1. If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA?
A.The one whose stock trades at the highest dollar price per share.
B.The one whose total equity has the highest market value.
C.The one having the greatest amount of equity in its capital structure.
A B C
A
There is an equal 95 change in price. Thus, the one with the greatest price will have the greatest impact on the average.
2. Regarding the technical points affecting the short sales of a stock, which of the following statements is TRUE?
A.The short seller must pay all dividends due to the lender of the shorted stock.
B.Stocks can only be shorted in a down market.
C.The lender must also deposit margin money to guarantee the eventual repurchase of the stock.
A B C
A
The up tick rule states that stocks can only be shorted in an up market. The short seller must also deposit margin money to guarantee the eventual repurchase of the security. The seller must borrow the securities from a broker before selling them.
3. Which of the following statements about trading shares of stock or market efficiency is FALSE?
A.Maintenance margin is the required percentage of an investor's equity compared to the total value of the stock after the investor trades on margin.
B.The up tick rule requires that the last trade in the security be at a price higher than the previous trade.
C.External efficiency means prices adjust rapidly to new information.
A B C
B
The up tick rule requires that either: (1) the last trade is at a price higher than the previous trade, or (2) the last trade is at the same price (a zero trade) and that the previous non-zero trade is at a price higher than the trade before it.
4. In securities exchange markets, a member who executes stop loss or stop buy orders when the specified price occurs is most likely a:
A.floor broker.
B.market maker.
C.commission broker.
A B C
B
Market markers (specialists) have two major functions. They act as brokers to match buy and sell orders, including special (stop loss or stop buy) orders. They also act as a dealer to maintain a fair and orderly market by providing liquidity when the normal flow of orders is not adequate.
5. Consider the following information: Assume an investor acquires 300 shares of a $ 40 stock for a total cost of $12000. There is a 50% initial margin requirement. If the stock price increases to $50 a share, the equity is:
A.60%.
B.70%.
C.80%.
A B C
A
If the stock price increases to $50 a share, the equity is 60%. Total market value of position: 300×50=15000. Initial margin =50%×12000 =6000. Equity =15000-6000=9000. 9000/15000=60%.
6. Which of the following groups of stocks do NOT tend to show above average returns over time?
A.Stocks with low Book Value to Market Value (BV/MV).
B.Neglected stocks.
C.Small stocks.
A B C
A
Most empirical evidence suggests that the greater the ratio of book value/market value, the greater the risk adjusted rate of return. Small, neglected and low P/E stocks have all shown evidence of excess returns.
7. The implication of efficient capital markets and a lack of superior analysts have led to the introduction of:
A.futures options.
B.index funds.
C.balanced funds.
A B C
B
An index fund is designed to duplicate the composition of a specific index series or market segment. There is a strong argument suggesting that portfolio managers cannot beat the market after fees, therefore an index fund should be used to try to match the market.
8. Which of the following statements regarding capital market efficiency is TRUE ?
A.Study results generally do not support the strong form of the efficient market hypothesis.
B.Event studies and time series tests provide evidence that markets do not tend to be semistrong form efficient.
C.Corporate insiders and stock exchange specialists have monopolistic access to information that can be used to obtain positive abnormal returns.
A B C
C
In general, study results support the strong form of the efficient market hypothesis. Exceptions include corporate insiders and exchange specialists since they appear to have monopolistic access to important information that may allow them to achieve positive abnormal returns.
9. Assume a stock index consists of many firms who have recently split their stock. Which of the following weighting schemes will see a bias due to the impact of stock splits?
A.Unweighted price series.
B.Standard and Poor's 500 Index.
C.Price-weighted series.
A B C
C
Firms that split their stock price will have the identical weight before and after the split in both the unweighted and the market value-weighted series. However, in the price-weighted series, large successful firms will lose weight within the index due to simply splitting their stock. This creates a downward bias in a price-weighted series. Standard and Poor's 500 Index is a market valueweighted index.
10. Which of the following statements about the implications of tests for the efficient market hypothesis (EMH) is least accurate?
A.By purchasing an index fund, an investor can match the market return and minimize costs.
B.Other than corporate insiders and market specialists, most traders have monopolistic access to information, which rejects the strong-form EMH.
