Question 1

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.

Accepted Answer

The Investment Dealers Association (IDA) sets and enforces margin requirements for security trading in Canada. The IDA is a self-regulatory organization for the investment industry in Canada and works to ensure a fair and efficient market for investors. While individual brokerage firms may have their own margin requirements, they must comply with the minimum standards set by the IDA.

Question 2

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%

Accepted Answer

The initial margin requirement is the minimum amount that an investor has to pay to purchase securities in the margin account. In this case, it is given as $65,000 or 6.5% of the purchase price of $10,000. Therefore, the initial margin requirement is $65,000.
The maintenance margin, on the other hand, is the minimum amount of equity that the investor must maintain in the margin account after the purchase of securities. In this case, the minimum equity position required is 30% of the total value of securities held in the margin account. Therefore, the maintenance margin is 30%.
Hence, the correct answer is C.

Question 3

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

Accepted Answer

Buying a diverse group of securities without focusing on particular securities is known as passive investing. Asset allocation involves determining the right mix of different types of investments based on individual goals and risk tolerance. Market timing involves attempting to predict the future movements of the market to make investment decisions. Active investing involves a more hands-on approach to selecting and managing individual securities. Asset management involves managing a portfolio of investments on behalf of clients.

Question 4

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

Accepted Answer

CIPF insurance only protects against losses from fraud or the failure of a brokerage firm. Therefore, the entire account is protected by a private fund, but only for losses resulting from fraud or other failure of the brokerage firm. The amount of coverage provided will depend on the specific circumstances of the failure or fraud.

Question 5

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

Accepted Answer

The answer of The CIPF guarantees your general brokerage account...

Question 6

________ 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

Accepted Answer

Market timing involves predicting the overall direction of the capital market and buying and selling securities accordingly. If one believes that the market will perform better than money market instruments, then they may increase their investment in the market. Asset allocation refers to dividing investment funds among different types of assets, security selection involves choosing specific securities to invest in, asset management involves managing a portfolio of assets, and margin timing refers to using borrowed funds to invest in the market.

Question 7

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.

Accepted Answer

Risk-averse individuals prefer to avoid risk but may invest in riskier assets if they are compensated with higher expected returns for taking on the additional risk.

Question 8

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

Accepted Answer

The Canadian Investor Protection Fund (CIPF) insures trading accounts up to $1,000,000 for losses of cash and securities, providing a safety net for investors if their brokerage firm goes bankrupt.

Question 9

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

Accepted Answer

Commission brokers earn their income through commissions on the trades they execute for clients. This payment structure can create a potential conflict of interest, as the broker might be incentivized to encourage more trading, regardless of whether it's in the best interest of the client, to generate higher commissions.

Question 10

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.

Accepted Answer

Purchasing stocks on margin amplifies both gains and losses compared to purchasing with cash. If the stock price drops, the loss is greater because of the borrowed funds that need to be repaid. Conversely, if the stock price rises, the return is greater because the gains are amplified by the leverage effect of using borrowed money.

Question 11

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.

Accepted Answer

Lower commissions are not typically associated with street name registration. The other options are all advantages of this type of registration.

Question 12

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.

Accepted Answer

All of the options can be constraints for an investor. Taxes can reduce returns, time horizon can limit investment options, liquidity can impact the ability to sell assets, and limited resources may restrict investment opportunities. Therefore, all of the options can be constraints for an investor.

Question 13

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

Accepted Answer

Churning refers to a broker making excessive trades solely for the purpose of generating commissions, rather than for the benefit of the client. This is considered a fraudulent practice and is a violation of securities laws.

Question 14

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.

Accepted Answer

The answer of Why would a broker whom is engaged...

Question 15

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

Accepted Answer

The spread is the difference or gap between the interest rate charged by the broker on the margin account and the call money rate or inter-bank lending rate. The margin rate is the interest rate charged by the broker on the borrowed funds, while the short rate refers to the interest rate charged for short selling. The overnight rate is the interest rate banks charge each other for overnight loans, and the cash rate refers to the interest rate on cash deposits.

Question 16

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

Accepted Answer

The answer of The process of trying to buy specific...

Question 17

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.

Accepted Answer

When you purchase a stock on margin, the money is borrowed from your broker. Your broker will require you to put down a certain amount of money (margin) and will then lend you the remaining amount to purchase the stock.

Question 18

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

Accepted Answer

A full-service broker typically offers personalized investment advice and makes investment decisions on behalf of their clients. As someone with no investment experience, it would be beneficial to have a professional guiding your investment decisions. While deep-discount brokers and online brokers offer lower fees, they do not typically offer personalized investment advice. Discount brokers may offer some guidance but may not have the same level of expertise as a full-service broker. Cyber-broker is not a recognized term in the financial industry.

Question 19

________ 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

Accepted Answer

Security selection refers to the process of choosing which individual assets to add to a portfolio. In this scenario, the focus is on selecting a specific pharmaceutical firm's stock to purchase. Market timing involves making decisions based on the current state of the market, asset allocation involves selecting a mix of different asset classes, asset management refers to the overall management of a portfolio, and margin timing involves deciding when to buy on margin.

Question 20

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

Accepted Answer

Asset allocation refers to the process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash equivalents, based on an investor's goals, risk tolerance, and investment time frame. Market timing refers to the practice of trying to predict the future direction of market prices and making investment decisions based on those predictions. Security selection refers to the process of choosing individual securities to invest in, while asset management refers to the overall management of a portfolio of assets. Margin timing refers to the practice of using margin to buy securities, with the intent of profiting from price fluctuations.

Quiz 3: The Investment Process

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

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 __

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

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?

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

________ 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.

If you are risk averse, you will:

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.

Which of the following is true?

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.

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

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

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

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

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

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

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

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

________ 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.

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