Practice Flashcards
Financial intermediaries that buy securities from and sell securities to investors are best described as:
Dealers maintain inventories of securities and buy them from and sell them to investors. Brokers do not trade directly with clients but find buyers for and sellers of securities to execute customer orders. Investment banks are primarily involved in assisting with the issuance of new securities. (Module 36.1, LOS 36.d)
An investor purchased 550 shares of Akley common stock for $38,500 in a margin account and posted initial margin of 50%. The maintenance margin requirement is 35%. The price of Akley, below which the investor would get a margin call, is closest to:
Po = 38500/550
Price of Margin Call = Po * (1-0.5)/(1-0.35)
An index of three non-dividend paying stocks is weighted by their market values. One of the index stocks splits 2-for-1 during the year, but no shares are sold. The total return of this index for the year is:
Because the stocks in the index do not pay dividends, there is no difference between the price return and the total return of the index. (Module 37.1, LOS 37.b)
Which of the following market indexes is likely to be rebalanced most frequently? An index that is:
An equal-weighted index is not equal weighted after even one day, unless all stocks in the index change by the same percentage. A change in share price preserves the weightings in a value-weighted index and preserves the weightings in a price-weighted index unless the price change results from a stock split or stock dividend. (Module 37.2, LOS 37.f)
Assuming the value effect persists over time, which of the following strategies would be most likely to earn positive abnormal returns? Purchase stocks with:
The value effect refers to value stocks outperforming growth stocks on a risk-adjusted basis. Value stocks have low price-to-earnings or market-to-book ratios, or high dividend yields. Growth stocks have high price-to-earnings or market-to-book ratios, or low dividend yields. If the value effect persists over time and is not the result of inadequate adjustment for risk, buying value stocks will produce positive abnormal returns. (Module 38.1, LOS 38.f)
Which of the following orders is said to be “behind the market”?
A limit buy order is behind the market if its limit price is below the best bid. A limit sell order is behind the market if its limit price is above the best ask. Market orders are never said to be behind the market.
(Module 36.3, LOS 36.h)
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:
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.
A trading system that matches buyers and sellers based on price and time precedence is most likely a(n):
Explanation
In an order-driven market, buy orders and sell orders are matched up by the exchange according to order matching rules. In a quote-driven market, customers trade with dealers at bid and ask prices set by the dealers. In a brokered market, brokers organize trades among their clients.
(Module 36.3, LOS 36.j)
Preferred stock most likely has a:
Preferred stock typically pays a fixed dividend and does not mature.
(Module 41.2, LOS 41.g)
Austin Bruno, CFA, places a fill or kill, limit buy order at 92 for a stock. Bruno’s order specifies:
Explanation
Fill or kill is a validity instruction as it indicates when the order can be filled (i.e. immediately or cancel the order). A limit buy order is an execution instruction as it indicates how the order should be filled (e.g. buy at $92 or less). Clearing instructions indicate how to settle the trade (i.e., how and when to transfer the cash and the security).
(Module 36.3, LOS 36.g)
High return on invested capital and high pricing power are most likely to be associated with an industry that has:
High return on invested capital and high pricing power are associated with high industry concentration (i.e., small number of firms), high barriers to entry, and low industry capacity.
(Module 40.2, LOS 40.h)
