Investment Quiz 4

Question 1

Which of the following statements about the efficient market hypothesis (EMH) and associated anomalies are CORRECT?

1. An investor purchasing a high price-to-earnings ratio is exploiting the P/E effect anomaly.
2. An investor studying annual reports and analysts’ reports in his stock selection process believes that markets are weak-form efficient.
3. An investor who buys the securities of firms that are not followed by many analysts is trying to benefit from the neglected-firm effect.
4. An investor who befriends the chauffeur of a firm’s CEO to solicit information about the firm’s plans before making investment decisions believes the markets are strong-form efficient.

Answer 1

2 and 3

The P/E effect suggests that portfolios consisting of stocks with low price-to-earnings ratios have higher average returns than do portfolios consisting of stocks with high P/E ratios. Strong-form market efficiency suggests that all public and private information is included in market prices. A person who solicits private information believes that it is possible to profit by making trading decisions based on private information, and does not believe that the markets are efficient in the strong form. Weak-form efficiency suggests that all historical price and volume information is included in stock prices but that gains may be made by analyzing other publicly available information. An investor studying annual reports and analyst’s reports to make stock selections indicates that the person is conducting fundamental analysis, because the investor believes that the markets are weak-form efficient.

Question 2

Which of the following statements concerning preferred stock is NOT correct?
A)
Preferred stock resembles bonds in that dividend income continues forever, unless the stock issue is called or otherwise retired.
B)
If the issuer of a cumulative preferred stock fails to pay the dividend in any year, the unpaid dividend(s) will have to be paid in the future before common stock dividends can be paid.
C)
Preferred stockholders are paid after bondholders but before common stockholders in terms of priority of payment of income and in case of corporate liquidation.
D)
Preferred stock dividends are not legally binding but must be voted on each period by the corporation’s board of directors.

Answer 2

A

Question 3

Which of the following terms best describes funding for product development and marketing for companies who have not sold products or services commercially?
A)
Bridge financing.
 B)
Seed financing.
 C)
First-stage financing.
 D)
Start-up financing.

Answer 3

D

Seed financing is funding for the purpose of research and development of an idea. First-stage financing is for initial manufacturing and sales. Bridge financing is for companies that expect to go public within approximately 1 year.

Question 4

____ financing is funding for the purpose of research and development of an idea

Answer 4

Seed

Question 5

____ financing is for initial manufacturing and sales

Answer 5

First stage

Question 6

_______ financing is for companies that expect to go public within approximately 1 year

Answer 6

bridge

Question 7

Which of the following statements regarding indifference curves is NOT correct?
A)
The increasing slope of the curve shows that investors require ever-increasing amounts of additional returns for the same additional risks, in order to maintain the same level of satisfaction.
B)
A lower indifference curve indicates a higher level of satisfaction.
C)
Indifference curves do not measure satisfaction; they only indicate relative rankings of satisfaction.
D)
Indifference curves show a trade-off between risk and return.

Answer 7

B

a higher indifference curve indicates a higher level of satisfaction

Question 8

Which of the following statements regarding convertible bonds is NOT correct?
A)
Most convertible bonds are secured by the assets of the issuing company.
B)
When the value of the underlying common stock increases, the price of convertible bonds will increase.
C)
Convertible bonds offer investors a fixed interest rate and the opportunity for equity capital appreciation.
D)
At issuance, convertible bonds will typically have a lower yield to maturity than the corporation’s non-convertible unsecured debt.

Answer 8

A

Question 9

Which of the following statements concerning portfolio selection is (are) CORRECT?

1. An alternative way to use the Markowitz model as a selection technique is to think in terms of asset classes, such as domestic stocks, foreign stocks of industrialized countries, stocks of emerging markets, and bonds.
2. The asset allocation decision refers to the allocation of portfolio assets to broad asset classes, such as cash equivalents, bonds, and equities.

Answer 9

both are correct

Question 10

Which of the following statements regarding underwriting is NOT correct?
A)
No more than 20 non-accredited investors may participate in a private placement.
B)
In standby underwriting, the underwriters purchase securities remaining after the initial offering at a predetermined price.
C)
The investment bank incurs zero risk in best efforts underwriting.
D)
All risk is shifted to the underwriter in a firm-commitment underwriting agreement.

Answer 10

A

no more than 35 non-accredited investors may participate in a private placement

Question 11

in ____ underwriting, the underwriters purchase securities remaining after the initial offering at a predetermined price

Answer 11

stabdby

Question 12

The investment bank incurs ___ risk in best efforts underwriting

Answer 12

zero

Question 13

under a ____ underwriting agreement, all risk is shifted to the underwriter

Answer 13

firm commitment

Question 14

Which of the following statements concerning the concept of bond duration is (are) CORRECT?

1. The bond price-yield relationship is linear, so over time, the duration of the bond remains constant.
2. Duration expands with time to maturity but at a decreasing rate, and is inversely related to coupon and yield to maturity.

Answer 14

both are correct

Question 15

All of the following are disadvantages of investing in foreign securities EXCEPT:
A)
lack of complete information about foreign companies.
B)
fluctuations in the value of currencies.
C)
changes in foreign government or government policies.
D)
high correlation with U.S. securities.