C.The best way to measure the performance of investments professionals is against a randomly selected buy-hold strategy of stocks (assuming the same risk level).
A B C
B
Other than corporate insiders and market specialists, no other group has monopolistic access to information, which supports the strong-form EMH. The other statements are true.
11. Which of the following statements regarding secondary markets is FALSE? Secondary markets are important because they provide:
A.investors with continuous information.
B.firms with greater access to external capital.
C.regulators with information about market participants.
A B C
C
Secondary markets are important because they provide liquidity and continuous information to investors. The liquidity of the Secondary markets adds value to both the investor and firm because more investors are willing to buy issues in the primary market, when they know these issues will later become liquid in the secondary market. Therefore, the secondary market makes it easier for firms to raise external capital.
12. Which of the following statements does NOT describe the role of a portfolio manager in perfectly efficient markets? Portfolio managers should:
A.construct diversified portfolios that include international securities to eliminate unsystematic risk.
B.quantify client's risk tolerance, communicate portfolio policies and strategies, and maintain a strict buy and hold policy avoiding any changes in the portfolio to minimize transaction costs.
C.help clients minimize taxes and reduce trading turnover.
A B C
B
A portfolio manager should quantify each client's risk tolerance and communicate portfolio policies and strategies. However, adhering to a strict buy and hold policy would not be in the client's best interest. Portfolios need to be rebalanced and changed to meet client's changing needs.
13. Which of the following efficient markets studies suggests that securities markets are semistrong-form efficient?
A.Small-firm effect.
B.Short-term stock splits.
C.Neglected-firm effect.
A B C
B
Results of empirical tests suggest that there are no short-run or long-run impacts on security returns due to stock splits. This supports the semi-strong-form EMH. Evidence of excess returns has been found for calendar effects, small firms and neglected firms.
14. An investor wishes to short sell 500 shares of McDonald Corporation. The shares open lower at $14.50 and the next five transactions are $14.00, $14.00, $13.50, $14.25, and $14.50. The lowest price at which the order can be executed is:
A.$14.25.
B.$13.50.
C.$14.00.
A B C
A
Short sells are executed on an up tick.
15. The reasons why a mispricing can persist all relate to the idea that:
A.taxes and other transactions costs make exploiting the anomaly prohibitive.
B.the size of the available profit is too small.
C.an anomaly cannot be quickly exploited by traders or arbitrageurs.
A B C
C
The fundamental reason that mispricing and anomalies can persist is that traders and arbitrageurs are not able to exploit the situation. The other items are possible reasons why traders and arbitrageurs are not able to act.
16. An investor sold a stock short and is worried about rising prices. To protect himself from rising prices he would place a:
A.stop order to sell.
B.limit order to sell.
C.stop order to buy.
A B C
C
A limit order to sell is placed above the current market price. A stop (loss) order to buy is placed above the current market price. A stop (loss) order to sell is placed below the current market price. A stop order becomes a market order if the price is hit.
17. A stock's abnormal rate of return is defined as the:
A.expected risk-adjusted rate of return minus the market rate of return.
B.actual rate of return less the expected risk-adjusted rate of return.
C.the market rate of return less the actual rate of return.
18. An index was recently begun with the following two stocks: Company A -50 shares valued at $ 2 each. Company B - 10 shares valued at $10 each. Given that the value-weighted index was originally set at 100 and Company A's stock is currently selling for $ 4 per share while Company B's stock is still at $10 per share, what is the current value of the price-weighted index and the value-weighted index? Price -weighted Value -weighted ①A. 7 300 ②B. 8 150 ③C. 7 150 A. ①B. ②C. ③
A B C
C
Price weight =(4+10)/2=7 Value weight = (4×50+10×10)/(2×50+10×10)×100=150
19. The semi-strong form of the efficient market hypothesis (EMH) asserts that stock prices:
A.fully reflect all historical price information.
B.fully reflect all relevant information including insider information.
C.fully reflect all publicly available information.
A B C
C
The semi-strong form of the EMH asserts that security prices fully reflect all publicly available information. This would include all historical information. The weak form relates to historical information only. The strong form relates to public and private information.
20. Which form (s) of the efficient market hypothesis (EMH) is/are tested by measuring a security's excess returns with respect to market returns while considering the security's market risk?
