater Boats for 2007 through 2012.

A) 28.0%
B) 17.2%
C) 20.6%
D) 16.3%
E) None of the above.

Question 48

The simple arithmetic average return for the common stock of Saltwater Expeditions Incorporated for the eight-year period from 2005 through 2012 was 21 percent.The one-year holding period returns from 2005 through 2011 are given below.What is the implied one-year holding period return for 2012?

A) 21.4%
B) 24.4%
C) 3.0%
D) 13.0%
E) −3.0%

Question 49

Geometric Average Return
Foxy Ladies Investment Club
The Foxy Ladies Investment Club purchased 100 shares of common stock each in Coca-Cola, Intel, and Merck on January 02, 2010.A summary of their portfolio is given below:
Refer to Foxy Ladies Investment Club.What was the portfolio's geometric average return per year from 2010 through 2012?

A) 20.0%
B) 21.8%
C) 68.3%
D) 18.9%
E) Not enough information is given to compute the geometric average return.

Question 50

Geometric Average Return
Foxy Ladies Investment Club
The Foxy Ladies Investment Club purchased 100 shares of common stock each in Coca-Cola, Intel, and Merck on January 02, 2010.A summary of their portfolio is given below:
Refer to Foxy Ladies Investment Club.What is the portfolio's three-year holding period return (from January 2010 through December 2012)?

A) 71.8%
B) 23.9%
C) 68.3%
D) 22.8%
E) None of the above.

Question 51

Holding Period Return
Portfolio
Refer to Portfolio.What was the two-year holding period return for the portfolio? Assume any dividend payments are included in the market value shown above.

A) 38.5%
B) 27.8%
C) 35.8%
D) 30.7%
E) None of the above.

Question 52

Geometric Average Return
Foxy Ladies Investment Club
The Foxy Ladies Investment Club purchased 100 shares of common stock each in Coca-Cola, Intel, and Merck on January 02, 2010.A summary of their portfolio is given below:
Refer to Foxy Ladies Investment Club.What was the portfolio's simple arithmetic average return per year from 2010 through 2012?

A) 20.0%
B) 21.8%
C) 68.3%
D) 18.9%
E) Not enough information is given to compute the simple arithmetic average return.

Question 53

Geometric Average Return
Foxy Ladies Investment Club
The Foxy Ladies Investment Club purchased 100 shares of common stock each in Coca-Cola, Intel, and Merck on January 02, 2010.A summary of their portfolio is given below:
Refer to Foxy Ladies Investment Club.What was the 12-month holding period return for Merck during 2012?

A) 39.2%
B) 29.5%
C) −37.3%
D) 41.0%
E) 26.2%

Question 54

Holding Period Return
Portfolio
Refer to Portfolio.What was the one-year holding period return for the portfolio in 2009? Assume any dividend payments are included in the market value shown above.

A) 11.8%
B) 15.0%
C) 25.2%
D) 10.6%
E) −5.0%

Question 55

Geometric Average Return
Foxy Ladies Investment Club
The Foxy Ladies Investment Club purchased 100 shares of common stock each in Coca-Cola, Intel, and Merck on January 02, 2010.A summary of their portfolio is given below:
Refer to Foxy Ladies Investment Club.What was the 12-month holding period return for Coca-Cola during 2010?

A) −30.0%
B) 43.7%
C) −29.0%
D) 30.6%
E) −41.4%

Question 56

The one-year holding period returns for Cherokee Adventures for 2010 and 2011 are given below.If Cherokee's geometric average return for 2010 through 2012 was 15 percent, what was its implied one-year holding period return for 2012?

A) 12.8%
B) 11.8%
C) 24.6%
D) 16.0%
E) Not enough information is given to answer this question.

Question 57

A portfolio contains three stocks (Stock A, Stock B, and Stock C).The overall value of the portfolio increased 20 percent during 2010⎯the value of Stock A increased by 15 percent, the value of Stock B increased by 22 percent, and the value of Stock C increased by 30 percent.If 40 percent of the total funds in the portfolio were in Stock A at the beginning of 2010, what was the percent of funds (weight) invested in stock B?

A) 50%
B) 30%
C) 10%
D) 60%
E) 40%

Question 58

Asset allocation recommendations shift from investments like ____ to ____ as the individual investor gets closer to retirement.

A) stocks; equity
B) stocks; cash
C) cash; stocks
D) bonds; stocks

Question 59

When the financial markets become more unstable and unpredictable than normal, many professional investment managers shift their asset allocations from ____ to ____.

A) stocks; short-term debt
B) bonds; stocks
C) stocks; derivatives
D) bonds; derivatives

Question 60

Holding Period Return
Portfolio
Refer to Portfolio.What was the one-year holding period return for the portfolio in 2011? Assume any dividend payments are included in the market value shown above.

A) 11.8%
B) 20.1%
C) 39.9%
D) 10.5%
E) 25.2%

Question 61

An investor who wants to have a "hands on" approach to managing his or her investment portfolio in order to take advantage of market anomalies would want to follow the passive management style of investing.

Question 62

Because stocks must be traded in round lots, or multiples of 100 shares, on the organized exchanges, individual investors can only trade in multiples of 100 shares at a time.

Question 63

When the market is rising, it is called a bull market.

Question 64

Speculators are investors who view investments as instruments that produce growth over a long period of time.

Question 65

Once realistic goals have been formulated based on investment objectives and risk attitudes, the costs associated with the selection and purchase of the investment instruments is minimal.

Question 66

An investor purchased a share of AutheTec stock (AUTH) for $12.50.Three months later the stock was sold for $14.25.What is the holding period return earned by the investor?

A) 14%
B) 20%
C) 18%
D) 16%

Question 67

The primary reason people invest is to supplement current income.

Question 68

The total value of a firm's stock which can be computed by multiplying the number of shares outstanding by the market price per share is called what?

A) Market weighted
B) Market capitalization
C) Market beta
D) Market return

Question 69

When an investor places a stop order, he or she is telling the broker to "stop" an order that was placed previously but hasn't been executed yet.

Question 70

Financial instruments that offer steady interest or dividend payments are called income securities because they are good income-producing investments.

Question 71

All of the following are examples of transactions costs for buying securities except

A) time costs
B) bid/ask spread
C) brokerage fees
D) telephone calls
E) all of the above are example of transaction costs

Question 72

The relative amount of personal funds, or initial equity, an investor has to "put up" when purchasing stocks on margin is called the initial margin requirement.

Question 73

When an investor trades on margin, he or she borrows from the broker some of the funds needed to purchase securities.

Question 74

The relative amount of personal funds, or initial equity, an investor can borrow from the broker when purchasing stocks on margin is called the initial margin requirement.

Question 75

A market order, which is an order to trade at the best price available when the transaction reaches the market, is the most common type of order placed by investors.

Question 76

More stock certificates are registered in the names of individual investors than in street names (i.e., brokerage firms).

Question 77

Investors are individuals who try to make a quick profit based on short-term market adjustments.

Question 78

To determine the weighted average returns of stocks held in a portfolio, the weights are determined as the fraction

A) of the total portfolio value of each stock at the midpoint of the holding period.
B) of the total portfolio value of each stock at the end of the holding period.
C) of the total portfolio average value of each stock during the holding period.
D) of the total portfolio invested in each stock at the beginning of the holding period.

Question 79

When an investor places an order to trade stock with his or her broker, as long as the market is open, it is always executed as soon as possible.

Question 80

The average return earned by a portfolio of stocks can be computed by summing the returns associated with the individual stocks and then dividing the result by the number of stocks in the portfolio.