Deck 4: Personal Investing - Investing in Stocks

Question 1

Limit orders are always preferable to market orders.

Answer 1

False

Question 2

Low interest rates tend to entice investors into the stock market where they can achieve better returns.

Answer 2

True

Question 3

Market makers are required to help make markets more liquid by taking the same position as those who want to buy or sell the stock.

Answer 3

False

Question 4

When the federal government fiscal policy moves to increases taxes,these revenues would generally be used to stimulate economic growth.

Question 5

Floor traders no longer exist on the TSX because trades are now handled electronically.

Question 6

Company's with lower P/E ratios are usually better long term investments than those with higher P/E ratios.

Question 7

A discount brokerage firm executes transactions and provides investment advice at a price less than that of full-service brokers.

Question 8

For most firms,having slightly more short-term assets versus short-term liabilities would be considered a reasonable current ratio.

Question 9

One study tracked recommendations by stockbrokers and showed that they make "buy" recommendations hundreds of times more often than "sell" recommendations.

Question 10

Low interest rates can increase demand for stocks and therefore have a direct impact on stock prices.

Question 11

Fundamental analysis is the valuation of stocks based on sensitivity of the firm's performance to economic conditions.

Question 12

A stock with a low P/E ratio compared with its peers means it is a good value using fundamental analysis.

Question 13

A high times-interest-earned ratio means that the firm should be more capable of covering its debt payments.

Question 14

The Toronto Stock Exchange (TSX)is the only Canadian stock exchange.

Question 15

The over-the-counter (OTC)market is a non-transparent communications network.

Question 16

The price-earnings method used to value stock is limited because it assumes that the firm has the same P/E ratio as its competitors.

Question 17

When you look at inventory turnover (cost of goods sold divided by average daily inventory),a high ratio means that a company is more efficient than those with lower ratios.

Question 18

If the stock market is efficient,then fundamental analysis will be a good way to determine when stocks are well priced.

Question 19

As long as you purchase the stock of a good company,it will be a good investment.

Question 20

A firm with a low debt ratio relative to the industry norm has a high degree of financial leverage and therefore may have a relatively high risk of default.

Question 21

A margin call is a request from a brokerage firm for the investor to increase the cash in the account in order to bring the margin back up to the minimum level.

Question 22

Stocks would be most favourably affected by

A)a decline in interest rates and a decline in inflation.
B)an increase in interest rates and a decline in inflation.
C)a decline in interest rates and an increase in inflation.
D)an increase in interest rates and an increase in inflation.

Question 23

Computer systems that match up buyers and sellers of stocks or bonds are

A)the NYSE Euronext exchange.
B)the over-the-counter (OTC)markets.
C)the Toronto Stock Exchange.
D)the national stock exchanges.

Question 24

The Investment Industry Regulatory Organization of Canada (IIROC)limits the amount that can be borrowed for a TSX list stock to 70 percent for stocks that trade for more than $5 per share.

Question 25

Which are the main Canadian stock exchanges?

A)TSX,TSX Venture Exchange and Montreal Exchange
B)TSX,NASDAQ,and Montreal Exchange
C)TSX,TSX Venture Exchange and Canadian OTC
D)TSE,NASDAQ and Canadian OTC

Question 26

Fiscal policy is about how the government manages interest rates and money supply.

Question 27

When you buy a stock on margin,your return is magnified if the stock goes up in value.

Question 28

When using a sell stop order to sell 100 shares of ABCO at $30,it could happen that you only get $2500 for the transaction.

Question 29

A way to evaluate the performance of a stock investment is to compare it to

A)The buy and sell recommendations from analysts
B)The returns of other stocks in your portfolio
C)The stocks relevant industry index
D)The historical return of the Canadian stock market

Question 30

When reviewing a corporate income statement,to find gross profit,cost of goods sold is subtracted from

A)revenue.
B)net income.
C)earnings before interest and taxes.
D)operating expenses.

Question 31

The risk of a market order is that you could pay more for a stock than you anticipated.

Question 32

Inflation is the measure of the increase in the general level of prices of products and services over a specified period.

Question 33

A firm's financial leverage indicates its reliance on debt to support its operations.

Question 34

Which of the following factors would contribute to an increase in stock prices?

A)Low inflation
B)High interest rates
C)Fiscal policy to increase tax rates
D)Inflationary monetary policy

Question 35

A stock purchase of 100 shares of CN at $30 per share requiring a 30% margin means you would need $900 cash to make the purchase.

Question 36

Venture capital refers to funds that investors are prepared invest in risky new businesses with growth potential.

Question 37

Which of the following ratios measures efficiency?

