CH 2

Question 1

1) Market timing is the:
A) placing of an order within the last half-hour of trading for a day.
B) placing of trades within the last half-hour prior to the commencement of daily trading.
C) period of time between the placement of a short sale and the covering of that sale.
D) buying and selling of securities in anticipation of the overall direction of the
market.
E) staggering of either buy or sell orders to mask the total size of a large transaction.

Answer 1

D

Question 2

2) Asset allocation is the:
A) distribution of investment funds among various broad asset classes.
B) selection of specific securities within a particular class or industry.
C) division of a purchase price between a cash payment and a margin loan.
D) dividing of assets into those that are hypothecated and those that are not.
E) division of a portfolio into short and long positions.

Answer 2

A

Question 3

3) Jack is researching chemical companies in an effort to determine which company’s stock he should purchase. This process is known as:
A) security selection.
B) purchase shorting.
C) marketing research.
D) asset allocation.
E) market timing.

Answer 3

A

Question 4

4) A Roth IRA:
A) funds are taxed at the time you begin withdrawals.
B) is a form of “tax-deferred” account.
C) invests after-tax dollars.
D) are well-suited to investors nearing retirement.
E) is the type of account offered by most employers.

Answer 4

C

Question 5

5) A brokerage account in which purchases can be made using credit is referred to as which type of account?
A) funds available
B) cash
C) call
D) margin
E) clearing

Answer 5

D

Question 6

6) Kay just purchased $5,000 worth of stock. She paid $3,000 in cash and borrowed $2,000. In this example, the term margin refers to:
A) the percentage of the purchase that was paid in cash.
B) any future increase in the value of the stock.
C) the percentage of the purchase paid with borrowed
funds.
D) any future decrease in the value of the stock.
E) the total amount of the purchase.

Answer 6

A

Question 7

7) Which one of the following best describes the term “initial margin”?
A) Amount of cash that must be paid when a broker issues a margin call
B) Total loan amount offered to a customer by a brokerage firm to cover future purchases
C) Amount of money that must be deposited to open a margin account with a broker
D) Amount of money borrowed when a security is purchased
E) Amount of cash that must be paid to purchase a security on margin

Answer 7

E

Question 8

8) The minimum equity that must be maintained at all times in a margin account is called the:
A) call requirement.
B) maintenance margin.
C) initial equity position.
D) margin call.
E) initial margin.

Answer 8

B

Question 9

9) When your equity position in a security is less than the required amount, your brokerage firm will issue a:
A) limit order.
B) leverage call.
C) margin call.
D) margin certificate.
E) cash certificate.

Answer 9

C

Question 10

10) Sam purchased 500 shares of Microsoft stock which he has pledged to his broker as collateral for the loan in his margin account. This process of pledging securities is called:
A) leveraging.
B) hypothecation.
C) margin calling.
D) street securitization.
E) maintaining the margin.

Answer 10

B

Question 11

11) Staci owns 1,000 shares of stock in a margin account. Those shares are most likely held in:
A) transit.
B) her registered name.
C) street name.
D) a discretionary account.
E) a wrap account.

Answer 11

C

Question 12

12) This morning, Josh sold 800 shares of stock that he did not own. This sale is referred to as a:
A) wrap trade.
B) hypothecated sale.
C) margin sale.
D) long position.
E) short sale.

Answer 12

E

Question 13

13) The amount of common stock held in short positions is referred to as the short:
A) margin.
B) sale.
C) interest.
D) proceeds.
E) shares.

Answer 13

C

Question 14

14) A company that owns income-producing real estate such as an apartment complex or a retail shopping center is called a(n):
A) EAR.
B) SPIC.
C) SIPC
D) REIT.
E) REEF

Answer 14

D

Question 15

15) An investor who has a resource constraint:
A) has insufficient funds to purchase a security.
B) will only invest in socially acceptable securities.
C) has a relatively high marginal tax rate.
D) has only one source of income.
E) pays no income taxes.

Answer 15

A

Question 16

16) To be considered liquid, a security must:
A) be held for less than one year.
B) pay dividends.
C) be able to be sold on short notice.
D) be able to be sold quickly with little, if any, price concession.
E) be held in a cash account.

