Investment Analysis and Portfolio Management 12e Frank Reilly, Keith Brown, Sanford Leeds (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter Ch01 - The Investment Setting 1. Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest. a. True b. False 2. The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest. a. True b. False 3. An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed, the expected rate of inflation, and the uncertainty of future payments. a. True b. False 4. The holding period return (HPR) is equal to the holding period yield (HPY) stated as a percentage. a. True b. False 5. The geometric mean of a series of returns is always larger than the arithmetic mean, and the difference increases with the volatility of the series. a. True b. False 6. The expected return is the arithmetic average of all possible returns. a. True b. False 7. An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk-averse investor. a. True b. False 8. Two measures of the risk premium are the standard deviation and the variance. a. True b. False 9. The variance of expected returns is equal to the square root of the expected returns. a. True b. False 10. The coefficient of variation is the expected return divided by the standard deviation of the expected return. a. True b. False 11. The two most common calculations investors use to measure return performance are arithmetic means and geometric means. a. True Powered by Cognero
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Ch01 - The Investment Setting b. False 12. The arithmetic mean is a superior measure of the long-term performance because it indicates the compound annual rate of return based on the ending value of the investment versus its beginning value. a. True b. False 13. Nominal rates are averages of all possible real rates. a. True b. False 14. The risk premium is a function of the volatility of operating earnings, sales volatility, and inflation. a. True b. False 15. The line that reflects the combination of risk and return available on alternative investments is referred to as the security market line (SML). a. True b. False 16. The basic trade-off in the investment process is a. between the anticipated rate of return for a given investment instrument and its degree of risk. b. between understanding the nature of a particular investment and having the opportunity to purchase it. c. between the high returns available on single instruments and the diversification of instruments into a portfolio. d. between the desired level of investment and possessing the resources necessary to carry it out. e. None of these are correct. 17. The rate of exchange between future consumption and current consumption is the a. nominal risk-free rate. b. coefficient of investment exchange. c. pure rate of interest. d. consumption/investment paradigm. e. expected rate of return. 18. If a significant change is noted in the yield of a T-bill, the change is most likely attributable to a a. downturn in the economy. b. static economy. c. change in the expected rate of inflation. d. change in the real rate of interest. e. change in risk aversion. 19. The real risk-free rate is affected by two factors: a. the relative ease or tightness in capital markets and the expected rate of inflation. b. the expected rate of inflation and the set of investment opportunities available in the economy. c. the relative ease or tightness in capital markets and the set of investment opportunities available in the Powered by Cognero
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Ch01 - The Investment Setting economy. d. time preference for income consumption and the relative ease or tightness in capital markets. e. time preference for income consumption and the set of investment opportunities available in the economy. 20. The ____ the variance of returns, everything else remaining constant, the ____ the dispersion of expectations and the ____ the risk. a. larger; greater; lower b. larger; smaller; higher c. larger; greater; higher d. smaller; greater; lower e. smaller; greater; greater 21. The coefficient of variation is a measure of a. central tendency. b. absolute variability. c. absolute dispersion. d. relative variability. e. relative return. 22. The nominal risk-free rate of interest is a function of the a. real risk-free rate and the investment’s variance. b. prime rate and the rate of inflation. c. T-bill rate plus the inflation rate. d. Tax-free rate plus the rate of inflation. e. real risk-free rate and the rate of inflation. 23. Assume you bought 100 shares of NewTech common stock on January 15, 2003, at $50.00 per share and sold them on January 15, 2004, for $40.00 per share. What was your holding period return? a. −10% b. −0.8 c. 25% d. 0.8 e. −20% 24. Assume you bought 100 shares of NewTech common stock on January 15, 2003, at $50.00 per share and sold them on January 15, 2004, for $40.00 per share. What was your holding period yield? a. −10% b. −0.8 c. 25% d. 0.8 e. −20% 25. Suppose you bought a GM corporate bond on January 25, 2001, for $750 and sold it on January 25, 2004, for $650.00. What was your annual holding period return? Powered by Cognero
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Ch01 - The Investment Setting a. 0.8667 b. −0.1333 c. 0.0333 d. 0.9534 e. −0.0466 26. Suppose you bought a GM corporate bond on January 25, 2001, for $750 and solid it on January 25, 2004, for $650.00. What was your annual holding period yield? a. −0.0466 b. −0.1333 c. 0.0333 d. 0.3534 e. 0.8667 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 27. The common stock of XMen Inc. had the following historic prices. Time 3/01/2019 3/01/2020 3/01/2021 3/01/2022 3/01/2023 3/01/2024
Price of X-Tech 50.00 47.00 76.00 80.00 85.00 90.00
What was your holding period return for the time period of 3/1/2019 to 3/1/2024? a. 0.1247 b. 1.8 c. 0.1462 d. 0.40 e. 0.25 28. The common stock of XMen Inc. had the following historic prices. Time 3/01/2019 3/01/2020 3/01/2021 3/01/2022 3/01/2023 3/01/2024
Price of X-Tech 50.00 47.00 76.00 80.00 85.00 90.00
What was your annual holding period yield (annual HPY)? a. 0.1462 b. 0.1247 Powered by Cognero
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Ch01 - The Investment Setting c. 1.8 d. 0.40 e. 0.25 29. You have concluded that next year the following relationships are possible: Economic Status Weak Economy Static Economy Strong Economy
Probability 0.15 0.60 0.25
Rate of Return −5% 5% 15%
What is your expected rate of return [E(Ri)] for next year? a. 4.25% b. 6.00% c. 6.25% d. 7.75% e. 8.00% 30. You have concluded that next year the following relationships are possible: Economic Status Weak Economy Static Economy Strong Economy
Probability 0.15 0.60 0.25
Rate of Return −5% 5% 15%
Compute the coefficient of variation for your portfolio. a. 0.043 b. 0.12 c. 1.40 d. 0.69 e. 1.04 31. Assume that during the past year the consumer price index increased by 1.5% and the securities listed below returned the following nominal rates of return. U.S. Government T-bills U.S. Long-term bonds
2.75% 4.75%
What are the real rates of return for each of these securities? a. 4.29% and 6.32% b. 1.23% and 4.29% c. 3.20% and 6.32% d. 1.23% and 3.20% e. 3.75% and 5.75% 32. Assume that you hold a two-stock portfolio. You are provided with the following information on your holdings: Powered by Cognero
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Ch01 - The Investment Setting Stock 1 2
Shares 15 25
Price(t) 10 15
Price(t + 1) 12 16
Calculate the HPY for stock 1. a. 10% b. 20% c. 15% d. 12% e. 7% 33. Assume that you hold a two-stock portfolio. You are provided with the following information on your holdings: Stock 1 2
Shares 15 25
Price(t) 10 15
Price(t + 1) 12 16
Calculate the HPY for stock 2. a. 5.3% b. 6.4% c. 6.7% d. 8.2% e. 10.1% 34. Assume that you hold a two-stock portfolio. You are provided with the following information on your holdings: Stock 1 2
Shares 15 25
Price(t) 10 15
Price(t + 1) 12 16
