Deck 3: The Investment Process

Question 1

In a ________ sale, you are selling a security that you do not currently own.

A) hypothecation
B) margin
C) street name
D) short
E) brokers call

Answer 1

D

Question 2

Having ________ means an asset can be sold quickly without significant price concession. The term describes the ease with which a security can be converted to cash.

A) Timing
B) Liquidity
C) Turnover
D) call money
E) short interest

Answer 2

B

Question 3

A brokerage account in which purchases can only be made if sufficient funds are available is called a(n) ____ account.

A) Clearing
B) Access available
C) Cash
D) Call
E) Margin

Answer 3

C

Question 4

Which of the following is NOT an investor constraint?

A) Liquidity
B) Time Horizon
C) Marginal Tax Rate
D) Expected Rate of Return
E) Investor's Resources

Question 5

Research suggests that 90 percent of a portfolio's performance is determined by _________.

A) market timing
B) security selection
C) asset allocation
D) portfolio efficiency
E) risk aversion

Question 6

A _______ is a call issued by your brokerage firm asking for more funds when your equity position in a security is less than the required amount.

A) margin call
B) hypothecation agreement
C) short sale
D) maintenance requirement
E) call money sale

Question 7

A brokerage account which permits the investor to buy and sell securities on credit is a(n) ___ account.

A) Cash
B) Short
C) Open
D) Margin
E) hypothecation

Question 8

The most fundamental decision for an investor when considering their investment objectives is the _________.

A) financial resources they have available.
B) investment style they wish to pursue.
C) rate of return they desire.
D) amount of risk they are willing to bear.
E) liquidity they require in their portfolio.

Question 9

The return on an investment expressed on an annualized basis is called the

A) Earned return
B) Leveraged return
C) Holding-period percentage return
D) Annual percentage rate
E) Effective annual return

Question 10

The insurance fund that covers investors' brokerage accounts with member firms when they go bankrupt is called the:

A) CDIC.
B) CIPF.
C) CRA.
D) TSX.
E) NASDAQ.

Question 11

Which of the following best describes a risk averse investor.

A) An investor who will accept higher risk only if there is a higher guaranteed return
B) An investor seeking only investments without risk.
C) An investor who seeks to minimize the amount of risk needed to achieve their return objective.
D) An investor who is not willing to accept greater risk to achieve higher potential returns.
E) An investor whose desire to avoid risk can only achieve moderate returns on their portfolio.

Question 12

________ is the process of pledging securities as collateral against a margin loan.

A) A street name registration
B) A margin agreement
C) A brokers call agreement
D) A short sale
E) Hypothecation

Question 13

The call money rate is the

A) Rate at which you borrow money to make a margin purchase
B) Percentage of a security's value that must be paid to a broker when you receive a marginal call
C) Percentage interest rate that must be paid on any margin shortfall until the brokerage firm receives the funds requested in a margin call
D) Rate at which the brokerage firm borrows funds that are subsequently loaned to margin customers
E) Minimum percentage rate of equity that must be maintained at all times

Question 14

You are buying $21,000 worth of a stock. You are paying 65% in cash and borrowing the remaining 35% of the cost. The 65% is referred to as the _____, which is the portion of the value of an investment that is not borrowed.

A) Call money
B) Brokerage
C) Initial margin
D) Hypothecation
E) Short interest

Question 15

You own 500 shares of XYZ stock but your brokerage firm is listed as the registered owner of the securities. Under this arrangement, the securities are said to be held in:

A) brokers call registration.
B) street name registration.
C) hypothecation.
D) a margin agreement.
E) a shorts sale agreement.

Question 16

Asset allocation is the:

A) selection of specific securities within a particular class or industry
B) division of a purchase price between a cash payment and a margin loan.
C) division of a portfolio into short and long positions.
D) distribution of investment funds among various broad asset classes.
E) dividing of assets into those that are hypothecated and those that are not.

Question 17

The minimum equity that must be kept at all times in a margin account is called the _____ that is an established value cannot fall below.

