Question 1

Which is the best strategy for a beginning investor?

Accepted Answer

Mutual funds offer diversification and professional management, making them a safer and more accessible option for beginners compared to individual stocks or bonds.

Question 2

Which of the following portfolio strategies is the riskiest?

Accepted Answer

Investing 100 percent in a small-cap technology company is the riskiest because small-cap stocks are generally more volatile and less stable than blue-chip stocks, and concentrating all investment in a single company increases risk due to lack of diversification.

Question 3

Owners of sole proprietorships generally have ____ personal liability than owners of corporations.

Accepted Answer

Owners of sole proprietorships have more personal liability because they are personally responsible for all debts and obligations of the business, unlike corporation owners who have limited liability.

Question 4

Dell is an American computer company. The founder, Michael Dell, and global technology investment firm, Silver Lake Partners, own all of the shares of Dell. It is not possible to buy shares of Dell stock on the secondary market because Dell is a

Accepted Answer

Dell is a private corporation, meaning its shares are not available for public trading on the stock market.

Question 5

If you buy 100 shares in a corporation that has issued 1,000 shares, your proportionate share of ownership in the company is

Accepted Answer

If you own 100 shares out of a total of 1,000 shares issued by the corporation, your ownership percentage is (100/1000) * 100% = 10%.

Question 6

A common shareholder's claim on a company's assets is residual, meaning the shareholder has a right to share in the assets and income of the corporation only after higher-priority claims from________ are satisfied.

Accepted Answer

Common shareholders have a residual claim, meaning they are paid after all other obligations, including bondholders, creditors, and preferred shareholders, are satisfied.

Question 7

Common stockholders have

Accepted Answer

Common stockholders have limited liability, meaning they are not personally responsible for the company's debts beyond their investment. They do not have guaranteed rights to dividends or voting on all company decisions.

Question 8

A stock dividend provides ___ benefit to a stockholder as a cash dividend.

Accepted Answer

A stock dividend does not provide as much immediate benefit as a cash dividend because it does not provide cash to the stockholder, only additional shares.

Question 9

A written agreement that gives your common stock voting rights to someone else is known as a

Accepted Answer

A proxy is a written authorization that allows someone else to vote on behalf of a shareholder.

Question 10

Limited liability for common shareholders means the most one can lose on a share of stock is

Accepted Answer

Limited liability means that shareholders can only lose the amount they have invested in the company, which is the value of their shares. They are not responsible for the company's debts beyond their investment.

Question 11

The reason corporations give the preemptive right to stockholders is to

Accepted Answer

The preemptive right allows existing shareholders to maintain their proportional ownership in the company when new shares are issued, preventing dilution of their ownership percentage.

Question 12

If you own 100 shares of stock currently selling at $50 per share and the company declares a 3 for 1 split, you will have about ______ after the split.

Accepted Answer

In a 3 for 1 stock split, each share is divided into three, so you will have 3 times the number of shares. Therefore, 100 shares become 300 shares. The total value remains the same, so the price per share is adjusted to $16.67.

Question 13

Which of the following statements concerning stock splits is true?

Accepted Answer

Stock splits often lead to a rise in stock price due to perceived increased liquidity and affordability, though they do not change the fundamental value of the company.

Question 14

When a stock split occurs,

Accepted Answer

In a stock split, the number of shares owned by shareholders increases, but the total value of their holdings remains the same as the price per share decreases proportionally.

Question 15

You plan to put $1,500 in an investment account today. What will it be worth in 20 years if you invest half in corporate bonds that pay 4% per year and half in corporate stock that earns 9% per year? Assume annual reinvestment of returns and round to the nearest dollar.

Accepted Answer

Half of $1,500 is $750. The $750 in bonds grows at 4% annually: $750 * (1.04^20) = $1,641. The $750 in stocks grows at 9% annually: $750 * (1.09^20) = $4,206. Adding both gives $1,641 + $4,206 = $5,847.

Question 16

Consider the following potential investments, which is the most liquid?

Accepted Answer

A checking account is the most liquid investment because funds can be accessed immediately without any penalties or waiting periods.

Question 17

Which of the following is a disadvantage of common stock ownership?

Accepted Answer

Common stock ownership can lead to dilution of management control, as shareholders have voting rights that can influence company decisions.

Question 18

A stock that pays investors a regular dividend is a good example of a(n)

Accepted Answer

An income stock is known for paying regular dividends to its investors, providing a steady income stream.

Question 19

In the last several years, Monster Beverage Corporation's stock price has increased substantially. The company has never paid its common shareholders a dividend. Monster Beverage Corporation can be classified as a(n) _______ stock.

Accepted Answer

Monster Beverage Corporation has never paid its common shareholders a dividend, which means it is a growth stock. Growth stocks are companies that reinvest their earnings back into the business in order to grow.

Question 20

A stock issued by a large, stable, mature company is known as a(n)

Accepted Answer

Blue-chip stocks are issued by large, stable, and mature companies with a history of reliable performance and dividends.

Quiz 12: Investing in Stocks and Bonds