Deck 7: A First Look at Investments

Question 1

The following data is provided for the S&P 500 Index:
Refer to the information above. Calculate the 20-year arithmetic average annual rate of return on the P 500 Index.

A)13.04%
B)10.56%
C)11.81%
D)none of the above

Answer 1

13.04%

Question 2

The following data is provided for the S&P 500 Index:
Refer to the information above. Calculate the geometric average annual rate of return on the 500 Index for the last ten years shown.

A)7.23%
B)17.76%
C)13.33%
D)5.91%

Answer 2

5.91%

Question 3

A stock has a market-beta of 2.65. This means that

A)the stock's returns will vary much more than the returns of the overall stock market.
B)if the general stock market is up 1%, this stock will be down 2.65%.
C)the stock is a less risky investment than an investment in the overall stock market.
D)None of the above is true.

Answer 3

the stock's returns will vary much more than the returns of the overall stock market.

Question 4

According to the definition used in this book, a cash asset is

A)a short-term equity asset.
B)a short-term debt asset.
C)a risk-free asset.
D)Both B and C.

Question 5

The following data is provided for the S&P 500 Index:
Refer to the information above. Calculate the 20-year geometric average annual rate of return on the 500 Index.

A)13.04%
B)11.81%
C)4.66%
D)10.54%

Question 6

What feature distinguishes the asset class, BONDS, from the asset class, CASH, according to the definitions used in this book?

A)All cash assets are risk-free; most bonds are not.
B)Cash assets are all backed by the U.S. government, but bonds may be issued by corporations and are not guaranteed by the U.S. government.
C)Bonds are debt instruments while cash is equity.
D)Bonds are longer-term debt instruments than cash assets.

Question 7

The following data is provided for the S&P 500 Index:
Refer to the information above. Calculate the 10-year arithmetic average annual rate of return on the 500 Index.

A)5.91%
B)7.23%
C)6.98%
D)8.11%

Question 8

If a stock's returns tend to move in the opposite direction of the general stock market, its market-beta will be

A)equal to 0.0.
B)a negative number.
C)greater than 1.0.
D)a nonsensical number.

Question 9

Which of the following statements is (are)true?

A)The geometric average rate of return will always be greater than the arithmetic average rate of return.
B)The arithmetic average rate of return will always be greater than the geometric average rate of return.
C)The difference between the geometric and arithmetic average rate of returns will be greater, the greater the variability of the annual returns.
D)Both A and C are true statements.

Question 10

The following data is provided for the S&P 500 Index:
Refer to the information above. Calculate the 5-year arithmetic average annual rate of return on the 500 Index.

A)10.84%
B)12.83%
C)13.15%
D)none of the above

Question 11

Which of the following assets are included in the asset class, CASH, according to the definitions used in this book?

A)certificates of deposit
B)municipal bonds
C)long-term Treasury bonds
D)both B and C

Question 12

Which of the following investment categories is likely to have a negative market-beta at any given point in time?

A)Treasury bonds
B)high-tech stocks
C)pharmaceutical stocks
D)gold

Question 13

Which of the following is a conclusion that can be drawn from the historical return data presented in this chapter?

A)An investment in individual stocks tends to be riskier than investing in a stock market index.
B)An investment in an individual stock would have provided you with a higher return than an investment in bonds, but you would have earned an even higher return by investing in
The S&P 500 Index.
C)An investment in any of the individual stocks would have provided you with higher returns than you would have earned by investing in a stock market index or in bonds.
D)Both A and C are true.

Question 14

The correlation of two variables will be

A)between 0 and +2, inclusive.
B)between minus infinity and plus infinity.
C)between 0 and +1, inclusive.
D)between -1 and +1, inclusive.

Question 15

Rank the following asset classes in terms of risk, from highest risk to lowest risk: I. Bonds
II. Individual stocks
III. 500 Index
IV. Certificates of deposit

A)IV, II, III, I
B)II, III, I, IV
C)II, I, III, IV
D)II, IV, III, I

Question 16

Which of the following assets are not included in the asset class, BONDS, according to the definitions used in this book?

A)commercial paper
B)long-term Treasury bonds
C)municipal bonds
D)All of the above are classified as bonds as defined by the chapter.

Question 17

The following data is provided for the S&P 500 Index:
Refer to the information above. Calculate the geometric average annual rate of return on the 500 Index for the last five years shown.

A)12.83%
B)13.15%
C)3.66%
D)12.44%

Question 18

When will the geometric average annual rate of return be equal to the arithmetic average annual rate of return?

A)when all the annual returns are either positive or zero
B)when there is no variability in the annual returns
C)The geometric average annual rate of return will never equal the arithmetic average annual rate of return.
D)when all the annual returns are positive

Question 19

Which of the following assets would not be classified as cash according to the definitions used in this book?

A)municipal bonds
B)commercial paper
C)certificates of deposit
D)Neither A nor C are considered to be cash assets.