Answer 16

D

Question 17

17) Walter is trying to decide whether he wants to purchase shares in General Motors, Ford, or Honda, all of which are auto manufacturers. Walter is making a(n) _______ decision.
A) active strategy
B) risk aversion
C) tax-advantaged
D) asset allocation
E) security selection

Answer 17

E

Question 18

18) Brooke has decided to invest 55 percent of her money in large company stocks, 40 percent in small company stocks, and 5 percent in cash. This is a(n)______decision.
A) tax-advantaged
B) asset allocation
C) active strategy
D) market timing
E) security selection

Answer 18

B

Question 19

19) Kay plans to retire in two years and wishes to liquidate her account at that time. Kay has a ________ constraint.
A) liquidity
B) tax
C) special circumstances
D) resource
E) horizon

Answer 19

E

Question 20

20) The SIPC:
A) guarantees cash balances held in brokerage accounts up to $500,000.
B) protects investors from missing assets when a brokerage firmcloses.
C) protects private brokerage firms from bankruptcy.
D) guarantees investors against any loss related to an investment account held at a
brokerage firm.
E) is an agency of the federal government.

Answer 20

B

Question 21

21) The determination of which individual stocks to purchase within a particular asset class is referred to as:
A) market timing.
B) security analysis.
C) asset allocation.
D) market selection.
E) security selection.

Answer 21

E

Question 22

22) An investor who follows a fully active strategy will:
A) maintain a relatively constant mix of asset classes while continually buying and
selling individual securities.
B) concentrate solely on asset allocation to maximize potential returns.
C) move money between asset classes as well as try to select the best performers in each class.
D) focus on picking individual stocks only.
E) move money between asset classes but will not be concerned about which
individual securities are owned.

Answer 22

C

Question 23

23) Which one of the following decisions falls under the category of asset allocation?
A) Adopting a passive investment strategy
B) Deciding to actively analyse individual securities
C) Purchasing Ford stock rather than General Motors stock
D) Determining that thirty percent of a portfolio should be invested in bonds
E) Deciding to use an online broker

Answer 23

D

Question 24

24) Tom recently inherited a large sum of money that he wants to invest in the stock market. Since he has no investment experience, he has decided that he would like to work with a professional who can explain the market to him and also manage his funds for him. Ted most likely needs the services offered by a(n):
A) full-service broker.
B) deep-discount broker.
C) online broker.
D) discount broker.
E) cyber broker.

Answer 24

A

Question 25

25) Which one of the following statements is correct?
A) Most brokerage agreements require disputes be settled in a court of law.
B) Churning is the preferred method of providing deep-discount brokerage services.
C) Full service brokers frequently provide financial planning services to clients.
D) Discount brokers only provide order execution services.
E) Arbitration is a formal legal process for settling disputes related to brokerage accounts.

Answer 25

C

Question 26

26) Martin has an investment account with William, who is a broker with City Brokerage. Martin believes that William has mishandled his account by churning it. If he files a complaint against William seeking compensation, the case will most likely be decided by:
A) a civil suit judge.
B) the office manager of City Brokerage.
C) the SEC Hearing Board.
D) a jury.
E) an arbitration panel.

Answer 26

E

Question 27

27) You currently have $5,000 in cash in your brokerage account. You decide to spend $8,000 to purchase shares of stock and borrow $3,000 from your broker to do so. Which type of brokerage account do you have?
A) Asset allocation
B) Short
C) Cash
D) Wrap
E) Margin

Answer 27

E

Question 28

28) Which one of the following statements is correct?
A) A margin loan is treated as an asset on an account balance sheet.
B) The percentage of a purchase paid for with borrowed funds is referred to as the margin.
C) The call money rate is the rate of interest brokerage firms charge on margin loans.
D) Margin is equal to account equity divided by the value of the securities owned.
E) The spread is the fee a deep-discount broker charges to execute a trade.

Answer 28

D

Question 29

33) You open a margin account with a local broker and purchase shares of stock. The house maintenance margin requirement for your account is set by:
A) the Federal Reserve.
B) theSIPC.
C) theSEC.
D) the stock exchange.
E) your broker.

Answer 29

E

Question 30

29) The absolute minimum initial margin requirement is set by the:
A) brokerage firm.
B) individual investor.
C) Securities and Exchange Commission.
D) Federal Reserve.
E) Security Investors Protection Corporation.

