Investments Final MC – Flashcards
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Stocks, bonds, options and futures are the four major types of...
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financial assets
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Which of the following asset categories has an annual returns history most closely linked to historical annual rates of inflation?
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U.S. Treasury bills
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Based on the annual returns history since 1926, which asset category, on average, has yielded the highest risk premium?
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Small-company stocks
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An individual investor's investment objectives should be expressed in terms of:
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risk and return
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Which of the following best reflects the importance of the asset allocation decision to the investment process? The asset allocation decision:
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Determines most of the portfolio's returns and volatility over time
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Which of the following investment factors, strategies, or tactics is the least relevant to a passive investment policy?
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Market timing
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Which of the following investment factors, strategies, or tactics is most associated with a active investment policy?
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Market timing
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Which of the following investment strategies or tactics will likely consume the greatest amount of resources, time, effort, and s on, when implementing an active investment policy?
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Security selection
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Which of the following investment strategies or tactics is likely the most relevant in the decision to short sell a particular stock?
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Security selection
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Which of the following investment constraints is expected to have the most fundamental impact on the investment decision process for a typical investor?
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Investor's attitude toward risk
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The following are common characteristics of money market securities?
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sold on a discount basis mature in less than one year most important risk is default risk
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Which of the following money market securities is the most liquid
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U.S. Treasury Bills
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A corporation with common stock issued to the public pays dividends
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at the discretion of the company's board of directors, who are elected by the shareholders
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Which of the following statements about short selling is true?
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Stocks that pay large dividends should be sold short before the ex-dividend date and bought afterward to take advantage of the the large price declines in a short time period
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Which of the following statements typically does not characterize the structure of an investment company?
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An investment company receives an annual management fee ranging from 3 to 5 percent of the total value of the fund
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Which of the following is not part of the expense statement?
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Shareholder demographic profile
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Which of the following is the least likely advantage of mutual fund investing?
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Mutual fund returns are normally higher than market average returns
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An open-end mutual fund is owned by which of the following?
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Its shareholders
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Which of the following is most true of a closed-end investment company?
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Fund shares outstanding are fixed at the issue date
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A closed-end fund is owned by:
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its shareholders
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Which of the following statements regarding exchange-traded funds (ETFs) is false?
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ETF investors own shares of the underlying fund sponsor
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Closed-end funds and ETFs have which of the following characteristics in common?
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Shares of both closed-end and ETFs trade in the secondary market
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Growth, value, large-cap, and small-cap investing are all examples of
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style investment strategies
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One of the main advantages to investing in a fund of funds (FOF) is that FOFs provide
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improved diversification of assets
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Which mutual fund type will most likely incur the smallest tax liability for its investors?
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Municipal bond fund
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Which mutual fund type will most likely incur the greatest overall risk levels for its investors?
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small-cap growth fund
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Which of the following mutual fund fees is assessed on an annual basis?
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12b-1 fees
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Which of the following mutual fund fees will most likely be the biggest expense for a long-term fund investor?
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12b-1 fees
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Which of the following mutual fund fees and expenses is the most difficulty for investors to assess
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Trading costs
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The compensation constraint that requires private equity fund manager's to "give back" performance fees when subsequent losses occur is a ____ provision
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Clawback
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The divisor for the DJIA is most likely to decrease when a stock in the DJIA
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Has a stock split
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Which of the following activities are not conducted by DMMs on the NYSE?
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Monitoring compliance with margin requirements
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What is a securities market characterized by dealers who buy and sell securities for their own inventories calleD?
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An over-the-counter market
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What is the over-the-counter market for exchange-listed securities called?
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Third market
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If the market price of each of the 30 stocks in the DJIA changes by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA?
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The one whose stock trades at the highest dollar amount per share
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In calculating the S&P's stock price indexes, how are adjustments for stock splits made?
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Automatically, due to the manner in which the index is calculated
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Which of the following indexes includes the largest number of actively traded stocks?
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The Wilshire 5000 Index
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Private equity funds that concentrate in smaller, family-owned companies with established cash flows are typically referred to as
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middle market
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The compensation constraint that requires private equity fund managers to meet a particular return target before performance fees can be taken is a ____ provision
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High-water-mark
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Private equity funds will often use convertible preferred stock or bonds with attached call options. These types of securities are used because they
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allow upside potential associated with a successful venture
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Which one of the following statements regarding the DJIA is false?
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The DJIA is affected equally by percentage changes in low and high priced stocks.
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In applying the constant growth dividend discount model, a stock's intrinsic value will do which of the following when the required rate of return is lowered?
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Increase
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The constant growth dividend discount model would typically be most appropriate for valuing the stock of which of the following?
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Moderate growth, mature company
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Which of the following assumptions does the constant growth dividend discount model require?
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Dividends grow at a constant rate The dividend growth rate continues indefinitely
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Two similar companies acquire substantial new production facilities, which they both will depreciate over a 10-year period. However, Company A uses accelerated depreciation while Company B uses straight liner. In the first year that the assets are depreciated, which of the following is most likely to occur?
