Chapter 16

Question 1

investor (16)

Answer 1

Individuals who purchase investments with current savings in anticipation of relatively stable growth on average or in the long term.

Question 2

speculators (16)

Answer 2

Individuals who take relatively large risks hoping to earn quick, abnormal returns; they gamble on whether the prices of financial assets believed to be mispriced will be adjusted accordingly in the market

Question 3

income securities (16)

Answer 3

investments, such as preferred stock and corporate bonds, that offer steady income in the form of dividends or interest payments

Question 4

risk tolerance level (16)

Answer 4

an investor’s ability and willingness to tolerate, or accept, risk.

Question 5

transaction cost (16)

Answer 5

the costs associated with trading securities, which include the costs of time, effort, and telephone calls as well as any broker commissions incurred.

Question 6

investment portfolio (16)

Answer 6

a combination of investment instruments

Question 7

asset allocation (16)

Answer 7

the proportion of funds invested in various categories of assets, such as money market instruments, long-term debt, stocks, and real estate.

Question 8

broker (16)

Answer 8

A middleman, or agent, who helps investors trade financial instruments such as stocks, bonds, and derivatives

Question 9

full-service brokerage firm (16)

Answer 9

A brokerage firm that offers a variety of services to its clients, including research information, monthly publications that contain investment recommendations, advisory services, and so forth

Question 10

round lots (16)

Answer 10

Multiples of 100 shares of a security

Question 11

odd lots (16)

Answer 11

Number of shares that are not in multiples of 100

Question 12

market order (16)

Answer 12

An order to execute a transaction at the best price available when the transaction reaches the market

Question 13

stop order (16)

Answer 13

an order that specifies the price at which a market order is initiated

Question 14

limit order (16)

Answer 14

an order to buy or sell a stock at no worse than a specified price

Question 15

day order aka DO (16)

Answer 15

an instruction to cancel an order if the price conditions are not met by the end of the trading day

Question 16

Good ‘Til Cancelled aka GTC (16)

Answer 16

an instruction to keep an order active until the price limitation are met or until the investor cancels it

Question 17

fill or kill order (16)

Answer 17

an instruction to cancel the order if it is not executed immediately

Question 18

street name (16)

Answer 18

a situation in which stock is registered to the brokerage firm rather than the individual investor

Question 19

stock symbol (16)

Answer 19

the trading initials of a company; the reference used by brokers when trades are made and price quotes are retrieved

Question 20

holding period return aka HPR (16)

Answer 20

The return earned over the period of time that an investment is held, which might be six months, one year, or five years.

Question 21

dividend yield (16)

Answer 21

The part of the total return associated with the dividends paid by the firm. It is computed by dividing the amount of dividends paid by the current stock price.

Question 22

capital gain (16)

Answer 22

A change in the market value of a security

Question 23

simple arithmetic average return (16)

Answer 23

a technique for computing the average return on an investment that sums each return and then divides by the number of returns; it does not consider compounding

Question 24

geometric average return (16)

Answer 24

A technique for computing the average return on an investment that involves taking the nth root of the growth multiple and subtracting 1. It considers compounding.

Question 25

market capitalism (16)

Answer 25

The total market value of a firm’s stock, which can be computed by multiplying the number of shares outstanding by the market price per share

Question 26

bull market (16)

Answer 26

A rising stock market

Question 27

bear market (16)

Answer 27

A falling stock market

Question 28

buy-and-hold strategy (16)

Answer 28

When investors purchase securities with the intention of holding them for a number of years

Question 29

margin trading (16)

Answer 29

When an investor borrows from his or her broker some portion of the funds needed to purchase an investment

Question 30

margin requirement (16)

Answer 30

the minimum percentage of the total purchase price that an investor must have to buy stock (or other investments) on margin

Question 31

hypothecation agreement (16)

Answer 31

A contract that assigns securities as collateral for a margin loan.

Question 32

broker loan rate (16)

Answer 32

The rate charged by brokers to borrow funds for margin trading.

Question 33

margin call (16)

Answer 33

A call from the broker to add more funds to a margined account.

Question 34

maintenance margin (16)

Answer 34

The lowest actual margin that the broker permits margined investors to have at any time

Question 35

short selling

Answer 35

A situation in which an investor borrow the stock of another investor and then sells it, but promises to replace the stock at a later date.