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Securities and Investments1. How would you explain that, although the efficient markethypothesis applies to the stock market, you can’t successfullyinvest by randomly selecting stocks?A. The hypothesis fails to fully explain the real marketenvironment.B. The hypothesis fails to consider these monopolies, whichdominate certain segments of the market.C. Random selection of stocks would ignore an individualinvestor’s goals.D. New theories are needed to explain stock price behaviorin the new economy.2. What is the best reason to use the price-to-sales (P/S) ratio instead of the price-to-earnings(P/E) ratio in valuing stocks?A. The P/S ratio is influenced by a corporation’s book value.B. The P/S ratio can be contrasted with the ratio of cash flow to price.C. The P/S ratio doesn’t have the same weaknesses as the P/E ratio.D. The P/S ratio is useful for stocks issued by corporations that have no earnings.3. If you analyzed a stock’s value using the dividend growth model, you would discountA. future cash flows from dividends, incorporating projected growth in dividends.B. future cash flows from dividends and from the projected growth in the value ofthe stock.C. the future value of the stock, assuming a fixed growth and discount rate over apreestablished time period.D. the value of a fixed, periodic annuity the way you would discount the value of futureperiodic interest payments.4. If you wanted the safest investment among the following choices, which should you select?A. The stock of large corporations paying high dividendsB. U.S. Treasury billsC. The stock of small corporationsD. Long-term government bonds5. At what rate does $1,000 grow to $1,953 after three years? Use the formula for the futurevalue of a lump sum, and assume annual compounding.A. 25 percent C. 75 percentB. 31.8 percent D. 95.3 percent6. What is the holding period return on an investment of $1,000 held for 10 months with $30in dividends and a selling price of $1,250?A. 28 percent C. 23.3 percentB. 25 percent D. 3 percent7. Given a choice between calculating returns using the holding period return (HPR) or theformula for the future value, you should select the future value formula because theA. HPR fails to consider the discounted value of the purchase price.B. future value formula incorporates the timing of cash flows.C. HPR overstates the internal rate of return in direct proportion to the discount rate.D. future value formula incorporates cash payments that are omitted in the HPR.8. Which of the following statements most accurately explains the utility of the dividendgrowth model?A. Dividend growth increases the total return earned on equity investments.B. Projected dividend growth can be incorporated into calculation of the discounted valueof cash flows.C. Stocks with rising dividends generally outperform stocks that don’t pay dividends orthat pay relatively static dividends.D. Rising dividends, plotted as a function of time, appear as an exponential function with apositive slope.9. ABC Corporation recently announced its plans to pay a 5 percent stock dividend in additionto its scheduled $0.32 quarterly dividend, which has been paid on its common stock in allof the previous 13 quarters. The ex-dividend date will be one month after the announcement.ABC Corporation hadn’t paid a stock dividend in the past nine years. You own 100shares of ABC Corporation common stock valued at $68 per share. Which of the followingexplanations accurately projects the effect of these transactions?A. Dilution will effect a 5 percent decline in price per share. That will be offset by the 2percent (annualized) dividend for a net decline of 3 percent in the stock price.B. The 5 percent stock dividend is equivalent to 1-for-20 stock split. Stock prices generallyrise after stocks split, so the 5 percent dilution effect will be reduced to either a price riseor a decline that’s smaller than 5 percent.C. The stock price will drop about 5 percent if all other factors remain constant.D. The discounted value of the stock split and will render a price decline smaller than 5percent.10. If you purchase a stock one month before the date of record, if a friend purchases thesame stock on the ex-dividend date, and if both of you hold the stock at least two months,A. both you and your friend receive the dividend.B. your friend receives the dividend, you don’t.C. you receive the dividend, your friend’s investment is uncertain.D. you receive the dividend, your friend doesn’t.11. In the absence of compelling empirical data to support technical analysis, which of thesearguments supports its use?A. The Dow Theory has a long history of successful use and has earned respect innonacademic circles.B. Traders of odd lots tend to be smaller, less sophisticated investors who reliably makethe wrong investment decisions.C. Emotions lead to irrational investment decisions that can be overcome by applying astrict set of technical methods.D. Several technical methods capitalize on empirical data supporting the contention thatsecurity prices move in the same direction.12. The technical analysis methods