A) Initial margin
B) Initial equity position
C) Maintenance margin
D) Call requirement
E) Margin call

Question 18

Market timing is the:

A) placing of an order within the last half-hour of trading for a day.
B) period of time between the placement of a short sale and the covering of that sale.
C) buying and selling of securities in anticipation of the overall direction of the market.
D) staggering of either buy or sell orders to mask the total size of a large transaction.
E) placing of trades within the last half-hour prior to the commencement of daily trading.

Question 19

Short interest is the number of shares of common stock

A) Held in short position
B) Held in margin account
C) Pledged as security for margin loans
D) For which sell orders are outstanding
E) For which buy orders are outstanding

Question 20

An investor who tries to anticipate the overall movement of the market is employing a _____________ strategy.

A) market timing
B) security selection
C) security analysis
D) passive market
E) portfolio balancing

Question 21

In Canada, the margin requirement for security trading is determined by the:

A) Provincial Securities Commission.
B) Investment Dealers Association (IDA).
C) Toronto Stock Exchange.
D) Bank of Canada.
E) individual brokerage firm.

Question 22

You want to buy $10,000 of securities in your margin account. Your advisor has informed you that you must pay a minimum of $65,000 or 6.5% of the purchase price in cash and thereafter maintain a minimum equity position of 30%. The initial margin requirement is ___ and the maintenance margin is ____

A) 35%; 30%
B) 35%; 70%
C) 65%; 30%
D) 65%; 35%
E) 65%; 70%

Question 23

Buying a diverse group of securities without focusing on particular securities is known as _______________.

A) asset allocation
B) passive investing
C) market timing
D) active investing
E) asset management

Question 24

You have an investment account with a brokerage firm that is CIPF insured. The account consists of $40,000 in cash, and $170,000 in securities. Which one of the following is true regarding this account?

A) Only $100,000 of the account is insured against fraud
B) The $40,000 of cash and $60,000 of the securities are insured against losses from any source
C) The entire account is guaranteed safe by the Canadian government agency issuing the CIPF insurance
D) The $40,000 in cash plus the first $100,000 in securities is guaranteed by the private insurance fund backing the CIPF insurance
E) The entire account is protected by a private fund but only for losses resulting from fraud or other failure of the brokerage firm

Question 25

The CIPF guarantees your general brokerage account up to ______ for any combination of cash and securities, and an additional ____ for each separate account.

A) $1,000,000; $100,000
B) $600,000; $200,000
C) $400,000; $100,000
D) $600,000; $100,000
E) $1,000,000; $1,000,000

Question 26

________ is buying and selling securities in anticipation of the overall direction of the capital market. Investment in the market is increased if one forecasts that this market will outperform the money market instruments such as T-bills.

A) Market timing
B) Asset allocation
C) Security selection
D) Asset management
E) Margin timing

Question 27

If you are risk averse, you will:

A) only invest in low-risk investments.
B) invest in an asset based only on its return, ignoring the risk of the asset.
C) invest only in high-risk assets.
D) invest in riskier assets only if there is additional return for taking the extra risk.
E) avoid risk at all costs.

Question 28

The trustees inform you that your brokerage company has gone bankrupt. The CIPF insures your trading account up to ______ for losses of cash and securities.

A) $1,000,000
B) $100,000
C) $200,000
D) $500,000
E) $10,000

Question 29

Which of the following is true?

A) Advice received from your broker is guaranteed to be accurate
B) Most brokerage agreement require disputes to be settled in a count of law
C) Arbitrage is the legal process of settling a case without a jury
D) The churning of a customer's account is a recommended brokerage activity
E) Commission brokers always have a potential conflict of interest with their clients

Question 30

You purchase a stock on margin. If the stock price drops, your return will be ____ than if you had purchased the stock with cash. If the stock price rises, your return will be ____ than if you had purchased the stock with cash.

A) lower; lower
B) lower; greater
C) greater; greater
D) greater; lower
E) Insufficient information.

Question 31

Which of the following is not an advantage of street name registration?

A) The broker provides all tax information on a single form.
B) There is no danger of theft or other loss of the security.
C) Dividends and interest are automatically credited to the shareholder account.
D) It generally results in lower commissions charged.
E) The broker provides regular account statements.

Question 32

Which of the following can be a constraint for an investor?