Question 20

The market -beta of a stock

A)reflects the degree to which the stock's return varies with the company's earnings per share.
B)depicts the relationship between a stock's expected return and its risk as measured by its standard deviation.
C)reflects the degree to which the stock's return moves with the return on a market index.
D)reflects the degree to which the stock's return varies with inflation.

Question 21

Which of the following statements is supported by the empirical data presented in this chapter?

A)Returns on cash assets tended to be uncorrelated with the returns on stocks.
B)Returns on stocks and bonds tended to have a high positive correlation
C)In every year, stocks offered a higher rate of return than an investment in cash assets, but in some years, bond investments offered a higher rate of return than stocks.
D)A positive average annual rate of return always translated into a positive compound holding period rate of return.

Question 22

A market-maker

A)buys and sells securities out of his own inventory.
B)is able to view limit orders that have not yet been executed, making him privy to information unavailable to other traders.
C)matches buyers and sellers for security transactions.
D)both A and B

Question 23

A risk-free asset will have a market-beta

A)equal to1.0.
B)that is negative .
C)that is nonsensical.
D)equal to 0.0.

Question 24

A mutual fund reported the following annual returns: 8%, -3%, 21%, 10%, and 12%.
What compound rate of return did it earn over the five-year period? What was its
annualized compound rate of return?

Question 25

A disadvantage of a non-continuous market is that

A)it requires a large number of market-makers , who must be rewarded for their risk exposure.
B)it has higher fixed costs that are passed on to traders in the form of commissions.
C)traders may not be able to buy or sell their securities in a timely fashion, and the price may change in the interim.
D)all of the above

Question 26

Which of the following statements is (are)necessarily true?

A)If a stock's returns are negatively correlated with the returns of the general market, it will have a market-beta equal to -1.0.
B)If a stock's returns are negatively correlated with the returns of the general market, it will have a negative market-beta.
C)If a stock's returns are positively correlated with the returns of the general market, it will have a market-beta equal to +1.0.
D)Both A and B are true.

Question 27

A broker who does not execute trades on behalf on the investor, but instead only takes care of the bookkeeping for the portfolio, margin provisions and short provisions, is called a

A)prime broker.
B)wholesale broker.
C)retail broker.
D)discount broker.

Question 28

When an investor has borrowed part of his investment money from his broker, he has executed a

A)margin transaction.
B)short sale.
C)prime loan.
D)limit order.

Question 29

When considering the historical performance of a mutual fund, should you calculate
the arithmetic average annual return of the fund or the geometric average annual
return? Why?

Question 30

If a stock's returns are positively correlated with the returns on the general stock market, then

A)its market-beta must be exactly equal to 1.0.
B)its returns will increase or decrease by the same percentage as the percentage increase or decrease in the general stock market.
C)its market-beta must be greater than 1.0.
D)None of the above is a true statement.

Question 31

What does a stock's market-beta indicate? What does it mean if a stock has a negative
market-beta?

Question 32

If the correlation of the returns of two assets is 100%, then

A)if one asset's return increases by 10%, the second asset's return will decrease by exactly 10%.
B)if one asset's return increases by 10%, the second asset's return will also increase, but not necessarily by 10%.
C)if one asset's return increases by 10%, the second asset's return will usually, but not always, also increase.
D)if one asset's return increases by 10%, the second asset's return will also increase by exactly 10%.

Question 33

An order to buy or sell at the prevailing price is called a

A)limit order.
B)market order.
C)margined order.
D)good-til-cancelled order.

Question 34

An alternative trading system that uses peer-to-peer networking to match buyers and sellers is called

A)Instinet.
B)Euronext.
C)Liquidnet.
D)Archipelago.

Question 35

In the United States, most bonds are traded

A)on electronic communication networks.
B)in the OTC market.
C)on the NYSE.
D)on pink sheets.

Question 36

Which of the following statements about the use of historical data is false?

A)Correlations and risk measures tend to be fairly stable and, therefore, past data can be assumed to reasonably represent the future.
B)In order to examine return patterns, a minimum of 20 to 30 years of data is necessary.
C)Historical average returns are good predictors of the future, but the rate of return in any given year should not be relied on to predict the future.
D)All of the above statements are true.

Question 37

The correlation of the returns of a risk-free Treasury bond with the returns of the general stock market will be

A)equal to 0.0.
B)between -1.0 and +1.0, depending on the yield-to-maturity of the Treasury bond.
C)equal to 1.0.
D)equal to -1.0

Question 38

Compare and contrast the two asset classes, "Cash" and "Bonds."

Question 39

What has been the correlation of the returns on cash and the stock market and of the
returns on bonds and the stock market, according to the historical evidence? Can you
reasonably assume that these correlations will be similar in the future?

Question 40

A short sale is

A)the sale of borrowed stock.
B)the sale of less than a round lot (100 shares)of stock.
C)the sale of stock for a specified price or better.
D)the sale and immediate repurchase of a stock in order to profit from temporary pricing abnormalities.