presented in the textbook useA. methods that are widely accepted in academic circles.B. historical price and volume to predict future prices.C. a combination of price, volume, and analysis of economic and industry factors to arriveat the intrinsic value of the corporation.D. methods that are unanimously rejected in academic circles.13. The rationale behind a moving average is thatA. observations falling within one standard deviation of the moving average are expectedin approximately two-thirds of all observations, and when an observation falls outside ofthis range, it’s indicative of a future change in the direction of prices.B. deviation from historical trends may be indicative of a change in trend.C. when observations fall more than 1.96 standard deviations from the moving average,their probability is .05.D. a change in the direction of the moving average indicates an opposite change in thedirection of stock prices.14. Investors contribute to the efficiency of security markets byA. using available information to make investment decisions.B. applying technical analysis to their investment decisions.C. combining cash flow analysis and ratio analysis to estimate stock value.D. avoiding hot tips.15. In calculating return on assets, you need to knowA. cash flow in order to back out noncash items.B. earnings after taxes divided by the asset portion of equity.C. both income statement and balance sheet information.D. only balance sheet information.16. Which of the following statements is correct?A. Security selection can be a complex process that’s aided by Internet financialinformation services.B. Security selection is most efficiently practiced by applying both technical andfundamental analysis.C. Security selection requires only the use of accounting ratios.D. Security selection simplifies investment decisions.17. The rationale for ratio analysis is explained best by the fact that ratiosA. are readily understood and easy to calculate.B. may be computed and interpreted from two perspectives, time-series analysis, andcross-sectional analysis.C. influence management and creditor decisions.D. indicate a corporation’s financial and operational effectiveness, which in turn affect themarket value of its stock.18. When interpreting the difference between the return on assets and the return on equity ofa single corporation for identical periods, you must take into consideration theA. impact of net income on the corporation’s total return on assets.B. contribution of current assets to total assets.C. period-to-period rate of change in revenue.D. corporation’s use of financial leverage, which is its use of debt.19. In fundamental analysis, the value added by industry analysis is particularly apparentA. when inflation rates are high and have a broad negative impact on business in general.B. in industries where business levels significantly change in certain seasons or inrelation to the business cycle.C. during recessions when business levels are suppressed across most industries.D. during the rapid growth stage of an economy.20. Which of the following reasons best explains why you would include inflation in a fundamentalanalysis of stock values?A. Inflation exerts broad influence on factors that underlie the economy.B. Inflation generally increases stock prices at a faster rate than other prices.C. Inflation generally increases stock prices because cash inflows increase.D. High inflation corresponds with high interest rates and low bond values.1. A bond will pay principal of $1,000 upon maturity in 10 yearsfrom now, plus it will pay $60 every six months, including thedate of maturity and starting six months from now. What pricewould you expect to pay for the bond if comparable bonds yield8 percent?A. $1,272 C. $815B. $1,162 D. $4562. What is the yield to maturity on a municipal bond scheduled topay $10,000 upon maturity 5 years from now? This is a zerocouponbond selling for $8,220. Round the yield to maturity tothe nearest percent.A. 8 percent C. 4 percentB. 5 percent D. 3 percent3. What is the yield to maturity on a corporate bond scheduled to pay annual interest of $100and $1,000 upon maturity 3 years from now? The bond is selling for $1,025.31. Round theyield to maturity to the nearest percent.A. 11 percent C. 8 percentB. 9 percent D. 7 percent4. What is the duration of a bond that will pay $50 per year in coupon payments and $1,000after four years? Use a discount rate of 10 percent.A. 8.4 years C. 3.7 yearsB. 