A) Taxes.
B) Time horizon.
C) Liquidity.
D) Resources
E) All of the above.

Question 33

A broker makes ten trades on an account for the purpose of generating commissions. The broker may be guilty of _______.

A) Fraud
B) Hypothecation
C) Churning
D) money trading
E) call trading

Question 34

Why would a broker whom is engaged in churning be at a conflict of interest with their client?

A) Investing in risky securities is counter to the interest of a risk averse investor.
B) The broker is trading to generate income for themselves and not returns for the investor.
C) The broker isn't performing the due diligence necessary to provide accurate advice.
D) The broker knows that the client has signed an agency contract agreeing not to sue.
E) The broker is required to inform the client before buying securities created by their firm.

Question 35

The amount by which the interest rate on your margin account exceeds your broker's call money rate is called the

A) Margin rate
B) Short rate
C) Spread
D) Overnight rate
E) Cash rate

Question 36

The process of trying to buy specific securities that we expect to be the "winners" in the future is called _______.

A) asset allocation
B) passive investing
C) market timing
D) active investing
E) asset management

Question 37

When you purchase a stock on margin, the money is borrowed from:

A) your broker.
B) a bank.
C) the Toronto Stock Exchange.
D) the Bank of Canada.
E) another investor.

Question 38

You recently inherited $284,000 that you wish to invest in the stock and bond markets. However, you have no investment experience and want a knowledgeable professional to make all of your investment decisions for you. You most likely need the services offered by

A) A deep-discount broker
B) A discount broker
C) A full-service broker
D) An on-line broker
E) A cyber-broker

Question 39

________ refers to the selection of assets within a particular class of investments. For example, you are reviewing pharmaceutical firms to determine which firm's stock to purchase.

A) Market timing
B) Asset allocation
C) Security selection
D) Asset management
E) Margin timing

Question 40

The distribution of an investment among various broad categories of assets is known as ___________.

A) market timing
B) asset allocation
C) security selection
D) asset management
E) margin timing

Question 41

Which of the following is false concerning margin?

A) The Investment Dealers Association of Canada sets the margin requirement.
B) An initial margin of 100 percent is basically the same as a cash purchase.
C) All financial products on the exchanges can be traded with margin accounts.
D) Different margin requirements apply to different types of securities.
E) Securities purchased on margin must be left with the brokerage firm in street name.

Question 42

Your investment strategy consists of holding 70 percent stocks and 30 percent bonds. You research stocks and bonds in order to find the best performers. You have a(n) _____ asset allocation strategy and a(n) _____ security selection strategy.

A) active; active
B) active; passive
C) passive; passive
D) passive; active
E) none of the above.

Question 43

If you ignore a margin call, your broker

A) Will create a loan on your behalf to cover the call amount
B) Will sell all of your securities and close your account
C) May place a short sale on your behalf to cover the amount of the call
D) Will increase both margin loan and the rate of interest on that loan
E) May sell some of your securities

Question 44

An investor places $200,000 in a discretionary account and makes all trades based on his own research. Three years later the account is worthless. To somehow recover his money, the investor can:

A) file a claim with the CIPF.
B) file a lawsuit.
C) request an arbitration hearing.
D) file a claim with the provincial securities commission.
E) none of the above.

Question 45

In a(n) _____ account, you choose a money manager or several money managers offered by the brokerage and all commissions and costs are covered by a single fee.

A) asset management
B) discretionary
C) wrap
D) advisory
E) cash

Question 46

If your securities are unavailable to be returned, ____ can, at its option, compensate you for the market value of those securities as of the bankruptcy date instead of giving back the physical securities.

A) CDIC.
B) OSC.
C) CIPF.
D) CRA.
E) IDA.

Question 47

The big attraction offered by margin accounts is

A) Leverage potential
B) Capital gains
C) Interest reduction
D) Less risk
E) All of the above

Question 48

You invest 60 percent of your money in stocks and 40 percent of your money in bonds. Your investments are all in mutual funds. You have a(n) _____ asset allocation strategy and a(n) _____ security selection strategy.

A) active; active
B) active; passive
C) passive; passive
D) passive; active
E) none of the above.

Question 49

Which of the following is the least compelling reason to use a professional money manager?

