FINC5210: Investments - Exam #1. This exam consists of 25 questions, each worth 4 points, for a total of 100 points. Please select the BEST answer for each question. Circle the letter for that answer on the sheet below. Good luck.
Name _______________________________________
1. a b c d e 14. a b c d e
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13. a b c d e
1. Which of the following determines today’s closing price of a share of stock?
a. The latest earnings per share announcement
b. The current stage of the economic cycle
c. What the rest of the market did today
d. The last price which buyers and sellers of the stock agreed upon
e. The price set by the “market maker” for the stock
2. Which of the following statements is NOT true regarding the risk associated with an investment?
a. An investment’s risk premium is equal to the difference between the historical return of the investment and the historical return of a theoretically risk-free benchmark investment, such as Treasury bills.
b. In general, the higher the historical returns of an investment, the higher the level of risk in any given year.
c. One method of determining the risk of an investment is to look at the variability of its historical returns (year by year); higher variability (in terms of standard deviation) usually means higher risk.
d. Historical studies have proven that there is a positive correlation between historical returns and historical risk.
e. All of the above are true.
3. Which of the following statements is true regarding the different types of brokers one might use for investment purposes?
a. A full-service broker will have the highest costs and should be expected to provide personalized service.
b. A discount broker should have lower costs than a full-service broker, but may still provide some of the services provided by a full-service broker.
c. The only difference between a discount broker and a deep-discount broker is the amount of commissions charged for a stock transaction.
d. All of the above are true.
e. Only a. and b. are true.
4. Which of the following statements is NOT true regarding margin?
a. Margin provides an investor with leverage.
b. Margin allows you to borrow money from your broker and use that money to buy stocks.
c. Margin is required to sell stocks short.
d. In a margin account, you can have your stocks registered in your own name or in your broker’s name.
e. If you buy stocks on margin, and the value of those stocks falls, you will receive a margin call from your broker. This means you will need to add money to your account or sell some of your stocks or both.
5. Which of the following statements is true regarding selling stocks short?
a. If you plan to hold the short position for more than 6 months, you are said to be “long” in the stock. If you plan to hold the short position for less than 6 months, you are said to be “short” in the stock.
b. When you believe the price of a stock is about to fall, you can sell it short. This means you will borrow shares of the stock from your broker and sell them, planning to buy them back later at a lower price.
c. You can sell a stock short at any time during the trading day, regardless of its price action. If the latest three quotes for the stock have been 21.00, 20.75, and 20.50, and then you sell the stock short, your price will be 20.50 or lower.
d. All of the above are true.
e. Only b. and c. are true.
6. Which of the following types of investments is based upon a tangible asset?
a. Common stock
b. Preferred stock
c. Corporate bonds
d. All of the above
e. Only a. and b.
7. Which of these statements is true regarding common and preferred stock?
a. They both represent ownership in a company.
b. Preferred stock has historically been considered to have lower overall risk than common stock.
c. Preferred stocks pay dividends in similar fashion to the way bonds pay interest, while common stocks may or may not pay dividends.
d. All of the above are true.
e. Only a. and c. are true.
8. In class, we discussed derivatives. Which of the following statements is NOT true regarding these types of investments?
a. Futures involve a contract to be fulfilled in the future, with no money exchanging hands at the present time.
b. Options involve the right to execute the option in the future, with a cost associated with that right which must be paid at the present time.
c. Futures contracts can be established for commodities as well as financial instruments.
d. Options can be bought which give the owner of the option the right to buy (or sell) a specific number of shares of stock at a given price some time in the future.
e. All of the above are true.
9. Which of the following statements best describes fixed-income investments?
a. They generally carry the same level of risk as equity investments.
b. The market price of a fixed-income investment will generally fluctuate in the opposite direction as interest rates.
c. Corporate bonds represent ownership in the corporation.
d. Regardless of how low a bond price may drop, you will always receive the full amount of the bond when it reaches the maturity date.
e. Once you buy a Treasury bill, you cannot sell it until it matures.
10. Which of the following classifications of mutual funds would contain funds that invest in a mixture of stocks, bonds, and cash?
a. Asset Allocation funds
b. Equity income funds
c. Growth and income funds
d. All of the above
e. Only a. and b.
11. It is widely reported that index funds which track the S&P-500 index regularly outperform a large percentage of all stock funds each year. Which of the following reasons might explain this phenomenon?
a. Fund fees eat up a large percentage of the profits.
b. Fund managers are limited in how much of a fund can be invested in a specific company. Therefore, they are forced to diversify into a large number of companies.
c. Fund managers will attempt to achieve the goals of their funds, which may mean investing in stocks even when the stock market is moving down.
d. All of the above
e. Only b. and c.