4.0 years D. 0.27 years5. What is the present value of a share of preferred stock that you own indefinitely? Thestock’s dividend is $5. The appropriate discount rate is 6 percent.A. $13.33 C. $852.33B. $83.33 D. $852.986. A perpetual bond annually pays interest of $35 and alternative investments yield 14 percent.What is the present value of the bond?A. $250 C. $490B. $355 D. $5057. Duration is a better way to compare cash flows than simply comparing present valuesbecauseA. duration incorporates cash flow volatility.B. present value fails to incorporate the timing of cash flows.C. when maturities differ among compared cash flows, present value inaccuratelyrepresents the yield to maturity.D. duration effectively treats cash flows as a perpetuity, incorporating the reinvestment rate.8. One of the benefits of the laddered approach to managing interest rate risk in a bondportfolio is thatA. reinvestment risk is eliminated because you standardize the timing of bond maturities.B. the portfolio includes bonds issued by different organizations, thereby reducing default risk.C. all bonds are liquidated if the investor elects to capitalize on an opportunity.D. when bonds mature at different intervals, you diversify the timing of reinvestment.9. If you want to maximize safety and earn federally tax-exempt interest, you should buyA. municipal bonds backed by the revenue earned on the project funded by the bond.B. municipal bonds backed by the taxing authority of the issuing government.C. U.S. Treasury bonds backed by the taxing authority of the U.S. federal government.D. U.S. Treasury bills backed by the taxing authority of the U.S. federal government.10. To participate in the U.S. national mortgage market by investing in bonds, the best waywould be to invest inA. revenue bonds issued by a sprawling suburban city.B. treasury bonds that ultimately depend on funding from households.C. mortgage pass-through bonds issued by a federal government agency.D. stocks issued by banks that make mortgage loans.11. One strategy for diversifying government-issued bonds and earning tax-exempt interest isto invest inA. U.S. Treasury bonds, notes, and bills with diverse maturities.B. a state-specific municipal bond fund.C. a combination of state and local bonds plus bonds issued by foreign governments.D. money market mutual funds and U.S. Treasury bills.12. What is the key distinction between Series EE bonds and Treasury bills?A. Series EE bonds pay interest every six months.B. Series EE bonds aren’t backed by the full faith and credit of the federal government.C. Treasury bills are deeply discounted bonds with all interest paid upon maturity.D. Treasury bills can be traded in the secondary market.13. Why do bond issuers attach a call feature to their bonds?A. Increases the marketability of the bondB. Increases the likelihood of issuing bonds at face value or higherC. Presents an opportunity to capitalize on rising interest ratesD. Frees the organization from high-interest debt if interest rates drop14. If you were CEO and decided to finance retirement of a bond issue, you would be mostlikely toA. issue collateral serial bonds, the proceeds of which would fund the bond retirement.B. rewrite the debenture to include an option to exchange bonds for shares of stock.C. set up a payment arrangement with a trustee to fund an account designated forbond retirement.D. sell production assets and apply the proceeds to bond retirement.15. If you owned bonds issued by a corporation that announced expectations for a protractedperiod of cash flow difficulties, what kind of risk would concern you most?A. Default risk C. Reinvestment rate riskB. Interest rate risk D. Price fluctuation16. When an investor purchases a 12-month T-bill with the intention of selling it after a periodof time, he’sA. riding the yield curve and selling on a secondary market.B. minimizing his return on a short-term investment.C. ensuring that the sale is at maximum discount.D. maximizing his return on a long-term investment.17. Which of the following measures would increase the duration of a bond issue?A. Exercising a call optionB. Offering bondholders early retirement of bondsC. Prepaying interestD. Exercising an extendible option18. If a bond issuer failed to honor terms of the indenture prohibiting the corporation frommerging with another corporation,A. the bond issue would be considered a fallen angel.B. the bond issue would be considered in default.C. the corporation would be obliged to exercise an extendible option.D. bondholders could exchange their bonds for stock of the issuing corporation.19. Periods of a negatively sloped yield curve have also been times ofA. rising interest rates and inflation.B. a bull market in stocks.C. rapid economic growth that reduced the cost of long-term debt.D. low commodity prices.20. The impact of inflation as it relates to a bonding arrangement is most devastating toA. borrowers. C. corporations and governments.B. lenders. D. trustees.1. You own a stock, and you’re concerned that the price of thestock may decline. What might you do to minimize risk of losson the stock?A. Buy a put C. Write a putB. Buy a call D. Buy a warrant2. At a single time, a stock’s price is $10 and the premium for a call option on the stock is $3.The strike price on the option is $8. How should you explain the additional value of thepremium over the difference between strike price and stock price?A. The stock price and option price may have been quoted at different times when stockvalues were different.B. The market value of the option premium equals the difference between the strike priceand the market value of the stock.C. The market value of the option premium equals the difference between the stockmarket value and the strike price plus a time premium.D. The hypothetical price of the