A) The investor has limited time available for research.
B) It may be more cost effective.
C) The investor may have limited knowledge.
D) The investor needs professional guidance.
E) Professional money managers generally generate superior returns.

Question 50

You are buying $10,000 worth of stock by putting up % 6,000 in cash and borrow the balance. This is an example of a transaction in a(n) ____ account.

A) Cash
B) Wrap
C) Short
D) Margin
E) Asset allocation

Question 51

Short selling is:

A) a low risk strategy.
B) a bear market strategy.
C) non-taxable.
D) a bull market strategy.
E) a recommended strategy for investors with losses.

Question 52

You actively research macroeconomic factors and move between stocks and bonds in an attempt to time the market. Your investment is in stock and bond index funds. You have a(n) _____ asset allocation strategy and a(n) _____ security selection strategy.

A) active; active
B) active; passive
C) passive; passive
D) passive; active
E) None of the above.

Question 53

A brokerage account that provides money management, cheque writing privileges, credit cards, and margin loans is called a(n) _____ account.

A) asset management
B) discretionary
C) wrap
D) advisory
E) cash

Question 54

Which of the following is false regarding short sales?

A) The maximum potential loss on a short sale is unlimited.
B) You will receive a margin call on a short sale only if the stock price rises.
C) The maximum potential dollar gain from a short sale is the stock price when shorted.
D) A short sale must be covered within one year.
E) If you short a dividend paying stock you must pay for any dividends the stock pays while you are shorting the stock.

Question 55

Which of the following is false regarding margin?

A) Margin accounts typically allow for unlimited margin purchases.
B) The spread you pay above the call money rate typically declines as you borrow more.
C) You must sign a hypothecation agreement to purchase stocks on margin.
D) You own 100 shares of Stock X purchased with cash and purchase 100 shares of Stock Y on margin. If you do not cover a margin call, your broker can sell shares of Stock X until you meet the maintenance margin.
E) The initial margin requirement on government bonds is lower than the initial margin requirement on stocks.

Question 56

When the initial margin requirement is lowered from 70% to 40%, this change means

A) The OSC is officially recognizing that the stock market is too tight
B) Your broker may now arrange for a 60% loan on the value of stock collateral
C) The maintenance margin will also decline by 10%
D) Credit to finance stock purchase is less available that previously
E) Stock purchases will probably not pay lower interest rates on their accounts

Question 57

A brokerage account in which the broker can make buy and sell decisions for the account holder without notification is called a(n) ______ account.

A) asset management
B) discretionary
C) wrap
D) advisory
E) cash

Question 58

A brokerage account in which the account holder is the sole person responsible for making transaction decisions is known as a(n) ______ account.

A) asset management
B) discretionary
C) wrap
D) advisory
E) mutual

Question 59

You actively research market sectors to determine the sectors you feel will perform the best and then research these sectors to determine the best securities in each sector. You have a(n) _____ asset allocation strategy and a(n) _____ security selection strategy.

A) active; active
B) active; passive
C) passive; passive
D) passive; active
E) none of the above.

Question 60

Shares for short sales are

A) borrowed from other brokerage firms.
B) typically shares held by the short seller's broker in street name.
C) borrowed from commercial banks.
D) both (A) and (B).
E) both (B) and (C).

Question 61

The biggest advantage(s) offered by margin accounts is(are):

A) less risk involved
B) leverage potential
C) unlimited capital gains
D) non-taxable interest deduction
E) all of the above

Question 62

You purchased 400 shares of ABC stock for $14 a share. The stock was purchased with an initial margin of 55%. The maintenance margin is 30%. The stock is currently selling for $12 a share. What is the minimum dollar amount of equity that you must have today to avoid a margin call?

A) $1,440
B) $1,510
C) $1,155
D) $1,245
E) $1,360

Question 63

You purchased 300 shares of ABC stock on margin when the stock was selling for $24 a share. The stock is currently selling for $28 a share. What is the minimum amount of equity you must have in this security to avoid a margin call if the maintenance margin is 40%?

A) $2,880
B) $2,910
C) $3,155
D) $3,245
E) $3,360

Question 64

If you are an experienced investor who is greatly concerned about commission paid, you probably need a(n) _____ broker.