Answer 15

D

Question 16

If each of the following bond matures in ten years, which one is the most volatile?
A)
Zero-coupon bond with 8% yield.
B)
Corporate bond priced at par with 6% yield.
C)
Zero-coupon bond with 6% yield.
D)
Corporate bond priced at par with 8% yield.

Answer 16

C

Question 17

An investor who carefully chooses a bond that has a duration that matches the investor's required holding period is practicing:
A)
a passive holding strategy.
 B)
an active management strategy.
 C)
an indexing strategy.
 D)
an immunization strategy.

Answer 17

D

Question 18

Which of the following statements regarding private activity bonds is CORRECT?
A)
Less than 5% of the proceeds of the issue are used for private business use.
B)
Interest is paid by the revenues received on the public project being financed by the bonds.
C)
Private activity bonds are issued by corporations to finance administrative projects.
D)
They are issued by municipalities to provide local industries with the necessary funds to purchase plants and equipment.

Answer 18

D

Question 19

The random walk hypothesis is supported when:

1. future price changes are not correlated with past price changes.
2. stock price changes are random but predictable.
3. stock prices respond rapidly to new information.
4. past information is not useful in predicting future price changes.

Answer 19

1, 3, and 4

Question 20

Which of the following statements concerning technical analysis as an approach to selecting securities is NOT correct?
A)
The rationale for technical analysis is that stock prices require time to adjust to changes in supply and demand.
B)
Technical analysis is only applied to the aggregate market, not to individual stocks.
C)
Price and volume are the primary tools of the technical analyst.
D)
The emphasis of technical analysis is on internal factors that help to detect supply and demand conditions in the market.

Answer 20

B

Question 21

Which of the following statements concerning ‘top-down’ fundamental security analysis is (are) CORRECT?

1. The analysis of individual companies, the last of three steps in ‘top-down’ fundamental security analysis, encompasses all the basic financial variables of the company, such as sales, management, and competition.
2. A stock’s intrinsic value is compared to its current market price in order to determine whether the stock is undervalued or overvalued.

Answer 21

both are correct

Question 22

A ______ is a strategy involving the sale of a call option to supplement a long position in an underlying asset.

Answer 22

covered call

Question 23

In a financial market:
A)
that is efficient, the prices of securities will not differ from their justified economic values for any length of time.
B)
investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH).
C)
investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities.
D)
that is efficient, new information will be slowly reflected in securities prices.

Answer 23

A

Question 24

Which of the following statements regarding investment risk are CORRECT?

1. A firm’s decision to buy back some of its own stock in the open market by borrowing funds through a new bond issue is an example of reinvestment rate risk.
2. Rising inflation represents purchasing power risk.
3. A decline in a firm’s share price as a result of a 20% decline in the S&P 500 Index represents market risk.
4. A reduction in the value of an international stock mutual fund as a consequence of a depreciation of the Euro is an example of exchange rate risk.

Answer 24

2, 3, and 4

Question 25

A firm’s decision to buy back some of its own stock in the open market by borrowing funds through a new bond issue is an example of _____ risk.

Answer 25

financial

Question 26

Which of the following statements regarding the bond ladder strategy is CORRECT?

A)
The bond ladder strategy is used to immunize a portfolio against interest rate risk.
B)
The bond ladder strategy is generally more aggressive than the barbell strategy.
C)
The bond ladder strategy involves the purchase of a mixture of very long-term and very short-term bonds.
D)
A laddered portfolio will provide lower yields than a portfolio consisting entirely of short-term bonds.

Answer 26

A

Question 27

The ____strategy involves the purchase of a mixture of very long-term and very short-term bonds

Answer 27

barbell

Question 28

true or false?

the barbell strategy is more aggressive than the ladder strategy

Answer 28

true

Question 29

A laddered portfolio will provide ___ yields than a portfolio consisting entirely of short-term bonds.

Answer 29

higher

Question 30

Which of the following is a reason an investor may choose preferred stock?
A)
Guaranteed returns.
 B)
Capital appreciation.
 C)
Hedge against inflation.
 D)
High dividend income.

Answer 30

D

Question 31

Preferred stocks are considered a hybrid security because they:

1. Offer guaranteed income.
2. Represent equity ownership.
3. Pay dividends based on a stated percentage of the par value of the stock.
4. Are issued for perpetuity.

Answer 31

2, 3, and 4

Question 32

Two months ago, an investor purchased a call option trading for $3 with an exercise price of $30. The stock's market price was $32. What was the time value of the call option?
A)
$3.
 B)
$6.
 C)
$1.
 D)
$2.

Answer 32

C

Question 33

Which of the following statements regarding index options is NOT correct?
A)
Investors often buy call index options to hedge against the risk of a decline in the value of their long positions in stocks.
B)
When exercised, index options result only in cash settlement.
C)
Index options allow investors to earn a return associated with the movements in the market.
D)
Investors can profit from a decline in the stock market by purchasing a put index option.

Answer 33

A