Question 1

____ are enforced to restrict the amount of credit extended to customers by stockbrokers.

Accepted Answer

Margin requirements are enforced to restrict the amount of credit extended to customers by stockbrokers, ensuring that investors have enough equity in their accounts to cover potential losses.

Question 2

Which of the following statements is incorrect?

Accepted Answer

Investors sell a stock short when they anticipate that its price will decrease, not rise, in order to buy it back at a lower price and profit from the difference.

Question 3

Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is

Accepted Answer

D

Question 4

A short-seller

Accepted Answer

Short-sellers make a profit by selling borrowed stock at a high price and then buying it back at a lower price, with the profit being the difference between these prices minus any dividends they had to pay in the interim.

Question 5

When investors buy stock with borrowed funds, this is sometimes referred to as

Accepted Answer

Purchasing stock on margin refers to the practice of buying stocks by borrowing funds from a broker, with the bought stocks serving as collateral for the loan.

Question 6

The risk of a short sale is that the stock price

Accepted Answer

In a short sale, the seller borrows a stock and sells it, hoping to buy it back later at a lower price. If the stock price increases instead, the seller faces the risk of buying it back at a higher price, leading to a loss.

Question 7

The short interest ratio is commonly measured as the number of shares sold short divided by the number of shares that the firm has repurchased in the last quarter.

Accepted Answer

The short interest ratio is actually measured as the number of shares sold short divided by the average daily trading volume of the stock, not by the number of shares the firm has repurchased.

Question 8

Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.

Accepted Answer

Purchasing a stock on margin involves borrowing money to buy the stock, which can actually increase risk because if the stock price falls, investors may face a margin call and have to add more funds or sell the stock at a loss.

Question 9

Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is

Accepted Answer

The investor's initial investment is $25 per share. The stock appreciates by $15.25 ($65.25 - $50) and pays a $2 dividend. The total gain is $17.25. The interest on the borrowed $25 is $2.25 (9% of $25). The net gain is $15 ($17.25 - $2.25). The return is $15/$25 = 60%.

Question 10

With a ____ order, the investor specifies a purchase price that is above the current market price.

Accepted Answer

A stop-buy order is used to purchase a stock at a specified price above its current market price, often to limit loss on a short sale or to initiate a new long position in anticipation of the stock's price rising.

Question 11

Mark purchases a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark thinks he can sell the stock for $100 after one year. If Mark uses his own funds for half of the investment amount and borrows the remainder from his brokerage firm at an annual interest rate of 12 percent, his estimated return on the stock would be ____ percent.

Accepted Answer

The answer of Mark purchases a stock priced at $70....

Question 12

You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been

Accepted Answer

When you purchase a stock with a combination of cash and borrowed funds (leveraging), and the stock's value decreases, the negative return is magnified because you still owe the borrowed amount plus any interest on it. Therefore, the return on your investment would be more negative than if you had used only cash, since you would not have the additional burden of repaying the borrowed funds.

Question 13

Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year?

Accepted Answer

The return is calculated as the total gain divided by the total investment. The total gain is the sale price minus the purchase price plus the dividends received, which is $55 - $25 + $2 = $32. The total investment is the purchase price plus the borrowed amount, which is $25 + $25 = $50. Therefore, the return is $32 / $50 = 0.64, or 64%.

Question 14

Karen purchased a stock priced at $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is her return on the stock?

Accepted Answer

The answer of Karen purchased a stock priced at $33...

Question 15

When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a

Accepted Answer

A margin call occurs when the value of an investor's margin account falls below the broker's required amount. The brokerage firm demands the investor deposit more money or securities to cover the potential loss, ensuring the loan value is adequately collateralized.

Question 16

Which of the following statements about program trading is incorrect?

Accepted Answer

Program trading primarily focuses on buying or selling a large basket of stocks based on movements in stock indices or pricing discrepancies, rather than directly aiming to capitalize on Federal Reserve monetary policy announcements.

Question 17

Mark uses his own funds to purchase a stock priced at $70. He thinks he can sell the stock for $100 after one year. What is Mark's estimated return on the stock?

Accepted Answer

Mark's estimated return on the stock is calculated as the profit divided by the purchase price. The profit is $100 - $70 = $30. The return is $30 / $70 = 0.4286, or 42.86 percent.

Question 18

A ____ order to buy or sell a stock means to execute the transaction at the best possible price.

Accepted Answer

A market order is designed to be executed as quickly as possible at the current market price, ensuring the best available price at the time of execution.

Question 19

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.

Accepted Answer

The maintenance margin is the minimum amount of equity that must be maintained in a margin account after the stock has been purchased, expressed as a percentage of the total market value of the securities, not the initial purchase price.

Question 20

Under the present margin requirements, at least ____ percent of an investor's invested funds must be paid in cash.

Accepted Answer

Under the current margin requirements, at least 50 percent of an investor's invested funds must be paid in cash. This is known as the initial margin requirement set by the Federal Reserve under Regulation T.

Quiz 12: Market Microstructure and Strategies