Deck 12: Market Microstructure and Strategies

Question 1

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

A)Limit orders
B)Margin requirements
C)Maintenance margins
D)Initial margins

Answer 1

B

Question 2

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

A)positive.
B)more negative than if you had covered the entire investment with cash.
C)negative, but more favorable than if you had covered the entire investment with cash.
D)zero.

Answer 2

B

Question 3

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

A)use of proxy.
B)purchasing stock on margin.
C)a margin call.
D)a margin residual claim.

Answer 3

B

Question 4

Karen just purchased a stock costing $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 the return on the stock?

A)27.60 percent
B)82.61 percent
C)76.09 percent
D)58.70 percent
E)none of the above

Question 5

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

A)margin call.
B)short sale.
C)proxy fight.
D)hedge.

Question 6

Which of the following statements is incorrect?

A)In a short sale, investors place an order to sell a stock that they do not own.
B)Investors sell a stock short when they anticipate that its price will rise.
C)When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it.
D)Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.

Question 7

Exhibit 12-1
Mark would like to purchase a stock priced at $70.The stock is not expected to pay any dividends in the coming year.He can either put up the entire amount and purchase the stock, or borrow $35 from his brokerage firm at an annual interest rate of 12 percent and put up the remainder.Mark thinks he can sell the stock for $100 after one year.
Refer to Exhibit 12-1.If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent.

A)42.86
B)85.71
C)73.71
D)30.00

Question 8

Program trading

A)is commonly used to reduce the susceptibility of a stock portfolio to stock market movements.
B)may involve the purchase of stocks that become "underpriced."
C)may involve the sale of stocks that become "overpriced."
D)can be combined with the trading of individual bonds to create portfolio insurance.
E)none of the above

Question 9

The present margin requirement is that at least ____ percent of an investor's invested funds must be paid in cash.

A)20
B)30
C)40
D)50
E)none of the above

Question 10

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?

A)50 percent
B)30 percent
C)10 percent
D)16 percent
E)8 percent

Question 11

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

Question 12

A short seller

A)anticipates that the price of the stock sold short will increase.
B)earns the difference between what they initially paid for the stock versus what they later sell the stock for.
C)makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made.
D)is essentially lending the stock to another investor and will ultimately receive that stock back from that investor.
E)none of the above

Question 13

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

Question 14

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

A)market
B)limit
C)stop-loss
D)stop-buy

Question 15

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

A)market
B)limit
C)stop-loss
D)stop-buy

Question 16

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

A)60 percent.
B)44 percent.
C)30 percent.
D)69 percent.

Question 17

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

Question 18

Exhibit 12-1
Mark would like to purchase a stock priced at $70.The stock is not expected to pay any dividends in the coming year.He can either put up the entire amount and purchase the stock, or borrow $35 from his brokerage firm at an annual interest rate of 12 percent and put up the remainder.Mark thinks he can sell the stock for $100 after one year.
Refer to Exhibit 12-1.If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?

A)30.00 percent
B)42.86 percent
C)30.00 percent
D)42.86 percent
E)none of the above

Question 19

An investor sold a stock short a year ago for $50 per share.The stock's price is currently $52 per share.If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a

A)stop-loss order with a specified selling price of $55 per share.
B)stop-buy order with a specified purchase price of $55 per share.
C)stop-loss order with a specified selling price of $45 per share.
D)stop-buy order with a specified purchase price of $45 per share.

Question 20

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

A)26.5 percent.
B)28.5 percent.
C)30.5 percent.
D)34.5 percent.

Question 21

The exchange rate risk associated with international trading of stock has been reduced by

A)information available on the Internet.
B)extensive computerization of stock exchanges.
C)the conversion of many European countries to a single currency.
D)the Eurolist system.

Question 22

The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are contained within the S&P 500 index values at more than $1 million.

A)direct access brokering
B)electronic communication networking
C)program trading
D)regulation of stock trading

Question 23

A ____ is a trading platform on a computer web site that allows investors to trade stocks without the use of a broker.

A)direct access broker
B)program trader
C)market maker
D)communication network

Question 24

A short-interest ratio of 20 or more indicates that many investors

A)believe that the stock price is currently overvalued.
B)believe that the stock price is currently undervalued.
C)are selling the stock short.
D)both A and C

Question 25

Lisa would like to purchase a stock priced at $70.The stock is not expected to pay any dividends in the coming year.She can either put up the entire amount and purchase the stock, or borrow $35 from her brokerage firm at an annual interest rate of 12 percent and put up the remainder.She thinks she can sell the stock for $100 after one year.If she borrows from her brokerage firm, her estimated return on the stock would be ____ percent.

A)42.86
B)85.71
C)73.71
D)30.00

Question 26

Trading halts are intended to ensure that the market has complete information before trading on news.

Question 27

____ facilitate transactions on the New York Stock Exchange by taking positions in specific stocks; they also stand ready to buy or sell these stocks.

A)Floor brokers
B)Capstone members
C)Specialists
D)None of the above

Question 28

The transaction costs associated with international trading of stocks have been reduced by

A)the consolidation of stock exchanges.
B)extensive computerization.
C)the Eurolist system.
D)all of the above

Question 29

Until recently, international trading of stocks was limited by

A)transaction costs.
B)information costs.
C)exchange rate risk.
D)all of the above

Question 30

The size of the spread on stocks that have relatively little trading is

A)smaller to reflect the lower degree of uncertainty.
B)the same as that of stocks with higher volumes of trading.
C)wider to reflect the higher degree of uncertainty.
D)not affected by trading volume.