option is less than the time premium.3. Which of the following strategies offers the greatest potential to maximize rate of return ona stock if the stock price rises after you implement the strategy?A. Purchase a stock and supplement your return by purchasing a call option on the stock.B. Assume a naked position in the stock with a call option.C. Write a covered put on the stock.D. Write a naked put on the stock.4. You speculate that the value of a stock won’t drop, and you’re unwilling to purchase thestock or pay a premium for an option. What position would you take to profit by the stock’sprice not dropping?A. Write a put. C. Write a call.B. Purchase a call. D. Employ a covered position.5. What is your profit or loss under the following circumstances when the stock price rises?You buy a stock at $15 and simultaneously buy a put. The strike price on the put is $12,and you pay a $5 premium. The stock price rises to $16.A. $5 loss C. $2 profitB. $4 loss D. $3 profit6. What is your loss in the following situation? You write a naked put when the stock price is$50. The strike price is $55, and the stock price drops to $40. Assume the option is nearexpiration and the market doesn’t assign any additional value to the option’s intrinsic value.A. $10 C. $20B. $15 D. $357. What is your profit or loss under the following circumstances? You buy a stock for $30, andits price suddenly drops to $25. To avoid the risk of further losses, you buy a put with a$30 strike price for $6. Subsequently, the stock price rises to $35, the option expires, andyou sell the stock.A. $1 profit C. $6 lossB. $1 loss D. $15 loss8. What is your profit or loss under the following circumstances? You buy a stock for $25, andsimultaneously write a covered call with a $20 strike price and $7 premium. The stockprice rises to $28, and the buyer exercises the option and you sell your ownership inthe stock.A. $3 loss C. $2 profitB. $2 loss D. $3 profit9. Which of the following positions would ordinarily minimize potential loss in terms ofpercentage of investment? Assume the loss would be realized during the term ofthe option.A. Purchase a stock at $25.B. Purchase a stock at $25 and a call on the stock for a $5 premium with a $21strike price.C. Purchase a call option for $4.D. Purchase a stock at $25, and a put on the stock for a $5 premium with a $29strike price.10. The risk of shorting a stock is greater than the risk of buying a put becauseA. the stock price can fall to zero, while the put limits risk to the amount of the premium.B. a stock price change results in a relatively smaller change in an option on that stock.C. the maximum risk of a put is the premium, while the maximum risk of shorting isunlimited because price can rise without limit.D. options provide unlimited hedging opportunities that render option positions less riskythan short stock positions.11. Although arbitrage presents potential profit opportunities, the likelihood of individualinvestors finding arbitrage opportunities is limited byA. the tendency for stock values to fall away from the efficient frontier.B. hedge strategies that combine option and stock purchases all but eliminatearbitrage opportunities.C. stock and option exchange managers, who are required to notify market makers whenarbitrage opportunities present themselves.D. market makers, who are in a better position to detect and quickly capitalize before gapsnarrow.12. You know that leverage increases risk becauseA. leverage increases the opportunity for greater profits and losses.B. when you lend money to businesses, you increase your exposure to default risk.C. leverage magnifies the potential return on an investment.D. leverage brings with it downside risk caused by the time-limited feature of options.13. If you owned the stock of a company that had also issued a warrant on its stock, howcould you use the warrant to limit your risk in the stock?A. Buy the warrant and write a put on the stock.B. Sell the warrant short.C. Buy a put on the stock.D. Buy a put on the stock, and buy the warrant.14. Suppose that you’re a corn farmer preparing to plant. You want to reduce the risk that cornprices will drop below $2.20 per bushel next September when you harvest. What is thebest strategy to reduce your risk?A. Enter a long position in corn futures to accept in September to enhance your profit ifcorn prices rise.B. Enter a futures contract to deliver September corn at a price under $2.20.C. Enter a long position in corn for futures contracts to accept corn in July.D. Enter a futures contract to deliver September corn at a price above $2.20.15. Which of the following is most likely to use currency futures to reduce risk?A. Foreign currency speculatorsB. Corporations that accept and make payments in foreign currenciesC. Households located near international bordersD. Wheat farmers who sell to U.S. exporters developing markets in China16. You have a long position in soybean futures at $4.75 per bushel. The contract is for 5,000bushels, and initial margin is $1,215. Maintenance margin is $900. An unexpected latefrost destroys newly planted crops in the Midwestern United States, and the