12. Go to the Fidelity Investments web site at www.fidelity.com. In the left margin, click on the “Mutual Funds” link. Then click on the “Learn about Fidelity funds” link. Then click on the “Browse our funds” link. Which of the following funds would be best described as a “balanced” fund?
a. Puritan fund
b. Equity-Income fund
c. Capital Appreciation fund
d. Magellan fund
e. None of the above
13. Go to the Fidelity Investments web site at www.fidelity.com. In the left margin, click on the “Mutual Funds” link. Then click on the “Learn about Fidelity funds” link. Then click on the “Browse our funds” link. Which of the following funds would be classified as having volatility nearest to the level of volatility of the market in general?
a. Large Cap Stock fund
b. Value fund
c. Growth Company fund
d. Blue Chip Growth fund
e. Puritan fund
14. Assume you have determined that a specific sector of the economy should experience significant growth over the next year. Which of the following investments would allow you to invest in that sector for the next year?
a. Buying shares of a sector fund, such as the “Select Portfolio” funds at Fidelity
b. Buying shares of one of the sector iShares through your broker
c. Buying shares of a growth mutual fund that currently holds a large number of stocks in a specific sector.
d. All of the above.
e. Only a. and b.
15. Mutual funds charge fees to invest your money in stocks. Which of the following fees pertain to the payment of distribution and marketing costs by the fund company?
a. Management fees
b. Sales charges
c. Other expenses
d. 12b-1 fees
e. None of the above
16. When you enter an order with your broker to buy 100 shares of XYZ stock, who actually is responsible to get the best price for your order?
a. The specialist who makes the market in XYZ.
b. The commission broker.
c. The floor broker.
d. The floor trader.
e. None of the above.
17. You currently own 100 shares of XYZ stock, which is trading at $50 per share. You want to sell the stock if the price drops to $45, and you are willing to take any price ($45 or under) once the $45 price has been hit during the daily trading activity in XYZ. Which type of order should you enter with your broker?
a. A market order to sell 100 shares of XYZ.
b. A stop-limit order to sell 100 shares of XYZ when the price hits $45.
c. A stop-loss order to sell 100 shares of XYZ when the price hits $45.
d. A short-sale order for 100 shares of XYZ at $45.
e. None of the above.
18. Which of the following statements is NOT true regarding the New York Stock Exchange (NYSE) and the Nasdaq?
a. The NYSE is a physical location where orders to buy and sell shares of stock are processed by individuals responsible for making the market for stocks.
b. The Nasdaq is a computer network of individuals who make the market for stocks.
c. The NYSE consists of larger, more established companies, while the Nasdaq consists of newer, smaller companies, resulting in the NYSE having a much larger number of companies and much higher trading volume than the Nasdaq.
d. On the NYSE, there is usually one individual responsible for making the market for a specific stock; on the Nasdaq, several individuals may make the market for a specific stock.
e. All of the above statements are true.
19. Which of the following stock market averages or indexes consists of the 30 large, established companies traditionally thought to represent American industry?
a. S&P-500.
b. NYSE composite.
c. Dow Jones composite.
d. Nasdaq 100.
e. None of the above.
20. Fundamental analysis of company can be used to determine:
a. What the price of the company’s stock “should” be today.
b. What the price of the company’s stock “should” be at some time in the future.
c. Whether the price of a company’s stock is fairly valued by the market in terms of the company’s fundamentals.
d. All of the above.
e. Only a. and c.
21. Assume the following about company XYZ:
Which of the following reflects a reasonable current value (in whole dollars) for XYZ stock using the dividend discount method?
a. $275
b. $196
c. $167
d. $42
e. None of the above
For the following two questions, assume the following about company XYZ:
22. Using earnings, what would be a reasonable price forecast for XYZ stock (in whole dollars)?
a. $50
b. $63
c. $72
d. $100
e. None of the above
23. Which price ratio method would provide the highest price forecast for XYZ?
a. Earnings.
b. Cash flow.
c. Sales.
d. The price forecasts for these three methods would be the same.
e. Price forecasts can’t be calculated for all three methods with the data provided.
24. Which of the following statements is NOT true regarding price ratio analysis?
a. Using price ratio data to calculate a projected stock price assumes that the basis for the price ratio can be projected into the future.
b. Future projections are sometimes based on historical averages.
c. Future projections are sometimes based on assumptions about the company’s financial future, such as might be developed using pro forma financial statements.
d. Price ratio analysis can include assumptions about non-financial aspects of the company’s operation, such as future changes in management, marketing, and product lines.
e. All of the above are true.
25. In which of the following cases would using price ratio analysis be a clearly superior choice to using dividend discount analysis?
a. When the stock has a very high P/E ratio.
b. When the stock has a very low P/E ratio.
c. When the stock’s dividend growth has been rising for several years.
d. When the stock does not pay a dividend.
e. None of the above.