A.Weak-form.
B.Semi-strong form.
C.Strong-form.
A B C
B
One set of tests for the semi-strong form of the EMH examines security performance adjusted for market risk.
21. If statistical tests of stock returns over time support the efficient market hypothesis, the resulting correlations should be:
A.lagged.
B.negative.
C.zero.
A B C
C
There should be zero correlation between observations, or all observations should be independent of each other, if the weak-form EMH is true.
22. Which of the following statements is INCORRECT?
A.The strong-form EMH assumes cost free availability of all information, both public and private.
B.The weak-form EMH suggests that fundamental analysis will not provide excess returns while the semi-strong form suggests that technical analysis cannot achieve excess returns.
C.The semi-strong form EMH addresses market and non-market public information.
A B C
B
The weak-form EMH suggests that technical analysis will not provide excess returns while the semi-strong form suggests that fundamental analysis cannot achieve excess returns.
23. Which of the following statements about bond and stock market indexes is FALSE?
A.Bond market indexes have been in existence virtually as long as the major stock indexes such as the Dow Jones Industrial Average (DJIA).
B.A small number of very large firms can dominate a value-weighted index.
C.When a company splits its stock, it loses weight in a price-weighted index.
A B C
A
Bond market indexes are relatively new.
24. An investor purchases 200 shares of Merxx on margin. The shares are trading at $40. Initial and maintenance margins are 50 percent and 25 percent. If the investor sells the stock when the price rises to $50 at year-end, the return on the investment would be closest to:
A.50.00%.
B.18.75%.
C.25.00%.
A B C
A
Profit =10000-8000=2000, Return =2000/4000=50%.
25. Which of the following is NOT an assumption behind efficient capital markets?
A.New information occurs randomly, and the timing of announcements is independent of one another.
B.Market participants correctly adjust prices to reflect new information.
C.Return expectations implicitly include risk.
A B C
B
The set of assumptions that imply an efficient capital market includes: There exists a large number of profit-maximizing market participants. New information occurs randomly. Market participants adjust their price expectations rapidly (trot not necessarily correctly). Return expectations implicitly include risk.
26. Index funds are:
A.on average underpriced by 15%, but this underpricing varies over time, which supports the EMH.
B.on average overderpriced by 15%, but this overpricing varies over time, which supports the EMH.
C.security portfolios designed to duplicate the composition and therefore the performance of a selected market index series.
A B C
C
Index funds are security portfolios designed to duplicate the composition and therefore the performance of a selected market index series.
27. Lynne Hampton purchased 100 shares of $75 stock on margin. The margin requirement set by the Federal Reserve Board was 40 percent, but Hampton's brokerage firm requires a total margin of 50 percent. Currently the stock is selling at $62 per share. What is Hampton's return on investment before commission and interest if she sells the stock now?
A.-17%.
B.-35%.
C.-40%.
A B C
B
Hampton originally purchased 100 shares at $75 for a total value of $7500. Half of the value ($3750) was borrowed and Hampton paid cash for the other half. The current total market value of the stock is $6200. If Hampton sells her holdings she will have $2450 left after she pays off the loan. Hampton's return on her original investment is: $2450/3750-1=0.65-1=-0.35=-35%.
28. June Rutherford is preparing a research report on Andronicus Fund, an offshore hedge fund that specializes in identifying market pricing inefficiencies and profiting from the arbitrage opportunities they present. Rutherford includes these statements in her report: Statement 1: The rate of return that investors require from Andronicus should reflect the risk that the fund managers will not consistently capture positive abnormal returns from the anomalies they have identified. Statement 2: Arbitrage trading is unlikely to bring about fully efficient prices because Andronicus and other arbitrageurs will not trade if the gains to be captured are less than their transactions costs. Are Rutherford's statements correct? Statement 1 Statement 2 ①A. Correct Correct ②B. Correct Incorrect ③C. Incorrect Correct A. ①B. ②C. ③
A B C
A
Both of Rutherford's statements are correct. The required rate of return from a strategy that takes advantage of pricing anomalies should include a premium for strategy risk. Market prices can remain less than perfectly efficient if the transactions costs of the arbitrage trades that would force them closer to efficient prices are greater than the gains that the trades offer.