A) naive
B) discount
C) deep-discount
D) online
E) full service

Question 65

A stock sells for $19 per share. You have $4,800 to invest and would like to purchase the stock on margin. What is the maximum number of shares you can buy if the initial margin is 70 percent?

A) 181 shares
B) 243 shares
C) 327 shares
D) 360 shares
E) 297 shares

Question 66

Hypothecation primarily protects:

A) brokers.
B) investors.
C) stock exchanges.
D) the Bank of Canada.
E) the OSC.

Question 67

Which of the following is true regarding broker-client relationships?

A) A typical brokerage agreement states the client waives the right to a jury trial and, instead, is bound by arbitration.
B) Any advice received from a broker is not guaranteed.
C) A broker has a legal duty to act in the client's best interest.
D) Your protection is shared over all of the brokers if you have brokerage accounts with more than one CIPF member when bankruptcy arises.
E) All of the above.

Question 68

Margin is equal to the:

A) amount borrowed by the account equity.
B) account equity divided by the value of the stock.
C) account equity divided by the amount borrowed.
D) stock value divided by the account equity.
E) account equity minus the stock value.

Question 69

You have a margin account with a 65% initial margin and a 30% maintenance margin. What is the maximum amount you can purchase of a stock if your cash balance in the account is $14,600?

A) $19,710.00
B) $22,461.54
C) $24,090.00
D) $41,713.79
E) $48,666.67

Question 70

Assume you purchase a stock on margin, and compare your returns with a cash purchase. If the stock return is positive, the effect of margin will make your return _____ than if you had purchased the stock with cash. If the stock return is negative, the effect of margin will make your return _____ than if you had purchased the stock with cash.

A) lower; lower
B) lower; higher
C) higher; higher
D) higher; lower
E) insufficient information

Question 71

You are opening a margin account with $12,500 in cash. The initial margin is 60% and the maintenance margin is 40%. What is the maximum number of shares you can purchase of a stock that is priced at $42 a share?

A) 496
B) 550
C) 698
D) 744
E) 842

Question 72

You own 300 shares of a stock that you purchased on margin. The stock is currently valued at $19 a share. Your broker advised you today that your minimum equity position for this purchase is $1,710 as of today. What is the maintenance margin percentage?

A) 25%
B) 30%
C) 35%
D) 40%
E) 50%

Question 73

You currently purchased 800 shares of stock on margin at a price of $6.80 per share. Your broker required a cash payment of $5,440 plus trading costs. What was the initial margin requirement on this particular stock?

A) 70%
B) 75%
C) 80%
D) 90%
E) 100%

Question 74

An experienced investor concerning so much about commission paid probably needs a(n)

A) Naïve
B) Discount
C) Deep-discount
D) Online
E) Full service

Question 75

You deposit $8,000 to purchase 400 shares of stock at a price of $37 per share. What is your initial margin?

A) 61%
B) 54%
C) 59%
D) 48%
E) 41%

Question 76

You purchase 800 shares of stock on margin at a price of $46 per share. If the initial margin is 60 percent, what is your margin loan?

A) $16,960
B) $22,080
C) $18,310
D) $36,800
E) $14,720

Question 77

You short 300 shares of stock at a price of $36 per share on 50 percent margin. What is the most you can lose?

A) $10,800
B) $5,000
C) $3,600
D) $5,400
E) There is no limit.

Question 78

You purchase 300 shares of stock at a price of $36 per share on 50 percent margin. What is the most you can lose?

A) $10,800
B) $5,000
C) $3,600
D) $5,400
E) There is no limit.

Question 79

A stock is currently priced at $76 per share. If the initial margin is 60 percent, how many shares can you purchase if you have $15,000 to invest in the stock?

A) 164 shares
B) 366 shares
C) 268 shares
D) 328 shares
E) 183 shares

Question 80

You have an investment portfolio comprised of multiple stocks and bonds. You make no attempt to time the market and sell securities only as you need to supplement your retirement income. You have a(n) _____ investment strategy.

A) Active
B) Passive
C) Pure liquid
D) Liquidity based
E) Tax-managed