Calculate the market weights for stocks 1 and 2 based on period t values. a. 39% for stock 1 and 61% for stock 2 b. 50% for stock 1 and 50% for stock 2 c. 71% for stock 1 and 29% for stock 2 d. 29% for stock 1 and 71% for stock 2 e. 30% for stock 1 and 82% for stock 2 35. Assume that you hold a two-stock portfolio. You are provided with the following information on your holdings: Stock 1 2
Shares 15 25
Price(t) 10 15
Price(t + 1) 12 16
Calculate the HPY for the portfolio. a. 10.5% b. 6.9% c. 13.5% d. 11.3% Powered by Cognero
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Ch01 - The Investment Setting e. 15.7% 36. You purchased 100 shares of GE common stock on January 1 for $29 a share. A year later, you received $1.25 in dividends per share and you sold it for $28 a share. Calculate your holding period return (HPR) for this investment in GE stock. a. 0.9655 b. 1.0086 c. 1.0357 d. 1.0804 e. 1.0973 37. You purchased 100 shares of GE common stock on January 1 for $29 a share. A year later, you received $1.25 in dividends per share and you sold it for $28 a share. Calculate your holding period yield (HPY) for this investment in GE stock. a. −0.0345 b. −0.0090 c. 0.0086 d. 0.0643 e. 0.0804 38. The annual rates of return of Stock Z for the last four years are 0.10, 0.15, −0.05, and 0.20, respectively. Compute the arithmetic mean annual rate of return for Stock Z. a. 0.03 b. 0.04 c. 0.06 d. 0.10 e. 0.40 39. The annual rates of return of Stock Z for the last four years are 0.10, 0.15, −0.05, and 0.20, respectively. Compute the standard deviation of the annual rate of return for Stock Z. a. 0.0070 b. 0.0088 c. 0.0837 d. 0.1080 e. 0.1145 40. The annual rates of return of Stock Z for the last four years are 0.10, 0.15, −0.05, and 0.20, respectively. Compute the coefficient of variation for Stock Z. a. 0.837 b. 0.935 c. 1.080 d. 1.145 e. 1.281 41. The annual rates of return of Stock Z for the last four years are 0.10, 0.15, −0.05, and 0.20, respectively. Powered by Cognero
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Ch01 - The Investment Setting Compute the geometric mean rate of return for Stock Z. a. 0.051 b. 0.074 c. 0.096 d. 0.150 e. 1.090 42. Which of the following is not a component of the required rate of return? a. expected rate of inflation b. time value of money c. risk d. holding period return e. nominal returns 43. Which of the following is NOT a component of the risk premium? a. business risk b. financial risk c. liquidity risk d. exchange rate risk e. unsystematic market risk 44. The ability to sell an asset quickly at a fair price is associated with a. business risk. b. liquidity risk. c. exchange rate risk. d. financial risk. e. market risk. 45. The variability of operating earnings is associated with a. business risk. b. liquidity risk. c. exchange rate risk. d. financial risk. e. market risk. 46. The uncertainty of investment returns associated with how a firm finances its investments is known as a. business risk. b. liquidity risk. c. exchange rate risk. d. financial risk. e. market risk. 47. The total risk for a security can be measured by its a. beta with the market portfolio. Powered by Cognero
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Ch01 - The Investment Setting b. systematic risk. c. standard deviation of returns. d. unsystematic risk. e. alpha with the market portfolio. 48. If over the past 20 years the annual returns on the S&P 500 market index averaged 12% with a standard deviation of 18%, what was the coefficient of variation? a. 0.6 b. 0.6% c. 1.5 d. 1.5% e. 0.66% 49. Given investments A and B with the following risk return characteristics, which one would you prefer and why?
Investment A B
Expected Return 12.2% 8.8%
Standard Deviation of Expected Returns 7% 5%
a. Investment A because it has the highest expected return. b. Investment A because it has the lowest relative risk. c. Investment B because it has the lowest absolute risk. d. Investment B because it has the lowest coefficient of variation. e. Investment A because it has the highest coefficient of variation. 50. You are provided with the following information: Nominal return on risk-free asset = 4.5% Expected return for asset i = 12.75% Expected return on the market portfolio = 9.25% Calculate the risk premium for asset i. a. 4.5% b. 8.25% c. 4.75% d. 3.5% e. 0% 51. You are provided with the following information: Nominal return on risk-free asset = 4.5% Expected return for asset i = 12.75% Expected return on the market portfolio = 9.25% Calculate the risk premium for the market portfolio. a. 4.5% Powered by Cognero
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Ch01 - The Investment Setting b. 8.25% c. 4.75% d. 3.5% e. 0% 52. Economists project the long-run real growth rate for the next five years to be 2.5% and the average annual rate of inflation over this five-year period to be 3%. What is the expected nominal rate of return over the next five years? a. 0.500% b. 1.056% c. 2.750% d. 5.500% e. 5.575% 53. Consider the following information Nominal annual return on U.S. government T-bills for year 2018 = 3.5% Nominal annual return on U.S. government long-term bonds for year 2018 = 4.75% Nominal annual return on U.S. large-cap stocks for year 2018 = 8.75% Consumer price index January 1, 2018 = 165 Consumer price index December 31, 2018 = 169 Compute the rate of inflation for the year 2018. a. 2.42% b. 4.0% c. 1.69% d. 1.24% e. 0% 54. What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse? a. shift up and keep the same slope b. shift up and have less slope c. shift up and have a steeper slope d. shift down and keep the same slope e. shift down and have less slope 55. A decrease in the market risk premium, all other things constant, will cause the security market line to a. shift up. b. shift down. c. have a steeper slope. d. have a flatter slope. e. remain unchanged. 56. A decrease in the expected real growth in the economy, all other things constant, will cause the security market line to a. shift up. Powered by Cognero
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Ch01 - The Investment Setting b. shift down. c. have a steeper slope. d. have a flatter slope. e. remain unchanged. 57. Unsystematic risk refers to risk that is a. undiversifiable. b. diversifiable. c. due to fundamental risk factors. d. due to market risk. e. unexplainable. 58. The security market line (SML) graphs the expected relationship between a. business risk and financial risk. b. systematic risk and unsystematic risk. c. risk and return. d. systematic risk and unsystematic return. e. real and nominal returns. 59. Two factors that influence the nominal risk-free rate are a. the relative ease or tightness in capital markets and the expected rate of inflation. b. the expected rate of inflation and the set of investment opportunities available in the economy. c. the relative ease or tightness in capital markets and the set of investment opportunities available in the economy. d. time preference for income consumption and the relative ease or tightness in capital markets. e. time preference for income consumption and the set of investment opportunities available in the economy. 60. Measures of risk for an investment include a. variance of returns and business risk. b. coefficient of variation of returns and financial risk. c. business risk and financial risk. d. variance of returns and coefficient of variation of returns. e. variance of returns and economic risk. 61. Sources of risk for an investment include a. variance of returns and business risk. b. coefficient of variation of returns and financial risk. c. business risk and financial risk. d. variance of returns and coefficient of variation of returns. e. variance of returns and economic risk. 62. Modern portfolio theory assumes that most investors are a. risk averse. b. risk neutral. Powered by Cognero