Question 41

Which of the following statements regarding unit investment trusts (UITs)is (are)true?

A)Managers of UITs are able to invest in assets that are less liquid than managers of closed-end funds can.
B)UITs are required to have a fixed termination date.
C)UITs are better known as mutual funds.
D)Shares of UITs trade only on exchange floors and are not redeemed through the trust itself.

Question 42

Which of the following agencies has primary regulatory power over the securities' markets?

A)U..S. Securities and Exchange Commission
B)Federal Reserve
C)FDIC
D)Congress

Question 43

Which of the following statements about initial public offerings (IPOs)is (are)true?

A)An IPO refers to the initial sale of a firm's stock or bonds.
B)The securities sold through an IPO are typically sold at a fixed price.
C)The securities sold during an IPO tend to be underpriced.
D)both B and C

Question 44

When a company that is already publicly-held issues new shares, it is called a

A)secondary offering.
B)reverse offering.
C)after-market offering.
D)seasoned equity offering.

Question 45

Which of the following statements regarding Exchange-Traded Funds (ETFs)is (are)false?

A)Most Exchange-Traded Funds are hedge funds.
B)Many Exchange-Traded Funds are organized as Unit Investment Trusts (UITs).
C)Many Exchange-Traded Funds invest in a variety of securities designed to mimic a particular market index.
D)All of the above statements are true.

Question 46

Joan sold 100 shares of Arch Coal, Inc. short at $35. A couple weeks later, Arch Coal
was selling for $42 a share. What was Joan's gain or loss on this transaction? Explain.
(Ignore dividend payments and transactions costs.)

Question 47

A firm is worth $5 million, and you own 500 shares worth a total of $5,000. If the firm repurchases $1 million of its shares for their fair market value, what will the value of your
Shares then be?

A)$3,750
B)$5,000
C)$4,000
D)This cannot be determined without knowing the number of shares outstanding before and after the repurchase.

Question 48

Which of the following statements about insider trading is (are)true?

A)Employees of a firm are not allowed to buy and sell shares of their company's stock except through a trustee.
B)Insiders are allowed to buy and sell shares of their company's stock as long as their trades are not based on information that has not yet been released to the general public.
C)Any executive who buys and sells shares of his or her own company's stock is guilty of violating his or her fiduciary obligation to the firm's shareholders.
D)Both A and B are true.

Question 49

Which of the following statements about share repurchases is (are)necessarily true?

A)A share repurchase shrinks the value of the equity of a firm.
B)An investor who retains his shares when a firm does a share repurchase will own shares that have a greater value after the repurchase is completed.
C)Share repurchases are typically done by firms that are experiencing financial difficulties.
D)Both A and B are true.

Question 50

Which of the following statements is true?

A)A stock is not allowed to be traded on both the NYSE and Nasdaq.
B)Trading on Nasdaq is conducted by auction.
C)The NYSE has a significantly higher trading volume than does Nasdaq.
D)Most Nasdaq stocks have multiple market-makers.

Question 51

What is the difference between an open-end fund and a closed-end fund?

Question 52

Which of the following statements about crossing systems is false?

A)They are available mainly to institutional traders.
B)The cost of a trade tends to be cheaper than it would have been on an exchange.
C)There is a chance that an order may never get executed.
D)All of the above statements are true.

Question 53

What is the difference between a market order and a limit order?

Question 54

An American Depository Receipt (ADR)

A)is a type of Exchange Traded Fund (ETF).
B)represents ownership of one or more shares of a foreign stock.
C)is debt of the U.S. government sold to overseas investors.
D)is debt issued by a commercial bank.

Question 55

You own 5,000 shares of a stock that currently sells for $30 a share. There are 2 million
shares outstanding. The firm has announced that it plans to devote $10,000,000 to a
share repurchase. Assume you do not participate in the repurchase and calculate the
total value of your investment and your percentage ownership both before and after
the repurchase.

Question 56

Which of the following statements regarding reverse mergers is true?

A)In a reverse merger, money flows out of the public sector into the private sector.
B)In a reverse merger, a large, publicly-held company spins off one of its divisions, which itself becomes a publicly-traded company.
C)A reverse merger is a method of making a publicly-held firm private once again.
D)In a reverse merger, a large, privately-held firm merges with a smaller firm that is publicly-held.

Question 57

Discuss the relative advantages and disadvantages of continuous trading systems and
non-continuous trading systems.

Question 58

Which of the following events results in an inflow of money to the financial markets?

A)share repurchases
B)delistings
C)reverse mergers
D)dividend payments

Question 59

Most of the expansion in the number of outstanding shares of publicly-traded companies is currently a result of

A)initial public offerings.
B)seasoned equity offerings.
C)after-market offerings.
D)employee stock option plans.

Question 60

Which of the following is not classified as an investment company?

A)unit investment trusts
B)mutual funds
C)closed-end funds
D)hedge funds