Practice questions Quiz 1 FIR 3710 Investments 1. Why are derivatives potentially dangerous? A) They involve leverage.

B) They are used to hedge. C) They are a tool for risk management. D) There are more than 1200 different derivatives on the market. 2. __________ assets generate net income to the economy and __________ assets define allocation of income among investors. A) Financial, financial B) Financial, real C) Real, financial D) Real, real 3. Asset allocation refers to the __________. A) allocation of the investment portfolio across broad asset classes B) analysis of the value of securities C) choice of specific assets within each asset class D) none of the above 4. A __________ represents an ownership share in a corporation. A) call option B) common stock C) fixed-income security D) none of the above 5. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. A) Active B) Idiotic C) Passive D) none of the above 6. Security selection refers to __________.

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A) B) C) D)

choosing specific securities within each asset-class deciding how much to invest in each asset-class deciding how much to invest in the market portfolio versus the riskless asset none of the above

7. The success of common stock investments depends on the success of __________. A) derivative securities B) fixed income securities C) the firm and its real assets D) none of the above 8. __________ is a true statement. A) Dividends on preferred stocks are tax-deductible B) Common dividends are paid before preferred dividends C) Preferred stockholders have voting power D) Preferred dividends are usually cumulative 9. __________ is not a true statement regarding municipal bonds. A) A municipal bond is a debt obligation issued by state or local governments. B) A municipal bond is a debt obligation issued by the Federal Government. C) The interest income from a Municipal bond is exempt from federal income taxation. D) The interest income from a Municipal bond is exempt from state and local taxation in the issuing state. 10. In a futures contract, the short position is taken by the person who __________. A) commits to delivering the commodity B) commits to purchasing the commodity C) plays between second base and third base D) uses his margin 11. Treasury bills are financial instruments initially sold by __________ to raise funds. A) commercial banks B) the Federal Government C) large corporations D) state and city governments 12. __________ is not a money market instrument. A) A certificate of deposit B) A treasury bill C) A treasury bond

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D) Commercial paper 13. __________ market-value weighted. A) The New York Stock Exchange Composite index is B) The Standard & Poor's Composite 500 Stock index is C) The Wilshire 5000 index is D) All of the above are 14. The Dow Jones Industrial Average is computed by __________. A) adding the prices of 30 large "blue-chip" stocks and dividing by 30 B) calculating the total market value of the 30 firms in the index and dividing by 30 C) adding the prices of the 30 stocks in the index and dividing by a divisor D) adding the prices of the 500 stocks in the index and dividing by a divisor 15. A 5%, 15 year annual coupon bond issued by the State of Georgia is priced to yield 8%. If you are in the 28% tax bracket for coupons received and 15% tax bracket for capital gains, this bond would provide you with an equivalent taxable yield of __________ A) 5.76% B) 9.2% C) 10.4% D) None of the above 16. The price which the owner of a call option must pay in order to purchase the stock named in the option contract is called the __________ A) purchase price B) exercise price C) strike price D) More than one of the above 17. The largest and most liquid companies trading over-the-counter are ______. A) listed on pink sheets B) posted on the OTC Bulletin Board C) listed on the NASDAQ National Market System D) listed on the NASDAQ Small Cap Market 18. Purchases of new issues of stock take place __________. A) at the desk of the Fed B) in the primary market C) in the secondary market D) none of the above

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19. __________ is a false statement regarding specialists. A) On a stock exchange all buy or sell orders are negotiated through a specialist B) Specialists can not trade for their own accounts C) Specialists earn income from commissions and spreads in stock prices D) Specialists stand ready to trade at quoted bid and ask prices 20. A prospectus is __________. A) a description of a firm and the security it is issuing B) a privately placed security C) the Latin word for prospector D) none of the above 21. The bulk of most initial public offerings (IPOs) of equity securities go to ____________. A) institutional investors B) individual investors C) the firm's current shareholders D) day traders 22. In a __________ underwriting arrangement, the underwriter assumes the full risk that shares cannot be sold to the public at the stipulated offering price. A) best efforts B) firm commitment C) private placement D) none of the above 23. The bid-ask spread exists because of ________________. A) market inefficiencies B) poor communication C) the need for dealers to cover expenses and make a modest profit D) none of the above 24. Assume you purchased 200 shares of XYZ common stock on margin at $80 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is __________. A) $4000 B) $6400 C) $9600 D) $16,000

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25. The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. A) Net Asset Value B) Average Asset value C) Gross Asset Value D) Total Asset Value 26. Assume that you have recently purchased 10,000 shares in an investment company that is reporting $15 million in assets, $5 million in liabilities, and has 100,000 shares outstanding. What is the Net Asset Value (NAV) of these shares? A) $150 B) $100 C) $50 D) $10 27. __________ fund is one where there is a sales commission charged on either buying or exiting the fund. A) A load B) A no-load C) An index D) All of the above 28. __________ funds stand ready to redeem or issue shares at their net asset value. A) Closed-end B) Index C) Open-end D) All of the above 29. The ratio of trading activity of a portfolio to the assets of the portfolio, is called ____________ . A) the reinvestment ratio B) the trading rate C) turnover D) None of the above 30. Borrowing a security from your broker in order to sell it, with the intention of repurchasing it later when the price is lower, is called ____________. A) post-purchasing B) pre-selling C) short-selling

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D) reverse investing

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Answer Key -- practice q1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. A C A B C A C D B A B C D C C D C B B A A B C B A B A C C C

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