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Ch01 - The Investment Setting c. risk seekers. d. risk tolerant. e. risk embracing. 63. All of the following are major sources of fundamental risk EXCEPT a. business risk. b. financial risk. c. default risk. d. country risk. e. liquidity risk. 64. Which of the following is least likely to move a firm’s position to the right on the Security Market Line (SML)? a. an increase in the firm’s beta b. adding more financial debt to the firm’s balance sheet relative to equity c. changing the business strategy to include new product lines with more volatile expected cash flows d. investors perceive the stock as being riskier e. an increase in the risk-free required rate of return 65. Your expectations from a one-year investment in Wang Computers are as follows: Probability 0.15 0.15 0.35 0.25 0.10
Rate of Return −0.10 −0.20 0.00 0.15 0.15
The expected return from this investment is a. −0.0752. b. −0.0040. c. 0.00. d. 0.0075. e. 0.4545. 66. Your expectations from a one-year investment in Wang Computers are as follows: Probability 0.15 0.15 0.35 0.25 0.10
Rate of Return −0.10 −0.20 0.00 0.15 0.15
The standard deviation of your expected return from this investment is a. 0.001. b. 0.004. c. 0.124. Powered by Cognero
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Ch01 - The Investment Setting d. 1.240. e. None of these are correct. 67. Your expectations from a one-year investment in Wang Computers are as follows: Probability 0.15 0.15 0.35 0.25 0.10
Rate of Return −0.10 −0.20 0.00 0.15 0.15
The coefficient of variation of this investment is a. −0.06. b. −0.65. c. 6.60. d. 16.53. e. 165.10. 68. You have an opportunity to invest in project X with the following expected rates of return: Probability 0.25 0.25 0.50
Rate of Return −0.10 0.00 0.10
The expected return for project X is a. 0.0% b. 0.5% c. 2.5% d. 5.0% e. 7.5% 69. An investment has a standard deviation of 12% and an expected return of 7%. What is the coefficient of variation for this investment? a. 1.714 b. 1.372 c. 0.714 d. 0.583 e. 0.500
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Ch01 - The Investment Setting Answer Key 1. True 2. True 3. True 4. False 5. False 6. True 7. True 8. False 9. False 10. False 11. True 12. False 13. False 14. False 15. True 16. a 17. c 18. c 19. e 20. c 21. d 22. e 23. d 24. e 25. d Powered by Cognero
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Ch01 - The Investment Setting 26. a 27. b 28. b 29. b 30. e 31. d 32. b 33. c 34. d 35. a 36. b 37. c 38. d 39. d 40. c 41. c 42. d 43. e 44. b 45. a 46. d 47. c 48. c 49. d 50. b 51. c Powered by Cognero
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Ch01 - The Investment Setting 52. e 53. a 54. c 55. d 56. b 57. b 58. c 59. a 60. d 61. c 62. a 63. c 64. e 65. d 66. c 67. d 68. c 69. a
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Ch02 - Asset Allocation and Security Selection 1. Experts suggest life insurance coverage should be seven to ten times an individual’s annual salary. a. True b. False 2. Term life insurance provides both a death benefit and a savings plan. a. True b. False 3. Most experts recommend a cash reserve of at least one year’s worth of living expenses. a. True b. False 4. The spending phase occurs when investors are relatively young. a. True b. False 5. The gifting phase is similar to, and may be concurrent with, the spending phase. a. True b. False 6. Long-term, high-priority goals include some form of financial independence. a. True b. False 7. It is not a good idea to get too specific when constructing your policy statement. a. True b. False 8. It is essential that both the client and the portfolio manager agree on an appropriate benchmark portfolio. a. True b. False 9. The third step of the portfolio management process is to construct the portfolio. a. True b. False 10. Asset allocation is the process of dividing funds into different classes of assets. a. True b. False 11. The typical investor’s goals rarely change during his/her lifetime. a. True b. False 12. Return is the only important consideration when establishing investment objectives. a. True Powered by Cognero
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Ch02 - Asset Allocation and Security Selection b. False 13. In constructing the portfolio, the manager should maximize the investor’s risk level. a. True b. False 14. Risk tolerance is exclusively a function of an individual’s psychological makeup. a. True b. False 15. An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy, such as capital preservation or current income. a. True b. False 16. Investment planning is complicated by tax concerns. a. True b. False 17. The ability to retire at a certain age is a typical example of a long-term, lower-priority goal. a. True b. False 18. An example of a unique need in an investment policy statement is related to the legal responsibilities of a fiduciary or trustee. a. True b. False 19. Investing 30 to 40% of your retirement funds in the company you work for is reasonable when they match funds. a. True b. False 20. Individual security selection is far more important than the asset allocation decision. a. True b. False 21. Average tax rate is defined as the total tax payment divided by total income. a. True b. False 22. The majority of a pension fund’s return is explained by asset allocation. a. True b. False 23. The portfolio mixes of institutional investors around the world are approximately the same. a. True Powered by Cognero
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Ch02 - Asset Allocation and Security Selection b. False 24. Equity allocations of pension funds in Japan and Germany are similar to those in the United States. a. True b. False 25. Arts and antiques are inferior inflation hedges compared to long-term bonds and common stocks. a. True b. False 26. Individual real estate assets had much lower standard deviations and either low positive or negative correlations with other asset classes in a portfolio context. a. True b. False 27. The current outlay of money to guard against a potentially large future loss is commonly known as a. asset management. b. portfolio management. c. minimizing risk. d. loss control. e. insurance. 28. The ____ phase is the stage when investors in their early-to-middle earning years attempt to accumulate assets to satisfy near-term needs, for example, children’s education or down payment on a home. a. accumulation b. spending c. gifting d. consolidation e. divestiture 29. Which of the following is NOT a life cycle phase? a. discovery phase b. accumulation phase c. consolidation phase d. spending phase e. gifting phase 30. John is 55 years old and has $55,000 outstanding on a mortgage and no other debt. John typically saves $5,000 in an IRA account and another $10,000 in a company pension. John is most likely in the a. discovery phase. b. accumulation phase. c. consolidation phase. d. spending phase. e. gifting phase. Powered by Cognero
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Ch02 - Asset Allocation and Security Selection 31. In an investment policy statement, the objectives of an investor are expressed in terms of a. risk and return. b. risk. c. return. d. time horizon. e. liquidity needs. 32. Which of the following is NOT a step in the portfolio management process? a. develop a policy statement b. study current financial and economic conditions c. construct the portfolio d. monitor investor’s needs and market conditions e. sell all assets and reinvestment proceeds at least once a year 33. The first step in the investment process is the development of a(n) a. objective statement. b. policy statement. c. financial statement. d. statement of cash needs. e. statement of cash flows. 34. Once the portfolio is constructed, it must be continuously a. rebalanced. b. recycled. c. reinvested. d. monitored. e. manipulated. 35. The policy statement may include a ____ against which a portfolio’s or portfolio manager’s performance can be measured. a. milestone b. benchmark c. landmark d. reference point e. market pair 36. One of the reasons for constructing a policy statement is it a. creates a standard by which to judge the performance of the investor. b. helps the investor decide on realistic investment goals. c. is open-ended in order to provide guidance for specific investments and time frames. d. guarantees success. e. helps the portfolio manager to become familiar with financial markets and investing risks. 37. Which of the following is NOT considered to be an investment objective? Powered by Cognero