Question 31

The ____ the trading volume of a stock, the ____ the spread.

A)higher; wider
B)higher; narrower
C)lower; narrower
D)none of the above

Question 32

The risk of a short sale is that the stock price

A)may decrease over time.
B)will remain the same.
C)may increase over time.
D)none of the above

Question 33

The Division of ____ of the SEC regulates the fair and orderly disclosure trading by ensuring honest practices by various organizations that facilitate the trading of securities.

A)Corporate Finance
B)Enforcement
C)Administration
D)Market Regulation

Question 34

Which of the following statements is incorrect?

A)Market-makers take positions to capitalize on the discrepancy between the prevailing stock price and their own valuation of a stock.
B)Specialists and market-makers may take the opposite position of uninformed investors and therefore stand to benefit if their expectations are correct.
C)For each stock that is traded in the Nasdaq market, there are 50 market-makers on average.
D)The spread quoted for a given stock may vary among market-makers.

Question 35

The "trade-though rule" established by the SEC requires that an order for NYSE-listed stocks must be executed on the exchange that offers the best price for the investor.

Question 36

The Division of ____ of the SEC assesses possible violations of regulations imposed by the SEC, and can take action against individuals or firms.

A)Corporate Finance
B)Enforcement
C)Administration
D)Market Regulation

Question 37

Short-selling a stock refers to

A)poor performance from purchasing an overvalued stock.
B)the new issuance of low-priced stocks by firms.
C)the new issuance of stocks by financially weak firms.
D)the borrowing of stock owned by someone else and selling it in the market.

Question 38

Trading halts are imposed by

A)the SEC.
B)brokers.
C)stock exchanges.
D)the Treasury.

Question 39

____ facilitate transactions on the New York Stock Exchange by executing stock transactions for their clients.

A)Floor brokers
B)Capstone members
C)Specialists
D)None of the above

Question 40

____ is an electronic communications network that was acquired by the NYSE.

A)Island
B)Archipelago
C)Instinet
D)CyberTrader

Question 41

A trading halt prevents a stock from experiencing a loss in response to news.

Question 42

A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock.

Question 43

____ are required to maintain a fair and orderly market in the securities assigned to them on the New York Stock Exchange.

A)Specialists
B)Floor brokers
C)Dealers
D)Market-makers
E)None of the above

Question 44

A relatively high percentage (such as 3 percent) of the ratio of the number of shares sold short divided by the total number of shares outstanding suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline.

Question 45

A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the stock.

Question 46

A market order is an order to buy or sell a stock at the best possible price.

Question 47

When investors place a limit order, they can place it for the day only.

Question 48

The short-interest ratio is the shares sold short divided by the

A)average shares purchased over a recent period.
B)average daily trading volume over a recent period.
C)interest rate paid on the short sale.
D)average daily trading volume on other stocks from the same industry.
E)none of the above

Question 49

Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients.

Question 50

Specialists and market-makers both enhance the stock market's liquidity by making a market for stocks.

Question 51

____ offer advice to customers on stocks to buy or sell.

A)Full-service brokers
B)Discount brokers
C)Floor brokers
D)Specialists
E)Market-makers

Question 52

The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call.

Question 53

Which of the following statements is incorrect with respect to the structure of the SEC?

A)It is composed of seven commissioners appointed by the president of the United States.
B)The president selects one commissioner to chair the commission.
C)Each commissioner serves a five-year term.
D)Commissioners' terms are staggered.
E)Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the regulations as needed.

Question 54

Marziano Co.stock is quoted by a broker as bid $21.20, ask $21.40.The bid-ask spread is ____ percent.

A)0.94
B)0.93
C)0.20
D)none of the above

Question 55

The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and can take action against individuals or firms.

Question 56

A(n) ____ from a broker requires the investor to put up additional collateral.

A)maintenance margin
B)initial margin
C)margin call
D)none of the above

Question 57

A short seller

A)anticipates that the price of the stock sold short will increase.
B)earns the difference between what he initially paid for the stock versus what he later sell the stock for.
C)makes a profit equal to the difference between the original selling price and the price paid for the stock, after subtracting any dividend payments made.
D)is essentially lending the stock to another investor and will ultimately receive that stock back from that investor.
E)none of the above

Question 58

The SEC's ____ requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities.

A)Division of Corporate Finance
B)Division of Market Regulation
C)Division of Enforcement
D)none of the above

Question 59

The bid-ask spread is negatively related to

A)order costs.
B)inventory costs.
C)risk
D)trading volume.

Question 60

When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it.

Question 61

The SEC's ____ reviews the registration statement files when a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues.

A)Division of Corporate Finance
B)Division of Market Regulation
C)Division of Enforcement
D)none of the above

Question 62

Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?

A)It required firms to disclose relevant information broadly to investors at the same time.
B)It restricts firms from providing analysts with information that they could use before the market is aware of the information.
C)It requires firms to announce a change in expected earnings to all investors and other interested parties at the same time.
D)It prohibits firms from communicating with analysts after a news announcement is made to all investors.
E)All of the above are correct with respect to Regulation FD.