Answer 30

D

Question 31

34) If you opt to purchase shares of stock on margin rather than with cash, you will:
A) have equal rates of return regardless of how the purchase is made.
B) eliminate any potential profit.
C) increase your maximum potential rate of return.
D) guarantee yourself a profit.
E) decrease your maximum potential rate of return.

Answer 31

C

Question 32

35) What is the purpose of a margin call?
A) to advise you that the interest rate on your loan has changed
B) to remind you of the upcoming monthly payment due on your margin loan
C) to let you know the amount of funds that are now available for you to borrow
D) to inform you that your margin loan is due and payable
E) to demand funds to increase your margin position

Answer 32

E

Question 33

36) If you ignore a margin call, your broker:
A) will increase both your margin loan and the rate of interest on that loan.
B) will seize all the assets in your account.
C) will close your account.
D) may sell some of your securities to repay the margin loan.
E) may place a short sale on your behalf to cover the amount of thecall.

Answer 33

D

Question 34

37) Lauren Mitchell has a margin account with a local brokerage firm, RL Brokers. She recently purchased 200 shares of Abbot Industries common stock that trades on the New York Stock Exchange (NYSE). These shares are held in street name and are registered under the name of:
A) Abbot Industries.
B) the New York Stock Exchange.
C) the Securities and Exchange Commission.
D) RL Brokers.
E) Lauren Mitchell.

Answer 34

D

Question 35

38) Which one of the following is generally true concerning securities held in street name?
A) All dividend checks are mailed to your street address.
B) There is a greater likelihood the security may be stolen.
C) The securities are registered under your mailing address rather than your name.
D) The brokerage firm is the owner of record.
E) The annual stock report is mailed directly to your streetaddress.

Answer 35

D

Question 36

39) Sarah has a brokerage account with Jeff, who is a money manager with Downtown Brokers. Sarah pays an all-inclusive annual fee to the firm and Jeff manages her funds. She pays no trading costs or commissions. Which one of the following best describes this type of account?
A) cash
B) advisory
C) margin
D) mutual
E) wrap

Answer 36

E

Question 37

40) A discretionary account:
A) is the account used to pledge securities as collateral for a marginloan.
B) charges an annual fee to cover all trading and management services.
C) is the same as a wrap account.
D) authorizes a broker to trade securities on your behalf.
E) is the term applied to brokerage accounts with check-writing and credit card services.

Answer 37

D

Question 38

41) An investor with a long position in a security will make money:
A) if the price of the security remains stable.
B) only by shorting the security.
C) if the price of the security declines.
D) only if the security has been purchased on margin.
E) if the price of the security increases.

Answer 38

E

Question 39

42) Which one of the following describes a short position?
A) Loaning a security to your broker to cover a margin call
B) Selling a security that you do not own
C) Selling a security that you originally purchased on margin
D) Purchasing a security on margin
E) Having less equity than required in your margin account

Answer 39

B

Question 40

3) On August 8 of this year, Brent sold 500 shares of ADO stock for $24 a share. On September 6 of this year, he purchased 500 shares of ADO stock to cover his position. The transaction on August 8:
A) was a short sale.
B) created a long transaction.
C) was a margin trade.
D) was a wrap transaction.
E) was a pooling transaction.

Answer 40

A

Question 41

44) A short sale:
A) is a bullish outlook towards a security.
B) creates a long position in a stock.
C) involves the borrowing of securities.
D) is the purchase of less than 100 shares of a stock.
E) is the resale of a security within four hours of purchase.

Answer 41

C

Question 42

45) If you benefit when a security decreases in value, you have a ________ position in the security.
A) margined
B) short
C) long
D) covered
E) wrapped

Answer 42

B

Question 43

46) The maximum loss you can incur on a short sale is:
A) unlimited.
B) zero.
C) limited to the margin loan plus interest.
D) limited to your initial margin.
E) limited to your initial equity.

Answer 43

A

Question 44

47) What is the maximum loss you can incur if you have a long position on a stock in a cash account?
A) The initial margin
B) Zero
C) The margin loan plus interest
D) The initial investment
E) Unlimited

Answer 44

D