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Ch02 - Asset Allocation and Security Selection a. capital preservation b. capital appreciation c. current income d. total return e. nominal preservation 38. ____ must be stated in terms of expected returns and risk. An investor’s tolerance for risk must be established before returns objectives can be stated. a. Investment requirements b. Investment constraints c. Investment rewards d. Investment objectives e. Investment policy 39. ____ is an appropriate objective for investors who want their portfolio to grow in real terms, that is, exceed the rate of inflation. a. Capital preservation b. Capital appreciation c. Portfolio growth d. Value additivity e. Nominal preservation 40. ____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often increase(s) as one approaches the later stages of the investment life cycle. a. Liquidity needs b. Time horizons c. Liquidation values d. Liquidation essentials e. Capital liquidations 41. Which of the following statements is FALSE? a. Unrealized capital gains are taxable. b. Realized capital gains are taxable. c. Tax-exempt investments are attractive to individuals with high tax liabilities. d. Returns comparisons should be made on an equivalent tax basis. e. Tax exempt investors prefer tax exempt investments. 42. ____ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it was purchased by the original owner or inherited by the heirs of the original owner). a. Realized capital b. Income c. Portfolio d. Nominal e. Real Powered by Cognero
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Ch02 - Asset Allocation and Security Selection 43. Which of the following statements is TRUE? a. Except for tax-exempt investors and tax-deferred accounts, annual tax payments increase investment returns. b. The only way to maintain purchasing power over time is to invest in bonds. c. After adjusting for taxes, long-term bonds consistently outperform stocks. d. An asset allocation decision for a taxable portfolio that does not include a substantial commitment to common stocks may make it difficult for the portfolio to maintain real value over time. e. None of these are correct. 44. Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains? a. capital appreciation b. capital preservation c. return preservation d. current income e. total return 45. If Taxable Income Is Over But Not Over
Then
The Tax is This Amount
Plus This %
Of The Excess Over
Single
$0 $7,150 $29,050 $70,350 $146,750 $319,100
$7,150 $29,050 $70,350 $146,750 $319,100 –
0 715 $4,000 $14,325 $35,717 $92,592.50
10% 15% 25% 28% 33% 35%
0 $7,150 $29,050 $70,350 $146,750 $319,100
Married Filing Jointly
$0 $14,300 $58,100 $117,250 $178,650 $319,100
$14,300 $58,100 $117,250 $178,650 $319,100 –
0 1430 $8,000 $22,787.50 $39,979.50 $86,328
10% 15% 25% 28% 33% 35%
0 $14,300 $58,100 $117,250 $178,650 $319,100
What is the marginal tax rate for a single individual with a taxable income of $85,000? a. 15% b. 25% c. 28% d. 33% e. 35% 46. If Taxable Income Is Over But Not Over Powered by Cognero
Then
The Tax is This Amount
Plus This %
Of The Excess Page 6
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Ch02 - Asset Allocation and Security Selection Over Single
$0 $7,150 $29,050 $70,350 $146,750 $319,100
$7,150 $29,050 $70,350 $146,750 $319,100 –
0 715 $4,000 $14,325 $35,717 $92,592.50
10% 15% 25% 28% 33% 35%
0 $7,150 $29,050 $70,350 $146,750 $319,100
Married Filing Jointly
$0 $14,300 $58,100 $117,250 $178,650 $319,100
$14,300 $58,100 $117,250 $178,650 $319,100 –
0 1430 $8,000 $22,787.50 $39,979.50 $86,328
10% 15% 25% 28% 33% 35%
0 $14,300 $58,100 $117,250 $178,650 $319,100
What is the average tax for a single individual with a taxable income of $85,000? a. 13.57% b. 15.68% c. 21.68% d. 25.74% e. 29.55% 47. What would the equivalent taxable yield be on an investment that offers a 6% tax exempt yield? Assume a marginal tax rate of 28%. a. 0.125% b. 7.20% c. 6.48% d. 8.33% e. 32.14% 48. If Taxable Income Is Over But Not Over
Then
The Tax is This Amount
Plus This %
Of The Excess Over
Single
$0 $7,150 $29,050 $70,350 $146,750 $319,100
$7,150 $29,050 $70,350 $146,750 $319,100 –
0 715 $4,000 $14,325 $35,717 $92,592.50
10% 15% 25% 28% 33% 35%
0 $7,150 $29,050 $70,350 $146,750 $319,100
Married Filing Jointly
$0 $14,300 $58,100
$14,300 $58,100 $117,250
0 1430 $8,000
10% 15% 25%
0 $14,300 $58,100
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Ch02 - Asset Allocation and Security Selection $117,250 $178,650 $319,100
$178,650 $319,100 –
$22,787.50 $39,979.50 $86,328
28% 33% 35%
$117,250 $178,650 $319,100
What is the tax liability for a married couple filing jointly with taxable income of $125,000? a. $23,800 b. $18,427 c. $24,958 d. $16,867 e. $19,650 49. What would the after-tax yield be on an investment that offers a 6% fully taxable yield? Assume a marginal tax rate of 31%. a. 2.79% b. 6.48% c. 4.14% d. 7.20% e. 12.50% 50. The future value of $50,000 invested today, at the end of 10 years assuming an interest rate of 7.5% per year, with semiannual compounding, is a. $104,407.60. b. $103,051.58. c. $123,510.52. d. $210,673.43. e. $105,117.46. 51. Assume that you invest $750 at the end of each quarter for the next 20 years in a mutual fund. The annual rate of interest that you expect to earn in this account is 5.25%. The amount in the account at the end of 20 years is a. $60,000.00. b. $105,039.84. c. $37,009.35. d. $123,510.52. e. $115,637.37. 52. Assume that you invest $1250 at the end of each of the next 15 years in a mutual fund. You currently have $10,000 in the mutual fund. The annual rate of interest that you expect to earn in this account is 4.35%. The amount in the account at the end of 15 years is a. $58,940.30. b. $28,750.00. c. $37,009.35. d. $44,630.81. e. $25,690.50. 53. Someone in the 15% tax bracket can earn 8% annually on his investments in a tax-exempt IRA account. What will be Powered by Cognero
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Ch02 - Asset Allocation and Security Selection the value of a $10,000 investment after five years (assuming annual compounding)? a. $6,805 b. $14,693 c. $15,528 d. $20,114 e. $50,000 54. Suppose the 8% investment of the previous problem is taxable rather than tax-deferred. What will be the after-tax value of his $10,000 investment after five years (assuming annual compounding)? a. $10,680 b. $11,765 c. $13,895 d. $14,693 e. $15,528 55. An individual in the 36% tax bracket invests $5,000 in a tax-exempt IRA. If the investment earns 10% annually, what will be the value of the IRA after five years? a. $6,600 b. $6,818 c. $7,500 d. $8,053 e. $10,879 56. An individual in the 15% tax bracket has $10,000 invested in a tax-exempt IRA account. If the individual earns 8% annually before taxes and inflation is 2.5% per year, what is the real value of the investment in 20 years? a. $23,211 b. $28,467 c. $29,178 d. $37,276 e. $46,610 57. An individual in the 36% tax bracket has $20,000 invested in a tax-exempt account. If the individual earns 10% annually before taxes and inflation is 3.0% per year, what is the real value of the investment in 10 years? a. $31,000 b. $33,200 c. $38,614 d. $39,343 e. $47,823 58. You currently have $150,000 in an IRA designated for retirement. If you save an additional $100 at the end of every month and expect to earn an annual return of 12%, how much do you expect to have in the IRA in 10 years? a. $467,632 b. $518,062 c. $732,546 d. $949,328 Powered by Cognero
