Deck 12: Personal Investing - Investing in Stocks

Question 1

The TSX Venture Exchange tends to attract newer, high-tech companies.

Answer 1

True

Question 2

Economic growth, as measured by increases in the gross domestic product (GDP), signals the start of a bull market where stock prices are bound to rise.

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

The daily stock quotations found in most large newspapers will tell you the annual dividends paid per share of stock.

Question 5

A good measure of a company's liquidity is the current ratio, which is the ratio of its short-term assets to its short-term liabilities.

Question 6

Interest rates can affect economic growth and therefore have a direct impact on stock prices.

Question 7

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

Question 8

Fiscal policy, the means by which the Canadian government imposes taxes on individuals and corporations and spends its money, has an impact on spending and thus an impact on the stock of some companies.

Question 9

A stock with a P/E of 10 may be a bargain, but more research is required.

Question 10

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

Question 11

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 12

Before buying a stock, you should estimate its future market value, just as you would the future value of a car or a home.

Question 13

Technical analysis and fundamental analysis are methods commonly used by investors to value stocks.

Question 14

Market makers help to make a market in stocks liquid by taking the same position as those who want to buy or sell the stock.

Question 15

The Toronto Stock Exchange (TSX)is the oldest and largest of the stock exchanges.

Question 16

Beta is the measure of a stock's sensitivity to its trading volume.

Question 17

Value Line Investment Survey provides an extremely detailed analysis of a firm's financial data.

Question 18

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

Question 19

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 20

The most up to date stock quotations can be found in the Financial Post or The Globe and Mail.

Question 21

If you don't need advice or other services offered, you are better off using a discount broker or Internet broker rather than a full-service broker.

Question 22

A stock market is considered efficient when investor demand and supply for stocks reflect all available news.

Question 23

Stocks are usually bought or sold in round lots, which are multiples of $100.

Question 24

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

Question 25

A stock purchase of 100 shares at $13 requires a minimum margin of $650 (margin rate is 50 percent).

Question 26

A stock with a P/E of 50 may be considered underpriced or undervalued.

Question 27

You can currently borrow up to 75 percent of stock transactions under today's margin rate.

Question 28

Limit orders can be placed only for a short period of time, usually one week or less.

Question 29

Online trading of stocks is not only less expensive than using traditional brokers, but also usually more convenient.

Question 30

The balance in your brokerage account is $1500 and you make a stock purchase of 200 shares at $19. You need to add $400 to your account to cover the margin rate of 50 percent.

Question 31

One study tracked recommendations by stockbrokers and showed that their advice did not lead to superior performance.

Question 32

A stop order is a special form of limit order; it is an order to execute a transaction when the stock price reaches a specified level.

Question 33

The price-sales method of valuing stock is popular for measuring stocks that cannot be valued by the P/E method.

Question 34

A stock trading at $20 with $4 of earnings has a low P/E.

Question 35

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

Question 36

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 37

In getting recommendations from brokers and analysts, you need to be careful that frequent suggestions to buy or sell are not being made to generate revenues for these traders.

Question 38

A market order is normally executed much more quickly than a limit order.

Question 39

An odd lot is the purchase of less than 100 shares of stock.

Question 40

Buying on margin is a good way to initially purchase stock if you don't have the funds.

Question 41

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 42

Venture capital refers to investors' funds for risky and new businesses with growth potential.

Question 43

Computer systems that match up buyers and sellers of stocks, even at night when the other exchanges are closed, are

A)the Montreal Exchange.
B)the over-the-counter (OTC)markets.
C)the Toronto Stock Exchange.
D)the regional stock exchanges.

Question 44

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

Question 45

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

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

Question 46

Which of the following ratios measures efficiency?

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

Question 47

A good way to measure the performance of your stock is to compare it to the return of a stock index.

Question 48

Compared to discount brokers, full-service brokers

A)give stock advice to their clients.
B)execute stock trades faster.
C)charge competitive rates.
D)offer margin accounts and derivatives.

Question 49

In reading 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)taxes.

Question 50

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

Question 51

Which two financial statements are used to assess profitability?

A)Cash flow and balance sheet
B)Income statement and cash flow
C)Income statement and balance sheet
D)Cash flow and owner's equity

Question 52

One of the most common measures of unemployment is the consumer price index (CPI).

Question 53

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

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

Question 54

Technical analysis is the valuation of stocks based on historical firm earnings patterns using various charting techniques.

Question 55

To compute the debt ratio of a firm you would use the

A)assets and liabilities.
B)assets and revenue.
C)equity and liabilities.
D)revenues and expenses.

Question 56

A P/E of 10 means that the firm's stock price is 10 times the

A)firm's earnings per share.
B)net income per share.
C)dividends per share.
D)the book value per share.

Question 57

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 58

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

Question 59

One of the problems of comparing the performance of your stock to a market index is that market indexes are often out of date.

Question 60

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

Question 61

Technical analysts look for stock price patterns which

A)have stocks with a rapidly changing P/E.
B)indicate a possible price trend.
C)show illiquid trading with small volume.
D)demonstrate higher profits.

Question 62

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

A)overvalued.
B)fairly valued.
C)undervalued.
D)market valued.

Question 63

Generally, stocks perform better when interest rates are

A)low.
B)high.
C)average.
D)inverted.

Question 64

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 65

The demand for which of the following will decrease most with a weak economy?

A)Cereal
B)Bread
C)Boats
D)Paper towels

Question 66

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)Using the formula

Question 67

The method of valuing stocks in which the revenue per share of a specific firm is multiplied by the mean industry ratio of share price to revenue is called

A)price-earnings method.
B)price-revenue method.
C)dividend discount model.
D)CAPM model.

Question 68

When researching a stock to buy, you look for a stock that is

A)overvalued.
B)correctly valued.
C)undervalued.
D)trending upwards.

Question 69

If IIROC limits the margin on O stock to 70 percent, initially how much money would you need to personally invest to purchase $10 000 worth of BMO stock?

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

Question 70

Fees charged by brokerage firms

A)are set by the TSX.
B)are set by the Ontario Securities Commission.
C)are set by the IIROC.
D)vary according to the services offered.

Question 71

A measure of inflation that represents prices of various products, such as groceries, household products, housing, and gasoline, is the

A)consumer price index.
B)cost of living index.
C)inflationary index.
D)household purchases index.

Question 72

When economic conditions are weak, the aggregate demand for products and services

A)declines.
B)increases.
C)remains the same.
D)may either decline or increase.

Question 73

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 74

If you were a supplier of a company selling goods on 30-day terms, you would be most concerned with ratios measuring

A)liquidity.
B)financial leverage.
C)efficiency.
D)profitability.

Question 75

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 76

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 77

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 78

What is the safest type of order to use?

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

Question 79

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

A)taxation policy.
B)fiscal policy.
C)bank policy.
D)budget policy.

Question 80

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