29. According to EMH knowledge, is the information set associated with the weak-form of the EMH best described as including all information associated with the: semistrong-form of the EMH strong-form of the EMH ①A. No No ②B. No Yes ③C. Yes No A. ①B. ②C. ③
A B C
C
The efficient market hypothesis implies that to be successful, fundamental analysis must be able to both identify and predict variables that are relevant to the valuation process.
30. In a value-weighted index firms with:
A.larger market caps have lesser impacts on the index.
B.greater market caps have greater impacts on the index.
C.higher stock prices have greater impacts on the index.
A B C
B
In a value weighted index, firms with greater market caps have a greater impact on the index than firms with lower market caps. A higher stock price does not necessarily mean a higher market cap.
31. Many academics claim that a particular anomaly's results reflect the inability of the asset pricing model to provide a complete measure of risk. Which of the following anomalies are the academics discussing?
A.The size effect.
B.Stock splits.
C.The neglected firm effect.
A B C
A
Many academics believe that the size effect is an anomaly due to the capital asset pricing model's (CAPM) inability to provide a complete measure of risk.
32. The DJIA is a biased measure and has been criticized. Which of the statements below regarding the bias and criticisms of a price-weighted series is false?
A.Because it is price weighted, when companies have a stock split, their prices decline, and therefore their weight in the DJIA is reduced.
B.The weighting scheme causes a downward bias in the DJIA, because the stocks that have higher growth rates will have higher prices.
C.Because the series is price weighted, a high-priced stock carries more weight than a low priced stock.
A B C
C
The DJIA is a biased measure and has been criticized. The bias and criticisms leveled at a price-weighted series include: Because it is price weighted, when companies have a stock split, their prices decline, and therefore their weight in the DJIA is reduced ; The weighting scheme causes a downward bias in the DJIA, because the stocks that have higher growth rates will have higher prices; Because the series is price weighted, a high-priced stock carries more weight than a low priced stock.
33. Which of the following statements regarding margin accounts is TRUE?
A.A margin call is issued only on short positions.
B.Margin accounts can be used to purchase securities by borrowing part of the purchase price.
C.Margin refers to the amount of funds the investor can borrow.
A B C
B
Margin accounts are brokerage accounts that allow investors to borrow part of the purchase price from the broker.
34. Use the data below to determine which of the statements is TRUE?
As of December 31
Company
Stock Price
Shares Outstanding
A
$25
20000
B
$50
20000
C
$100
10000
A.A 100% increase in the stock price of Company A will have a smaller impact on the price-weighted index than a 100% increase in the stock price of Company C. B. For a given percentage change in the stock price, Company A will have a greater impact on the market-value weighted index than Companies B or C.
C.For a given percentage change in the stock price, Company B will have less of an impact on the market-value weighted index as Company
C.
A B C
A
A 100% change in the stock price of Company C will have a larger impact than a 100% change in either stocks A or B on the price-weighted index. A price-weighted index adds together the market price of each stock in the index and then divides this total by the number of stocks in the index. The price-weighted index assumes you purchase one share of each stock represented in the index. The price-weighted index is influenced most by given percentage changes in the higher priced stocks.
35. The most appropriate reason for an investor to sell a security short is the investor's belief that, in the near future.
A.the security's price will decline.
B.interest rates will decline.
C.The required rate of return on the security will decline.
A B C
A
A short sale is the sale of borrowed stock with the intention of buying the stock back later at a lower price.
36. Which of the following statements about securities exchanges is FALSE?
A.A stock with a relatively large market volume is most likely to trade in the continuous market.
B.A call market is an open-outcry market where bids are called out in a trading pit.
C.The price in continuous markets is set by either the auction process or by dealer bid-ask quotes.
A B C
B
For a given stock with a relatively small market volume, it is most likely to trade in the call market where the stock is only traded at specific times.
37. Which of the following statements about "short selling" is TRUE?
A.A short position may be hedged by purchasing put options.
B.Short sellers may be subject to margin calls if the stock price increases.
C.Stocks that pay large dividends should be sold short before the ex-dividend date and bought afterward to take advantage of the large price decline in a short time period.