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Ch02 - Asset Allocation and Security Selection e. $1,215,234 59. Which of the following is NOT a typical portfolio constraint? a. liquidity needs b. risk tolerance c. time horizon d. tax concerns e. legal factors 60. For an investor with a time horizon of 6 to 10 years and lower risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks. b. 100% cash. c. 30% cash, 50% bonds, and 20% stocks. d. 10% cash, 30% bonds, and 60% stocks. e. 100% bonds. 61. For an investor with a time horizon of eight years and a higher risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks. b. 100% cash. c. 30% cash, 50% bonds, and 20% stocks. d. 10% cash, 30% bonds, and 60% stocks. e. 100% bonds. 62. For an investor with a time horizon of 12 years and a higher risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks. b. 30% cash, 50% bonds, and 20% stocks. c. 10% cash, 30% bonds, and 60% stocks. d. 50% bonds and 50% stocks. e. 100% bonds. 63. For an investor with a time horizon of 15 years and moderate risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks. b. 40% cash and 60% stocks. c. 30% cash, 50% bonds, and 20% stocks. d. 50% bonds and 50% stocks. e. 20% bonds and 80% stocks. 64. For an investor with a time horizon of four years and a higher risk tolerance, an appropriate asset allocation strategy would be a. 100% cash. b. 30% cash, 50% bonds, and 20% stocks. Powered by Cognero
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Ch02 - Asset Allocation and Security Selection c. 20% cash, 40% bonds, and 40% stocks. d. 10% cash, 40% bonds, and 50% stocks. e. 100% bonds. 65. For an investor with a time horizon of five years and moderate risk tolerance, an appropriate asset allocation strategy would be a. 100% cash. b. 30% cash, 50% bonds, and 20% stocks. c. 20% cash, 40% bonds, and 40% stocks. d. 10% cash, 30% bonds, and 60% stocks. e. 100% bonds. 66. Research from the 1970s to the 1990s found that over 90% of a fund’s returns over time are explained by a. market timing. b. stock selection. c. manager selection. d. asset allocation. e. cash allocation. 67. Asset allocation is a. the process of dividing funds into asset classes. b. concerned with returns variability. c. concerned with the risk associated with different assets. d. concerned with the relationship among investments’ returns. e. All of these are correct. 68. The asset allocation decision must involve a consideration of a. cultural differences. b. the objectives stated in the investor’s policy statement. c. the types of assets that are appropriate for the investor. d. the risk associated with different investments. e. All of these are correct. 69. Research has shown that the asset allocation decision explains ____% of the variation in fund returns across all funds and ____% of the variation in returns for a particular fund over time. a. 90; 100 b. 100; 40 c. 90; 40 d. 40; 100 e. 40; 90 70. Adding Japanese, Australian, and Italian stocks to a U.S. stock portfolio _____ the portfolio risk because the global portfolio reflects only worldwide _____. a. reduces; systematic factors Powered by Cognero
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Ch02 - Asset Allocation and Security Selection b. increases; systematic factors c. does not change; correlation d. reduces; risk e. increases; risk 71. Adding foreign stocks and bonds to a U.S. portfolio will almost certainly _____ the risk of the portfolio and can possibly _____ its average return. a. reduce; increase b. increase; reduce c. increase; increase d. decrease; decrease e. not change; decrease 72. A study examining the performance of numerous assets from the United States and around the world confirms that a. riskier assets with higher standard deviations experienced lower returns. b. riskier assets with higher standard deviations experienced higher returns. c. standard deviation did a better job of explaining the returns than beta. d. U.S. equities are highly correlated with world government bonds and with the commodities index. e. most assets (including common stocks) have positive correlations with inflation. 73. A study examining the performance of numerous assets from the United States and around the world confirms that a. riskier assets with higher standard deviations experienced lower returns. b. riskier assets with lower standard deviations experienced higher returns. c. beta did a better job of explaining the returns than the standard deviation. d. U.S. equities are highly correlated with world government bonds and with the commodities index. e. most assets (including common stocks) have positive correlations with inflation. 74. A study examining the performance of numerous assets from the United States and around the world confirms that a. riskier assets with higher standard deviations experienced lower returns. b. riskier assets with lower standard deviations experienced higher returns. c. standard deviation did a better job of explaining the returns than beta. d. U.S. equities have zero correlation with world government bonds and with the commodities index. e. most assets (including common stocks) have positive correlations with inflation. 75. A study examining the performance of numerous assets from the United States and around the world confirms that a. riskier assets with higher standard deviations experienced lower returns. b. riskier assets with lower standard deviations experienced higher returns. c. standard deviation did a better job of explaining the returns than beta. d. U.S. equities are highly correlated with world government bonds and with the commodities index. e. most assets (including common stocks) have negative correlations with inflation. 76. Most art and antiques are _____, and the transaction costs are ____ compared to those of financial assets. a. illiquid; low b. illiquid; high Powered by Cognero
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Ch02 - Asset Allocation and Security Selection c. liquid; low d. liquid; high e. correlated to bonds; high 77. The following are the annual returns for both Alpine Corporation and Tauber Industries:
Year 1995 1996 1997 1998 1999
Alpine’s Rate of Return 5% 9% 11% −10% 12%
Tauber’s Rate of Return 9% 16% −16% 12% 9%
Calculate the covariance. a. −0322 b. −0233 c. 1.00 d. 0.00233 e. 0.00322 78. The following are the annual returns for both Alpine Corporation and Tauber Industries:
Year 1995 1996 1997 1998 1999
Alpine’s Rate of Return 5 9 11 −10 12
Tauber’s Rate of Return 9 16 −16 12 9
Calculate the coefficient of correlation. a. −0.456 b. −0.354 c. 0.000 d. 0.456 e. 3.538 79. What is the correlation coefficient for two assets with a covariance of 0.0032, if asset 1 has a standard deviation of 12% and asset 2 has a standard deviation of 9%? a. 0.2963 b. 0.3456 c. 0.8721 d. 1.5980 80. Which of the following is NOT considered a type of crypto asset? Powered by Cognero
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Ch02 - Asset Allocation and Security Selection a. Cryptocurrency b. Meme coins c. Exchange-traded funds d. Non-fungible tokens 81. What is the purpose of ”miners” in the Bitcoin blockchain network? a. To process and validate transactions before they are added to the blockchain b. To solve complex math problems that allow them to earn Bitcoin c. To maintain an updated copy of the Bitcoin database d. Both b and c 82. How does Bitcoin compare to traditional currencies based on the following characteristics: I. Medium of exchange II. Store of value III. Unit of account a. Satisfies I and II only b. Satisfies II and III only c. Satisfies I and III only d. Does not satisfy any 83. What is one risk of investing in Bitcoin and other cryptocurrencies? a. They have no intrinsic value and rely purely on speculation b. Governments may impose regulations restricting their use c. They have high volatility and can experience massive price declines d. All of the above 84. Bitcoin is promoted as “digital gold” because: a. Both rely on intrinsic value to determine price b. Neither are used often for transactions c. Both benefit from a network effect d. Government regulations support their use 85. Cryptocurrencies are a safe investment and are insured by the U.S. government. a. True b. False 86. The intrinsic value of cryptocurrencies is typically calculated using methods similar to stock and bond valuation in terms of cash flow analysis. a. True b. False 87. The volatility of cryptocurrencies is typically higher than that of the U.S. dollar. a. True b. False Powered by Cognero