A)Times interest earned
B)Inventory turnover
C)Return on assets
D)Return on equity

Question 38

To evaluate the liquidity of a firm,you should look at the

A)current ratio.
B)debt ratio.
C)inventory turnover.
D)return on net assets.

Question 39

A company's earnings are $3 per share,its dividend is $2 per share,and its stock price is $30 per share.Its P/E is

A)15.
B)10.
C)6)
D)15 percent.

Question 40

If you wish to evaluate the financial leverage of a firm,you could look at the

A)short-term liabilities versus assets.
B)long-term liabilities versus total assets.
C)gross revenue versus total assets.
D)long-term debt versus total equity.

Question 41

The means by which the Canadian government imposes taxes on individuals and corporations and the way it spends tax revenues is the

A)tax policy.
B)fiscal policy.
C)monetary policy.
D)budgetary policy.

Question 42

If IIROC limits the margin on a stock to 70 percent,initially how much money would you need to personally invest to purchase $10000 worth of BMO stock?

A)$7000
B)$3000
C)It depends on the price.
D)$10 000

Question 43

Technical analysts look for stock price patterns which

A)indicate stocks with rapidly changing P/Es.
B)indicate a possible price trend.
C)indicate value trends.
D)demonstrate profit trends.

Question 44

You want to purchase 100 shares of CIB for a maximum price of $3000 and it is currently trading at $33.Which order should you place?

A)A buy stop order to purchase 100 shares of CIB at $30 good until filled
B)A limit order to buy 100 shares of CIB at $30 good until filled
C)A market order to buy 100 shares of CIB at $30
D)A market order to purchase 100 shares of CIB at $33

Question 45

A market in which stock prices fully reflect all information that is available to investors is called

A)inefficient.
B)efficient.
C)overvalued.
D)factored.

Question 46

What additional risk is involved when buying stock on margin?

A)The interest rate charge
B)The leverage
C)A margin call
D)The amount borrowed

Question 47

In fundamental research you look for a stock that is

A)overvalued.
B)from a well-known company.
C)undervalued.
D)trending upwards.

Question 48

One of the most commonly used measures of inflation is the

A)gross domestic product.
B)fiscal policy.
C)consumer price index.
D)inflation factor.

Question 49

If you need to be sure you will sell your shares of a certain stock if the price drops below a certain threshold,which type of order should you place?

A)Sell stop order for price X
B)Limit order to sell for price X
C)Market order to sell for price X
D)Short sell order for price X

Question 50

Which of the following orders to buy or sell is an odd lot?

A)1000 shares at $10
B)$3780 worth of shares at $20
C)$8600 worth of shares at $4.30
D)500 shares at $22.50

Question 51

If a company's P/E is 20 and its industry's mean P/E is 15,the company is likely considered to be

A)overvalued.
B)poorly managed.
C)undervalued.
D)risky.

Question 52

Which of the following is a limitation of the P/E method?

A)Finding the price of the stock
B)Finding earnings per share information
C)Difficulty forecasting earnings
D)Changing dividend payouts

Question 53

How many shares of TIC could you purchase on margin if you have $6000? The market price is $20 and the margin requirement is 30 percent.

A)900 shares
B)300 shares
C)1000 shares
D)428 shares

Question 54

If stock markets are truly efficient,it implies that

A)it will not be easy to find undervalued stocks.
B)technical analysis should be more effective than fundamental analysis.
C)professional money managers should outperform individual investors.
D)stock purchase and sell orders can always be completed within a number of seconds.

Question 55

What can be said about broker and analyst recommendations?

A)They generally beat the markets.
B)They tend to be optimistic on "buy" recommendations.
C)They cannot own the stocks they recommend.
D)They tend to give more "sell" recommendations.

Question 56

What is the safest type of stock order to use?

A)Market order
B)Limit order
C)Buy stop order
D)Sell stop order

Question 57

How much should a share of stock be worth for a firm whose earnings per share are $4 if the industry's average P/E is 11?

A)$40
B)$44
C)$48
D)$88

Question 58

One of the key ways to apply fundamental analysis is by

A)following an investor newsletter.
B)tracking historical stock price trends.
C)charting stock price patterns.
D)using the dividend discount model.

Question 59

Which of the following methods is used most commonly to value stock?

A)Price-earnings method
B)Price-revenue method
C)General evaluation of the economy and industry
D)Technical analysis

Question 60

An order to execute a transaction to buy or sell a stock at its prevailing price is called a

A)limit order.
B)stock order.
C)market order.
D)good till cancelled order.

Question 61

If John executes a buy order to take place when the stock price of ABC Ltd.falls to $10,it is a(n)

A)on-stop order.
B)limit buy order.
C)buy stop order.
D)sell stop order.