futures pricerises to $5.20 per bushel over the next few trading days. Which of the following results ismost likely?A. You receive a margin call from your broker.B. The futures exchange imposes a temporary hold on trading in soybean futures.C. The contract value rises to $25,000.D. The contract value rises $2,250.17. You enter a short position in an oats futures contract. The trading unit is 5,000 bushels,the futures price is $1.08 per bushel, initial margin is $270, and maintenance margin is$200. The futures price rises $.02 to $1.10 on projections of poor yields. What is themost likely result?A. You consider closing your position to capitalize on a $100 profit.B. You get a margin call for $70.C. You get a margin call for $100.D. The long position exercises the futures contract.18. Which of the following investors would reduce risk by shorting municipal bondswith futures?A. Someone who owns a large portfolio of municipal bondsB. An investor who has entered a contract to deliver municipal bondsC. Someone who has entered a futures contract to accept Treasury notesD. A city that has issued municipal bonds19. If you were CFO of a U.S.-based international corporation with significant operationsin Switzerland, which of the following would be the best way to reduce currency riskthrough derivatives?A. Enter a short position in the Swiss franc.B. Purchase Swiss francs and invest them in Swiss certificates of deposit.C. Enter a swap agreement so that U.S. operating expenses are paid on behalf of acorporation based in Switzerland.D. Enter a swap agreement so that Swiss operating expenses are paid by a corporationbased in Switzerland.20. Which of the following events would increase a futures price?A. Inflation declines during the term of the contract.B. Spot price declines because of excess volume in the commodity.C. The broker increases the maintenance margin.D. Interest rates rise faster than expected.1. Base your answer to this question on contents of Exhibit 22.4on page 821 of your textbook. Use the January 1991–December1995 data only. Strictly on the basis of the correlation of returns,investments in which three countries would yield the greatestdiversification?A. Brazil, Hungary, IndonesiaB. Turkey, Korea, ChileC. Turkey, India, ColombiaD. Turkey, Brazil, Malaysia2. What special advantage do mutual funds confer for investing in emerging markets?A. Emerging markets typically yield higher rates of returns for a given investment periodbecause risk is relatively high.B. The correlation coefficients of returns between emerging and established markets aregenerally negative.C. Emerging funds allow investors to invest in specific markets even though they aren’tfamiliar with corporations, laws, and particulars of investing in those markets.D. Emerging market mutual funds provide diversification not available in global orinternational funds.3. Which of the following investments would certainly increase your risk exposure if most ofyour portfolio is dominated by U.S. investments?A. International investments characterized by a correlation with U.S. investments near zeroB. International investments with high historical rates of return and, therefore, to the rightside of the security market lineC. A mix of European and Pacific Basin stocks purchased through an internationalmutual fundD. International investments in countries where the exchange rate fluctuates excessively4. If you were supervisor of a mutual fund investment manager working for an internationalgrowth fund, how would you interpret the following situation? The manager recommendspurchase of stock in General Electric, a New York–based corporation. Her rationale for thepurchase is based on the fact that General Electric’s operations and revenue are truly international,with a substantial proportion of operations and revenue from over a dozen countries.A. If the manager were permitted to make the purchase, it would violate the fund’sinvestment policy.B. General Electric’s international exposure would enhance the fund’s diversification.C. General Electric would add to the fund’s diversification, but the corporation’s large sizeis contrary to the growth objective for the fund.D. General Electric’s diverse operations are a favorable attribute, and the company’sgrowth would enhance the fund’s growth objective.5. If you wanted international diversification but wanted to decide which countries you wouldinvest in, which strategy would you use?A. Invest through iShares country-specific exchange-traded funds.B. Invest through a global mutual fund.C. Invest through World Equity Benchmark shares.D. Invest in euros.6. Of the reasons listed below, which is the most important reason to invest internationally?A. The overall return on international investments exceeds the return on most domesticinvestments, thereby increasing total return.B. International investments may be riskier than domestic investments, but their diversifyingeffect can reduce the risk of the entire portfolio.C. International investments reduce total portfolio risk because returns on internationalinvestments typically have a lower standard deviation than domestic