A B C
B
Short sellers are subject to margin calls if the margin falls below the maintenance margin.
38. The opportunity to take advantage of the downward pressure on stock prices that result from end-of-the-year tax selling is known as the:
A.January anomaly.
B.December anomaly.
C.end-of-the-year effect.
A B C
A
The January Anomaly is most likely the result of tax induced trading at year end. An investor can profit by buying stocks in December and selling them during the first week in January.
39. The recent creation of indexes tracking both stocks and bonds provides better benchmarking information for which of the following portfolios?
A.sector index funds.
B.the typical stock mutual fund.
C.investment funds broadly diversified across asset classes.
A B C
C
These types of indexes allow broadly diversified portfolios to be benchmarked against a single publicly available index.
40. Tests of trading rules based on available market data are tests of which form of the efficient markets hypothesis (EMH)?
A.Strong-form.
B.Semistrong-form.
C.Weak-form.
A B C
C
Trading rule tests are used to examine the weak form of the EMH. Most evidence suggests that technical trading rules do not produce superior returns after adjusting for transaction costs and taxes.
41. Which of the following statement about market is FALSE?
A.Over-the-counter-market is called a continuous market.
B.Dealer-markets are price driven markets.
C.If trades occur at any time the market is open, it is called continuous market.
A B C
B
Dealer-markets are price-driven markets.
42. Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50 percent and the maintenance margin is 25 percent. CSC stock price has fallen dramatically in recent months and it closed today with a sharp decline bringing the closing price to $ 40 per share. Will Jensen receive a margin call?
A.Yes, he does not meet the minimum maintenance margin requirement.
B.Yes, he does not meet the minimum initial margin requirement.
C.No, he meets the minimum maintenance margin requirement.
A B C
C
Total original value held by Jensen is 400×$60=$24000. Amount of equity is 50 percent ($24000)=$12000. Current total value is 400×$40=$16000. So Jensen's equity is $16000-$12000=$4000 which is 4000/16000=25% of the total market value.
43. Given that markets are efficient, which of the following is least likely to cause an actively managed mutual fund to underperform an index fund?
A.Taxes.
B.Inferior stock selection.
C.Management expenses.
A B C
B
Inferior stock selection would not be a reason because, in an efficient market, all securities are priced perfectly. Therefore, there are no undervalued or overvalued securities. Since all securities are perfectly priced, the investor should select a strategy that minimizes taxes, transactions costs, and management expenses.
44. The use of interest rates to forecast future stock prices is ruled out by which form of market efficiency?
A.weak form. B. semi-strong form.
C.both A and
B.
A B C
C
Interest rate information is in the set of current and historical security market information.
45. An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40 percent and the maintenance margin requirement is 25 percent. If the shares of stock later sold for $ 200 per share, what is the rate of return on the margin transaction?
A.250%.
B.100%.
C.200%.
A B C
A
Step 1: Calculate All Cash Return: Cash Return % = [(Ending Value/Beginning Equity Position)-1]×100=[($200×200)/($100×200)-1]×100=100% Step 2: Calculate Leverage Factor: Leverage Factor =1/Initial Margin %=1/0.40=2.50 Step 3: Calculate Margin Return: Margin Transaction Return = All cash return × Leverage Factor =100%×2.50=250% Note: You can verify the margin return as follows: Margin Return % = [((Ending Value - Loan Payoff)/Beginning Equity Position)-1]×100=[(([$200×200]-[$100×200×0.60])/($100×0.40×200))-1]×100=[((40000-12000)/8000)-1]×100=250%
46. Which of the following about a well functioning market is FALSE?
A.numerous buyers and sellers are willing to trade at prices about and below the current price.
B.the current price of a security fully reflects all the information currently available about the security.
C.market participants can buy and sell quickly at a known price.
A B C
C
47. Which of the following statements about securities markets is least accurate?
A.Characteristics of a well-functioning securities market include: many buyers and sellers willing to trade at below market price, low bid-ask spreads, timely information on price and volume of past transactions, and accurate information on supply and demand.
B.When Conglomerate, InC. trades directly with MultiNational, Ltd. , it is using the fourth market.
C.A limit buy order and a stop buy order are both placed below the current market price.