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A's P/E ratio will be higher than B's
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A company's return on equity is greater than its required return on equity. The earnings multiplier (p/e) for that company's stock is most likely to be positively related to the
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earnings retention ratio
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A market anomaly refers to
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Price behavior that differs from the predicted by the efficient markets hypothesis
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After lengthy trial and error, you discover a trading system that would have doubled the value of your investment every 6 months if applied over the last three years. Which of the following problems makes it difficult to conclude that this is an example of market inefficiency?
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Data snooping problem
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In discussion of financial market efficiency, which of the following is not one of the stylized forms of market efficiency?
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Economic form
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Which month of the year, on average, has had the highest stock market returns as measured by a small-stock portfolio?
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January
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Which of the following intraday changes in the DJIA will trigger a circuit breaker halting NYSE trading for one hours?
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10% drop before 2 p.m.
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The SEC has regulations that prohibit trading on inside information. If the market is ____-form efficient, such regulation is not needed/
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Strong
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Which of the following is a possible explanation of the January effect?
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Institutional window dressing Tax-loss selling
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Circuit breakers implemented by the NYSE were designed to
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Slow a market decline
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Assume the market is semistrong-form efficient. The best investment strategy is to
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Invest in an index fund
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Assume the market is weak-form efficient. If this is true, technical analysts ____ earn excess returns and fundamental analysts ____ earn excess returns
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could not; could
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You purchase a stock that you expect to increase in value over the next year. One year later, after the discovery that the CEO embezzled funds and the company is close to bankruptcy, the stock has fallen in price. Which of the following statements is true?
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This is not a violation of market efficiency
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Which of the following statements concerning market efficiency is true?
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If the market is semistrong-form efficient, it is also weak form efficient
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Which of the following is a basic assumption of technical analysis in contrast to fundamental analysis?
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Security prices move in patterns, which repeat over long periods
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Which of the following is least likely to be of interest to a technical analyst?
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Company earnings and cash flow growth
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Dow theory assets that three forces are at work in the stock market at any time. Which of the following is not one of these Dow theory forces?
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Reversals or overreactions
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The advance/decline line is typically used to
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Measure market breadth
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The closing Arms (TRIN) ratio is the ratio of
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average trading volume in declining stocks to advancing stocks
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Resistance and support areas for a stock market index are viewed as technical indicators of
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Psychological barriers
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When companies changed the structure of 401k plans to allow employees to opt out rather than in, the participation rates significantly increased. This is an example of:
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Frame dependence
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When someone who wins money is more willing to lose the gains, this is referred to as:
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the house money effect
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Investors are generally more likely to choose a well-known company when faced with a choice between two firms.This is an example of"
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representativeness
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Many investors try to simplify the investment process by using rules of thumb to make decisions. This is an example of:
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A heuristic
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All of the following are ways to help reduce behavioral biases except:
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Watching more financial news programs
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Which of the following techniques deals with the breadth of the market
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advance/decline lines
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Which of the following techniques does not assume there are psychologically important barriers in stock prices?
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Support and resistance lines
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Which of the following interest rates is a bellwether (leading indicator) rate of bank lending to business?
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Prime rate
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Among the following interest rates, which is normally the highest rate?
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Commercial paper rate
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An analyst finds that the semiannual interest rate that equates the present value of the bond's cash low to its current market price is 3.85%. Which of the following are true?
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The bond equivalent yield on the security is 7.7% The effective annual yield on the bond is 7.85% The bond's yield-to-maturity is 7.7%
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The Fisher hypothesis essentially asserts which of the following?
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Nominal interest rates follow inflation
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Which of the following statements about the term structure of interest rates is true?
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The market segmentation theory contends that borrowers and lenders prefer particular segments of the yield curve.
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Which of the following is not an explanation of the relationship between a bond's interest rate and its term to maturity?
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Default (credit) risk hypothesis
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Which theory explains the shape of the yield curve by considering the relative demands for various maturities?
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Segmentation Theory
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The yield to maturity on a bond is
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The interest rate that makes the present values of the payments equal to the bond price
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In which of the following cases is the bond selling at a discount?
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Coupon rate is less than current yield, which is less than yield to maturity
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When are YTM and current yield on a bond equal?
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If the coupon and market interest rate are equal
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Which of the following states the correct relationship among yield measures for discount bonds?
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coupon rate < current yield < YTM
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Which of the following states the correct relationship among yield measures for premium bonds?
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coupon rate > current yield > YTM
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Consider a 5-year bond with a 10% coupon that is presently trading at a YTM of 8%. If market interest rates do not change, one year from now the price of this bond
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Will be lower
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Another term for bond duration is
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effective maturity
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The interest rate risk of a non-callable bond is most likely to be positively related to the
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bond's time to maturity
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Starcents has a expected return of 25% and Jpod has an expected return of 20%. What is the likely investment decision for a risk-averse investor?