investments.D. Although domestic investments offer some growth opportunities, the mature domesticmarket lacks the number of growth opportunities in emerging economies.7. If you lived in a nation that didn’t use the Swiss currency for exchange and were investedin securities issued by the government of Switzerland, you might expect the value of yourinvestment to rise ifA. you hedged your investment with currency futures.B. the value of the Euro dropped in relation to the Swiss franc.C. political uncertainty in France resulted in a decline in your domestic stock market.D. your domestic currency fell in relation to the Swiss franc.8. Use Figure 22.4, on page 819, to answer the following question: How would you interpretobservations in the lower-left quadrant?A. When one country’s return fell below –20 percent, the S&P 500 return was slightlybelow zero.B. After a year that the S&P 500 yielded a return slightly below zero, the EAFE lost morethan 20 percent.C. Roughly every 20 years, you should expect a negative relationship between EAFEreturns and returns in the S&P 500.D. Lines AB and CD are nearly equidistant from the observation, exemplifying howdiversification can benefit a portfolio.9. The importance of market efficiency and its contribution to international investing is thatA. obtaining information on which to base foreign investment information may be difficult.B. the rapid dissemination of new information and the intense competition amonginvestors produces efficient U.S. financial markets.C. foreign firms with securities traded on U.S. exchanges meet SEC disclosure requirements.D. inefficiencies in international markets may present opportunities for excess returns.10. You might expect a domestic currency devaluation ifA. exports increase, resulting in a flood of foreign currency into the country.B. significant domestic productivity declines decrease the attractiveness ofdomestic investments.C. demand for domestic currency by foreign investors increases the supply ofdomestic currency.D. domestic equity market values rise on news of projected interest rate decreases.11. The cash budget is critical to financial planning because itA. enumerates receipts and disbursements necessary to project asset allocation.B. aids the investor when deciding to purchase small cap stocks.C. helps estimate social security payments.D. is the best means for establishing one’s financial position.12. Which of the following should be part of a balance sheet?A. Bank deposits, salary, and royaltiesB. IRA distributions, insurance, and maintenanceC. Pension, money market funds, and Keogh accountsD. Certificates of deposit, cash value of life insurance, and real estate13. Before investing, it’s essential that the investor firstA. determine his or her net worth.B. thoroughly research and hire a professional planner.C. construct a financial plan.D. define his or her goal.14. If a U.S. investor buys the stock of a corporation in Mexico, the investor will certainly sustaina loss if the stock priceA. falls and the value of the peso rises.B. rises and the value of the peso rises.C. falls and the value of the peso falls.D. rises and the value of the dollar rises.15. When an investor buys an ETF, he or sheA. knows the return will be based on the movement of dollar cost of the currency purchased.B. is sure of little fluctuation in the value of his or her currency.C. physically holds the currency purchased.D. counts on impure play of one currency’s value versus another’s.16. A 30-year-old with a portfolio of $50,000 with projected earnings of five percent per yearcan expect the portfolio to be worth _______ at age 60.A. $216, 097.12 C. $132,195.27B. $160,972.13 D. $108,049.1617. The single most influential variable in determining investment returns isA. heavy reliance upon index mutual funds.B. selection of a fee-only investment advisor experienced in asset allocation.C. selection of low-cost, high-performing mutual funds.D. asset allocation decisions driven by investment policy.18. What is the most likely explanation for discrepancies between targeted asset allocationsand current asset allocations if the portfolio’s allocations matched the target one year agoand no money was added to or subtracted from the portfolio?A. Excessive turnover adds costs to the portfolio that put downward pressure onasset values.B. The investment policy may have assigned an over-weight to equity investments.C. Some asset class values rise and fall faster than others, leading to an imbalance.D. The portfolio performed much better than expected when targeted asset allocationswere established.19. The real benefit of constructing a cash budget for investors is toA. ensure that spending doesn’t exceed income.B. identify sources of cash flow for investments.C. aid balance sheet construction.D. identify net cash flow for determination of net worth.20. A pro forma financial statement identifiesA. what is owed and what is owned.B. balance sheet and cash budget data.C. one’s future or projected financial position.D. what the investor’s present-day “estate” looks like. ................
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