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Ch02 - Asset Allocation and Security Selection 88. Compared to more traditional currencies, cryptocurrencies are a better medium of exchange but not as good of a store of value. a. True b. False 89. Compared to more traditional currencies, cryptocurrencies are deficient as a store of value and unit of account. a. True b. False
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Ch02 - Asset Allocation and Security Selection Answer Key 1. True 2. False 3. False 4. False 5. True 6. True 7. False 8. True 9. True 10. True 11. False 12. False 13. False 14. False 15. False 16. True 17. False 18. False 19. False 20. False 21. True 22. True 23. False 24. False 25. False Powered by Cognero
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Ch02 - Asset Allocation and Security Selection 26. True 27. e 28. a 29. a 30. c 31. a 32. e 33. b 34. d 35. b 36. b 37. e 38. d 39. b 40. a 41. a 42. a 43. d 44. e 45. c 46. c 47. d 48. c 49. c 50. a 51. b Powered by Cognero
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Ch02 - Asset Allocation and Security Selection 52. d 53. b 54. c 55. d 56. c 57. d 58. b 59. e 60. c 61. d 62. a 63. e 64. c 65. b 66. d 67. e 68. e 69. e 70. a 71. a 72. b 73. c 74. d 75. e 76. b Powered by Cognero
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Ch02 - Asset Allocation and Security Selection 77. a 78. b 79. b 80. c 81. d 82. d 83. d 84. b 85. False 86. False 87. True 88. False 89. True
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Ch03 - Organization and Functioning of Securities Markets 1. A market is a means through which buyers and sellers are brought together to aid in the transfer of goods and/or services. a. True b. False 2. It is required by law that a stock market must have a physical location. a. True b. False 3. If transaction prices are volatile, but long-term prices are stable, this is referred to as price continuity. a. True b. False 4. A continuous market that has price continuity requires the depth of buyers and sellers. a. True b. False 5. A market in which prices adjust rapidly to new information is considered to be internally efficient. a. True b. False 6. Informational efficiency refers to when the cost of acquiring information is very cheap. a. True b. False 7. The primary market is where issues are traded between current and potential owners. a. True b. False 8. Negotiation, competitive bids, and best efforts are three forms of underwriting arrangements. a. True b. False 9. A corporation wishing to raise funds will normally want the investment banker to use a “best efforts” arrangement rather than a negotiated basis. a. True b. False 10. Rule 415, shelf registration, allows large firms to register ten years’ worth of financing needs all at one time. a. True b. False 11. Only the stocks of large companies are traded in the primary market. a. True b. False Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 12. A good secondary market is important to the efficiency of the primary market. a. True b. False 13. Rule 415 allows corporations to place securities privately with large, sophisticated institutional investors without extensive registration documents. a. True b. False 14. Rule 144A reduced registration documentation requirements for placing securities privately with large institutional investors. a. True b. False 15. Secondary equity issues are new shares offered by firms that already have stock outstanding. a. True b. False 16. In a pure auction market, buyers and sellers submit bid-and-ask prices for a given stock to a central location. a. True b. False 17. In a dealer-market trading system, shares of stock are sold to the investor with the highest bid price and bought from the seller with the lowest offering price. a. True b. False 18. Call markets can also be used at the opening for stocks on any exchange if there is an overnight buildup of buy and/or sell orders. a. True b. False 19. In a continuous market, trades occur at any time the market is open and stocks are priced either by auction or by dealers. a. True b. False 20. A pure auction market is also referred to as a quote-driven market. a. True b. False 21. The NYSE has dominated the other U.S. exchanges in trading volume. a. True b. False 22. In recent years, there has been a trend toward the consolidation of existing exchanges in developed markets, such as London, Frankfurt, and Paris. Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets a. True b. False 23. The over-the-counter market includes all stocks not listed on one of the major exchanges but constitutes a lesser dollar value than the New York and American Exchanges combined. a. True b. False 24. The over-the-counter market lists more stocks than the New York Stock Exchange and the American Stock Exchange combined. a. True b. False 25. The value of the stocks traded in the over-the-counter market is greater than the combined values of the stocks traded on the New York Stock Exchange and the American Stock Exchange combined. a. True b. False 26. The Nasdaq National Market System is an order-driven market. a. True b. False 27. The NYSE is a dealer market. a. True b. False 28. Algorithmic trading is basically creating computer programs to make trading decisions. a. True b. False 29. Margin transaction involves borrowing part of the cost of an investment. a. True b. False 30. Short selling is practiced when an investor borrows part of the cost of the investment, for example, they are “short” on cash. a. True b. False 31. The individual placing a limit order specifies the buy or sell price. a. True b. False 32. The financial market landscape has become a few large holding companies that own global exchanges for stocks, bonds, and derivatives. a. True Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets b. False 33. Which of the following statements about a market is true? a. It is not necessary for the market to have a physical location. b. The market does not necessarily own the goods or services involved. c. A market can deal in any variety of goods and services. d. Both buyers and sellers benefit from the existence of a market. e. All of these are correct. 34. Which of the following is NOT a characteristic of a good market for goods and services? a. timely and accurate information b. liquidity c. low transaction costs d. external efficiency e. All of these are incorrect as they are all characteristics of a good market. 35. When a market is externally efficient, it means that a. timely and accurate information is available. b. the market is liquid. c. transaction costs are low. d. prices adjust rapidly to new information. e. the number of buyers and sellers is the same. 36. When a market is internally efficient, it means that the market has a. price continuity. b. minimal transactions costs. c. good depth. d. more buyers than sellers. e. more sellers than buyers. 37. In a negotiated bid, the underwriter carries out the following service(s): a. origination, risk-bearing, and distribution. b. origination and risk-bearing. c. risk-bearing and distribution. d. origination and distribution. e. risk-bearing and distribution. 38. Municipal bonds are sold using the following method or methods: a. competitive bid b. negotiated sale c. private placement d. using an underwriting function. e. All of these are correct. Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 39. Which of the following is an underwriting function? a. origination b. risk-bearing c. distribution d. putting together an underwriting syndicate. e. All of these are correct. 40. The basic distinction between a primary and a secondary market is that a. proceeds from sales in the primary market go to the current owner of a security; proceeds in the secondary market go to the original owner. b. primary markets involve direct dealings within regional exchanges. c. only new securities are sold in the primary market; only outstanding securities are bought and sold in the secondary market. d. primary markets deal exclusively in bonds; secondary markets deal primarily in common stock. e. primary markets deal exclusively in common stocks; secondary markets deal primarily in bonds. 41. Which of the following is NOT a characteristic of shelf registrations? Shelf registrations a. were introduced by Rule 415. b. allow large firms to register security issues and sell them piecemeal during the following six years. c. provide flexibility and reduce registration fees and expenses. d. are typically used for the sale of straight debentures rather than common stock or convertible issues. e. All of these are correct. 42. Which of the following is NOT a secondary equity market? a. treasury market b. national exchanges c. regional exchanges d. over-the-counter market e. call market. 43. Which of the following is NOT a function of the specialist? a. assists the Federal Reserve in controlling the money supply. b. acts as a broker who handles the limit orders or special orders placed with member brokers. c. buys and sells securities in order to stabilize the market. d. acts as a dealer in assigned stocks to maintain a fair and orderly market. e. attempts to derive a new equilibrium price using a call-market approach. 44. The member of the New York Stock Exchange who acts as a dealer on assigned stocks is known as a a. registered trader. b. commission broker. c. registered broker. d. floor broker. e. specialist. Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 45. In a call market, trading for individual stocks a. occurs anytime the market is open. b. takes place at specific times. c. takes place at the open and close of the trading day. d. is priced either by auction or by dealers. e. None of these are correct. 46. A pure auction market is one in which a. dealers provide liquidity by buying and selling shares of stock for themselves. b. dealers compete against each other to provide the highest bid and lowest asking prices. c. buyers submit bid prices to sellers. d. sellers submit ask prices to buyers. e. buyers and sellers submit bid and ask prices to a central location to be matched. 47. Trading in the secondary markets for U.S. government and municipal bonds a. takes place through a network of primary dealers. b. takes place over the counter by dealers who buy and sell on their own account. c. takes place on the NYSE bond annex. d. takes place on financial futures exchanges. e. takes place on equity markets. 48. Secondary markets are important because a. the prevailing market price of securities is determined in the secondary market. b. it has an impact on price stability. c. it has an impact on price continuity. d. the proceeds from a sale go to the issuing unit. e. they prevent price discovery. 49. All of the following are advantages of secondary markets EXCEPT that they a. provide liquidity to individuals holding the securities. b. support the primary market by reducing the required rate of return due to the lower liquidity risk for securities. c. provide price discovery for corporations selling seasoned securities. d. impact market efficiency and price volatility. e. All of these are advantages of secondary markets. 50. Which of the following is NOT a major category of membership in stock exchanges? a. specialist b. commission broker c. floor broker d. financial analyst e. registered trader 51. All of the following are characteristics of a dealer market EXCEPT that: a. it is a quote-driven market. Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets b. the NASDAQ market is a dealer market. c. individual dealers buy and sell shares for themselves. d. it has a centralized trading location. e. All of these are characteristics of a dealer market. 52. The U.S. secondary market with the largest number of issues traded is the a. AMEX. b. NASDAQ. c. NYSE. d. LSE. e. TSX. 53. A block trade is one which involves a minimum of a. 1,000 shares. b. 5,000 shares. c. 10,000 shares. d. 100,000 shares. e. 1,000,000 shares. 54. A 1994 study concluded dealers were colluding to maintain wide bid/ask spreads by concentrating market quotes in quarters instead of eighths. This study eventually led to new order handling rules that required quotes to be available to the public through a. the NASDAQ market. b. electronic communications networks (ECN). c. high-frequency trading (HFT). d. algorithmic trading (AT). e. intermarket trading system (ITS). 55. Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60% and Turtle Industries is currently selling at $50 per share. How many shares of Turtle can Jackie purchase? a. 5,000 b. 3,000 c. 1,800 d. 1,200 e. 750 56. Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60% and Turtle Industries is currently selling at $50 per share. If the maintenance margin is 25%, to what price can Turtle Industries fall before Jackie receives a margin call? a. $14.56 b. $23.17 c. $32.42 d. $26.67 e. $25.52 Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 57. Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50%, and RC Industries is currently selling at $50 per share. How many shares of RC can Heidi buy? a. 2,500 b. 2,000 c. 1,000 d. 500 e. 250 58. Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50%, and RC Industries is currently selling at $50 per share. What is Heidi’s profit if RC’s price rises to $80? a. $55,000 b. $50,000 c. $60,000 d. $68,270 e. $28,570 59. Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50%, and RC Industries is currently selling at $50 per share. If the maintenance margin is 25%, to what price can RC Industries stock price fall before Heidi receives a margin call? a. $21.75 b. $23.33 c. $32.00 d. $33.33 e. $22.22 60. Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80%, and Jackson Industries is currently selling at $40 per share. How many shares of Jackson can Kathy buy? a. 1875 b. 1500 c. 1750 d. 1200 e. 950 61. Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80%, and Jackson Industries is currently selling at $40 per share. What is Kathy’s profit if Jackson’s price rises to $50? a. $18,750 b. $15,750 c. $55,000 d. $37,750 e. $28,570 Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 62. Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80%, and Jackson Industries is currently selling at $40 per share. If the maintenance margin is 25%, to what price can Jackson Industries fall before Kathy receives a margin call? a. $21.75 b. $23.00 c. $10.67 d. $15.93 e. $12.67 63. You decide to sell 100 shares of Davis Industries short when it is selling at its yearly high of $35. Your broker tells you that your margin requirement is 55% and that the commission on the sale is $15. While you are short, Davis pays a $0.75 per share dividend. At the end of one year, you buy your Davis shares (cover your short sale) at $30 and are charged a commission of $15 and a 6% interest rate. What is your dollar return on the investment? a. $130.50 b. $300.50 c. $100.00 d. $1,773.75 e. $3,500.00 64. You decide to sell 100 shares of Davis Industries short when it is selling at its yearly high of $35. Your broker tells you that your margin requirement is 55% and that the commission on the sale is $15. While you are short, Davis pays a $0.75 per share dividend. At the end of one year, you buy your Davis shares (cover your short sale) at $30 and are charged a commission of $15 and a 6% interest rate. What is your rate of return on the investment? a. 10.48% b. 12.87% c. 13.98% d. 15.61% e. 18.87% 65. You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its yearly high of $42.25. Your broker tells you that your margin requirement is 60% and that the commission on the sale is $20. While you are short, Topgun pays a $0.85 per share dividend. At the end of one year, you buy your Topgun shares (cover your short sale) at $44 and are charged a commission of $20 and a 5% interest rate. What is your dollar return on the investment? a. $384.50 b. $432.88 c. −$432.88 d. −$384.50 e. −$950.55 66. You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its yearly high of $42.25. Your broker tells you that your margin requirement is 60% and that the commission on the sale is $20. While you are short, Topgun pays a $0.85 per share dividend. At the end of one year, you buy your Topgun shares (cover your short sale) at $44 and are charged a commission of $20 and a 5% interest rate. What is your rate of return on the investment? Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets a. 10.48% b. 12.87% c. −13.98% d. −24.49% e. −15.17% 67. Suppose you buy a round lot of DG Solutions stock on a 60% margin when it is selling at $55 a share. The broker charges a 10% annual interest rate and commissions are 3% of the total stock value on both the purchase and the sale. If at year end you receive a $1.10 per share dividend and sell the stock for 55 5/8, what is your rate of return on the investment? a. −10.38% b. −12.84% c. −11.44% d. 21.84% e. 28.38% 68. Suppose you buy a round lot of HS Inc. stock on a 55% margin when it is selling at $40 a share. The broker charges a 10% annual interest rate and commissions are 4% of the total stock value on both the purchase and the sale. If at year end you receive a $0.90 per share dividend and sell the stock for 35 5/8, what is your rate of return on the investment? a. −38.52% b. −21.84% c. 14.74% d. 21.84% e. 35.17% 69. Suppose you buy a round lot of Altman Industries stock on a 50% margin when it is selling at $35 a share. The broker charges a 10% annual interest rate and commissions are 5% of the total stock value on both the purchase and the sale. If at year end you receive a $1.00 per share dividend and sell the stock for $42.63, what is your rate of return on the investment? a. 19.31% b. 11.84% c. 14.74% d. 21.84% e. 28.38% 70. Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%. At the end of one year, shares of RossCorp stock are selling for $55 per share and the company paid dividends of $0.85 per share. Assuming that you paid the full cost of the purchase, what is your rate of return if you sell RossCorp stock? a. 18.08% b. 23.51% c. 22.32% d. 14.96% e. 19.67%
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Ch03 - Organization and Functioning of Securities Markets 71. Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%. At the end of one year, shares of RossCorp stock were selling for $35 per share and the company paid dividends of $0.85 per share. Assuming that you paid the full cost of the purchase, what is your rate of return if you sell RossCorp stock? a. −33.05% b. −23.89% c. 23.42% d. 33.05% e. −25.35% 72. Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%. At the end of one year, shares of RossCorp stock were selling for $55 per share and the company paid dividends of $0.85 per share. Assuming that you borrowed 25% of the cost of the purchase, what is your rate of return? a. −23.51% b. 29.35% c. 24.14% d. 5.21% e. 10.06% 73. Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%. At the end of one year, shares of RossCorp stock were selling for $35 per share and the company paid dividends of $0.85 per share. Assuming that you borrowed 25% of the cost of the purchase, what is your rate of return? a. 33.05% b. −33.94% c. −23.51% d. −25.35% e. −40.64% 74. Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2% for purchases and 2% for sales. The interest rate on margin debt is 6.25% per year. The maintenance margin is 30%. Assume that you purchase 150 shares of RossCorp stock at $45 each by making a margin deposit of 55%. At what price would you receive a margin call? a. $29.39 b. $26.48 c. $50.39 d. $30.21 e. $50.10 75. You own 50 shares of Auto Corporation that you purchased for $30 a share. The stock is currently selling for $50 a share, and you placed a stop-loss order at $45. If the stock price drops to $35 a share, what is your return on this investment? a. −30.0% b. 16.7% c. 50.0% Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets d. 66.7% e. 150.0% 76. You purchased 100 shares of Highlight Company for $20 a share one year ago with a margin of 50%. The stock is currently selling for $28 a share, and no dividends were ever paid. The broker charges an annual interest rate of 8% and a $100 commission on both the purchase and sale of these shares. What is your annual rate of return on this investment? a. 21% b. 47% c. 52% d. 60% e. 72% 77. Suppose you purchase 200 shares of Best Hat Corporation at $52 a share by making a margin deposit of 50%. If the maintenance margin is 30%, at what price will you receive a margin call? a. $37.14 b. $37.95 c. $38.23 d. $38.76 e. $39.42 78. You purchased 75 shares of Basket Company for $42 a share. One share of the stock is currently trading between $52 and $53, and you placed a stop-loss order at $47. If the stock price drops to $40 a share, what is your return on this investment? a. 8.7% b. 9.2% c. 10.3% d. 11.9% e. 12.8% 79. You sell short 100 shares of Hi-Light Corporation when it is trading at $70. Your margin requirement is 50%. Assuming there was no commission and the maintenance margin is 25%, at what stock price would you receive a margin call? a. $76 b. $80 c. $84 d. $88 e. $92 80. An order that specifies the highest buy or lowest sell price is a a. limit order. b. short sale. c. market order. d. margin call. e. stop loss. Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 81. When an investor borrows part of the investment cost, it is known as a. a short sale. b. a fill or kill order. c. a margin transaction. d. a limit order. e. going long. 82. Investors can leverage their stock transactions with the use of a. margin orders. b. stop loss orders. c. limit orders. d. market orders. e. specialists. 83. You sell short 100 shares of Newly Corporation when it is trading at $50. Your margin requirement is 50%. Assuming there was no commission and the maintenance margin is 30%, at what stock price would you receive a margin call? a. $57.69 b. $65.80 c. $72.84 d. $81.88 e. $85.92 84. To be considered a market, it is not necessary for the market to have a physical location. a. True b. False 85. When a market is externally efficient, it means that new information is represented quickly in prices. a. True b. False 86. When a market is internally efficient, it means that transaction costs are low. a. True b. False
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Ch03 - Organization and Functioning of Securities Markets Answer Key 1. True 2. False 3. False 4. True 5. False 6. False 7. False 8. True 9. False 10. False 11. False 12. True 13. False 14. True 15. False 16. True 17. False 18. True 19. False 20. False 21. True 22. True 23. True 24. True 25. False Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 26. False 27. False 28. True 29. True 30. False 31. True 32. True 33. e 34. e 35. d 36. b 37. a 38. e 39. e 40. c 41. b 42. a 43. a 44. e 45. b 46. e 47. a 48. a 49. e 50. d 51. d Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 52. b 53. c 54. b 55. a 56. d 57. b 58. c 59. d 60. a 61. a 62. c 63. b 64. d 65. d 66. e 67. c 68. a 69. a 70. e 71. b 72. c 73. b 74. d 75. c 76. c Powered by Cognero
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Ch03 - Organization and Functioning of Securities Markets 77. a 78. d 79. c 80. a 81. c 82. a 83. a 84. True 85. True 86. True
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