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Investment funds partly in Starcents and partly in Jpod
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Which of the following statements best reflects the importance of the asset allocation decision to the investment process? The asset allocation decision
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determines most of the portfolio's returns and volatility over time
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An investor is considering adding another investment to a portfolio. To achieve the maximum diversification benefits, the investor should add an investment that has a correlation coefficient with the existing portfolio closest to
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-1.0
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According to the CAPM, what is the rate of return of a portfolio with a beta of 1?
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The return on the market (RsubM)
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The return on a stock is said to have which two of the following basic parts?
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An expected return and an unexpected return
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A news announcement about a stock is said to have which two of the following parts?
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An expected part and a surprise
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A company announces that its earnings have increased 50% over the previous year, which matches analysts' expectations. What is the likely effect on the stock price?
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The stock price will not be affected
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A company announces that its earning have decreased 20% from the previous year, but analysts expected a small increase.What is likely effect on the stock price?
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The stock price will decrease
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A company announces that its earnings have increased 25% from the previous year, but analysts actually expected a 50% increase. What is the likely effect on the stock price?
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The stock price will decrease
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A company announces that its earnings have decreased 50% from the previous year, but analysts only expected a 25% decrease.What is the likely effect on the stock price?
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The stock price will decrease
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The systematic risk of a security is also called its
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market risk
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Which type o risk is essentially eliminated by diversification?
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Unsystematic risk
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The systematic principles states that
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The reward for bearing risk depends only on the systematic risk an investment
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The systematic risk principle has an important implication, which is
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the expected return on an asset depends only on its systematic risk
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A financial market's security market line (SML) describes
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The relationship between systematic risk and expected returns
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In the context of capital market theory, unsystematic risk
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is described as unique risk
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Which of the following statements about the security market line (SML) is false?
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The SML leads all investors to invest in the same portfolio of risky assets.
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Beta and standard deviation differ as risk measures in that beta measures
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only systematic risk, whereas standard deviation measures total risk
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Which of the following statements is true regarding the distinction between futures and contracts and forward contracts?
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Futures contracts are exchange-traded, whereas forward contracts are OTC-traded
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In which of the following ways do futures contracts differ from forward contracts?
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Futures contracts are standardized For futures, performance of each party is guaranteed by a clearinghouse Futures contracts require a daily settling of any gains or losses
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The open interest on a futures contract at any given time is the total number of outstanding
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Contracts
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Initial margin for a futures contract is usually
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In the range between 5% and 15% of contract value
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In futures trading, the minimum level to which an equity position may fall before requiring additional margin is most accurately termed the
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Maintenance margin
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A silver futures contract requires the seller to deliver 5,000 troy ounces of silver. An investor sells one July silver futures contract at a price of $28 per ounce, posting an $8,400 initial margin. If the required maintenance margin is $6,900,the price per ounce at which the investor would first receive a maintenance margin call is closet to
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$28.30
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Which of the following statements is false about futures account margin?
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A margin call results when account margin falls below initial margin
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Which of the following contract terms changes daily during the life of a futures contract?
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Futures price
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Cash flow per share is calculated as
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Operating cash flow/shares outstanding
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The difference between net income and operating cash flow is at least partially accounted for by which of the following items?
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Depreciation
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Which of the following profitability ratios is incorrect?
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Gross margin = Gross profit/Cost of goods sold
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Which of the following per-share ratios is incorrect?
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Book value per share = Total assets/Shares outstanding
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A dividend payment has which of the following effects on the balance sheet?
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A decrease in shareholder equity
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A particular firm is operating at less than full capacity. If sales are expected to grow at only a modest rate next year, which of the following is true?
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External financing will likely not be needed next year
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Which of the following is true regarding the full-capacity sales level of a firm?
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A firm with excess capacity has the room to expand without increasing its investment in fixed assets.
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What does the call feature of a bond mean?
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Issuer can call the bond issue prior to the maturity date
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Who primarily benefits from a call provision on a corporate bond?
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The issuer
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Which of the following describes a bond with a call feature
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It would usually have a higher yield than a similar non-callable bond
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Two bonds are identical, except one is callable and the other is non-callable. Compared to the non-callable bond, the callable-bond has
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Negative convexity and a lower price
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What does positive convexity on a bond imply?
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Prices increase at a faster rate as yields drop than they decrease as yields rise
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A convertible bond sells at $1,000 par with a conversion ratio of 40 and an accompanying stock price of $20 per share. The conversion price and conversion value are, respectively,
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$25 ad $800
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A convertible bond as a par value of $1,000 and a conversion ratio o 20. The price of the underlying stock is $40. What is the conversion value?
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$800
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A US Treasury bond has a asking quote of 102:05 and a bid quote of 102:02. If the face value of the bond is $1,000, the price an investor should pay or the bond is closest to
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$1,021.56
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When originally issued, a 10yr maturity T-note can be stripped into how many separate components?
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11
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T-bills are sold on a discount basis, meaning that the difference between their issue price and their redemption value is
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The bond equivalents yield for the T-bill
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Which of the following statements about single-price Treasury actions is true?
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Noncompetitive bidders pay the stop-out bid
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Which of the following investors is most likely to invest in locally issued municipal bonds?
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High-income individual living in a triple income tax municipality.