A B C
C
A limit buy is placed below the current market price, but a stop buy order is placed above the current market price (stop buy orders are often placed to protect a short sale from a rising market).
48. Which of the following statements about securities exchanges is TRUE?
A.Continuous markets are markets where trades occur 24 hours per day.
B.Call markets are markets in which the stock is only traded at specific times.
C.Setting a negotiated price to clear the market is a method that is never used in major continuous markets.
A B C
B
Continuous markets are markets where trades occur at any time, but only when the market is open (i. e. they do not need to be open 24 hours per day). Setting one negotiated price is a method used in major continuous markets to set the opening price.
49. Which of the following actions is most likely to give an analyst superior results7
A.The ability to react very quickly to public announcements.
B.Having superior abilities to identify patterns of returns based on historical data of economic factors and being able to determine the relationship between a stock return and certain economic factors based on historical data and then use that relationship to make reliable forecasts for future price movements.
C.A strong ability to interpret and estimate the future impact of publicly available information.
A B C
C
An analyst cannot obtain superior results by relying on historical datA. The analyst must be able to do a superior job of interpreting and estimating variables that are relevant to the value of the security.
50. Which of the following statements regarding primary and secondary markets is FALSE?
A.Secondary market transactions occur between two investors and do not involve the firm that originally issued the security.
B.New issues of government securities can be sold on the primary market.
C.Prevailing market prices are determined by primary market transactions and are used in pricing new issues.
A B C
C
Prevailing market prices are determined by the transactions that take place on the secondary market. This information is used to determine the price of new issues sold on primary markets.
51. According to the characteristics of the capital market, which of the following is most directly a function of primary capital markets and which is most directly a function of secondary capital markets? Primary capital markets Secondary Capital markets ①A. Source of liquidity Security underwriting ②B. Source of new capital Source of price information ③C. Source of price information Source of new capital A. ①B. ②C. ③
A B C
B
This is the difference between primary capital markets and secondary capital markets.
52. An order to buy or sell a stock at the best current price is a:
A.limit order.
B.floor order.
C.market order.
A B C
C
Market orders are orders to buy or sell at the best price available.
53. The Dow Jones Industrial Average accounts for stock splits by:
A.multiplying the index by the stock split ratio.
B.reducing the market capitalization of the stock experiencing the split.
C.increasing the weighting of the stock experiencing the split.
A B C
B
The Dow Jones Industrial Average index is the arithmetic average of the prices of 30 stocks, adjusted for stock splits (through the adjusted divisor).
54. Which of the following statement about weighting schemes used in constructing stock market indexes is FALSE?
A.The Nikkei Dow is a price-weighted index.
B.The Standards and Poor's indexes are market value-weighted indexes.
C.A market-weighted index automatically adjusts for stock splits.
A B C
A
55. Which of the following statements about the assumptions of efficient capital markets and the conclusion of the efficient market hypothesis is FALSE?
A.If markets are efficient, investors should not trade often.
B.In testing for semistrong-form market efficiency, researchers typically adjust for the stock's risk.
C.Tests of market efficiency have found no strategy that produces excess returns above the market after accounting for transaction costs.
A B C
C
Several strategies have been shown to produce abnormal returns (returns above the market after adjusting for risk). Small firms and firms with low price to earnings (P/E) ratios and high book-to-market values have all been found to produce positive abnormal returns.
56. Which of the following statements about the efficient market hypothesis is FALSE ?
A.Exchange specialists derive above-average returns from private information.
B.Runs tests are used to test the weak form of the efficient markets hypothesis.
C.Efficient markets tests have found that professional money managers, as a group, have consistently outperformed the market.
A B C
C
Professional money managers, as a group, have not been found to outperform the market.
57. What is the price-weighted index of the following three stocks?
As of December 31, 2001
Company
Stock Price
Shares Outstanding
A
$50
10000
B
$35
20000
C
$110
30000
A.65.
B.75.
C.80.
A B C
A
The price -weighted index equals (50+35+110)/3=65.
58. What are the three basic categories of bond indexes?
A.Corporate; government; municipal.
B.Investment grade; high yield; global.
C.Manufacturing; service; technological.
A B C
B
The three categories include investment grade, high-yield (weaker than investment grade) and global.