Question 62

You have bought 1000 shares on margin at $50 per share,putting up $25 000.The stock price has increased to $65.If the margin rate is 50 percent,how much more will the broker lend you?

A)$0
B)$15 000
C)$7500
D)$5000

Question 63

To assess the performance of your purchase of TD Bank stock,which index would be the most relevant?

A)TSX 60 Index
B)TSX Capped Financials Index
C)TSX Global Financials Index
D)TSX Unweighted

Question 64

If stock markets are inefficient

A)fundamental value analysis will not be effective.
B)it will be easier for investors to find stocks that are undervalued.
C)stock prices fully reflect information that is available to investors.
D)stock selections by investors will not consistently beat the market.

Question 65

Which technique for valuing stocks is used in technical analysis?

A)Index comparisons
B)Price charting
C)DDM
D)P/E ratio analysis

Question 66

If Jim's stock return was -1 percent and the TSX stock index had a 3 percent return,the excess return of Jim's stock is

A)-4 percent.
B)2 percent.
C)-2 percent.
D)4 percent.

Question 67

The best assessment of the performance of your selection of stocks is to compare the returns to

A)the average gains or losses you had in the last five years.
B)the average returns of GICs.
C)a comparable stock index during the same period.
D)the prime rate set by the Bank of Canada.

Question 68

You purchased stock worth $10 000 on margin (50 percent).Now the value of your stock has declined to $7000 and you receive a margin call.How much cash do you need to bring the margin back to the minimum level?

A)$1500
B)$3000
C)$5000
D)$2000

Question 69

In deciding to invest in stocks,the most time-consuming Chapter is

A)fundamental analysis.
B)choosing a broker.
C)the actual purchase of the stock.
D)monitoring results.

Question 70

A brokerage firm currently limits the margin rate to 70 percent.The amount that can be borrowed for a transaction to buy 100 shares at $50 is

A)$4000.
B)$3500.
C)$5000.
D)$1500.

Question 71

Which of the following was put in place to restore investor confidence in the markets and to prevent further occurrences of corporate fraud?

A)Ontario Securities Commission (OSC)
B)Securities and Exchange Commission (SEC)
C)Investment Industry Regulatory Organization of Canada (IIROC)
D)Sarbanes-Oxley Act

Question 72

When the Bank of Canada uses interest rates to regulate the economy,it is using

A)monetary policy.
B)fiscal policy.
C)economic growth policy.
D)gross domestic product (GDP)policy.

Question 73

TD Bank pays an annual dividend of $2.12 at the rate of $0.53 quarterly.The stock is trading at $63.21.What is the effective annual yield?

A)3)35 percent
B)3)25 percent
C)3)60 percent
D)0)84 percent

Question 74

Which of the following techniques is regarded as fundamental analysis?

A)Study of the firm's revenue and earnings
B)Study of the firm's stock price history
C)Study of the firm's recent change in management
D)Study of the firm's commentary by the financial news

Question 75

The TSX Index had a return of 12 percent and Apple Inc.had a return of two percent over the same six month period.What can you say about whether your purchase of Apple Inc.was a good decision?

A)Nothing because the TSX Index is not a relevant comparison for an American company.
B)Your analysis of Apple was poor.
C)Apple is always a good company to buy,but this was too short a time to compare.
D)Comparing returns with an Index is irrelevant.

Question 76

If you need to be sure to buy shares of a company when the price rises above a certain level,you need to use a

A)buy limit order.
B)buy stop order.
C)buy market order.
D)buy price order.

Question 77

Which of the following is not a typical way to analyze firm-specific characteristics through financial statements?

A)Profitability
B)Efficiency
C)Liquidity
D)Competitive strategy

Question 78

The dividend discount model method is used to value a stock based on a firm's ________ and is ________ at an appropriate rate of interest.

A)future dividend payments,compounded
B)future earnings,discounted
C)future earnings,compounded
D)future dividend payments,discounted

Question 79

You bought IBM stock at $70 per share.It is now $120 a share.You think it could go higher but you are nervous that it could go down and you would lose your gains.To protect your gains but still give yourself the chance to make future profits,you could place a

A)limit order to sell for $130 a share.
B)sell stop order at $110 a share.
C)limit order to sell for $110 a share.
D)sell stop order at $130 a share.

Question 80

An example of fraud in financial reporting would be

A)allowing orders to be cancelled.
B)arriving at a P/E using the weighted average number of shares outstanding during the year.
C)inflating revenues by recording income from contracts which will extend beyond one year.
D)advising your auditors about a change in accounting procedures.