1. If you invested in a long-term U.S. Treasury bond to hold to maturity, which form of risk should most concern you?
A. Prevailing interest rates will decline during the life of the bond.
B. Prevailing interest rates will rise during the life of the bond.
C. Rates will be higher when the bond matures.
D. Rates will be lower when the bond matures.
2. An investor willing to forgo FDIC insurance and unwilling to risk loss of principal could invest using
A. money market instruments.
B. repurchase agreements.
C. financial intermediaries.
3. Demand for liquidity means demand for
A. rising interest rates.
4. If the bid-ask spread narrows, which of the following is the most likely cause?
A. Transaction volume is rising.
B. Fewer specialists trade the issue.
C. Price of the security will probably rise.
D. The market has sustained a large increase in odd lot trading.
5. If you believe that markets are efficient, with which of the following statements do you agree?
A. Some portfolios may assume the same level of risk and earn different rates of return.
B. Investment returns in one industry tend to match returns in other industries.
C. Low-cost investments consistently yield higher returns than investments with moderate costs.
D. Investors can’t, on average, outperform the market.
6. If you’ve noticed rapidly rising gasoline prices, what could you infer?
A. Gasoline prices have reached a new equilibrium.
B. Supply for gasoline has surpassed a new high.
C. Demand for gasoline is rising.
D. The quantity of gasoline bought exceeds the quantity of gasoline sold.
7. Through diversification, investors can reduce _______ risk.
B. purchasing power
8. If you wanted to participate in the IPO market, which of the following documents should
you study before investing?
A. Preliminary prospectus
D. Security certificate
9. Which of the following statements is correct?
A. Margin accounts describe accounts with marginal investments.
B. Margin accounts expose the investor to increased risk and the potential for increased return.
C. Margin accounts are commonly referred to as maintenance accounts.
D. Margin accounts aren’t suitable for retired investors.
10. A chief executive office of a corporation is preparing to issue stock, and the executive wants to minimize the risk of raising less cash than needed. The executive should
A. hire a brokerage firm to advise him or her on the issue.
B. register the issue with the Securities and Exchange Commission.
C. employ an underwriter under a firm commitment agreement.
D. enter a best-efforts agreement with an investment banker.
11. A friend announces a plan to benchmark the performance of his small-cap stocks with the S&P 500. Which of the following concerns should dominate your thoughts?
A. The risk and return of small-cap stocks and the S&P 500 aren’t matched. The comparison is inappropriate.
B. Problems with small-cap benchmarking were recently revealed. Russell 2000 index elements frequently change.
C. This investor is serious about managing his portfolio, and he’s on the right track, though you have suggestions for fine-tuning his approach.
D. The investor’s portfolio is too heavily weighted in small-cap stocks. This problem is an allocation error driven by demand for excess returns.
12. Suppose you’re a mutual fund investor, and you want to minimize expenses while maximizing the probability of achieving performance that exceeds the performance of most mutual funds. If you narrowed your alternatives to the following, which should you select?
A. Purchase an actively managed no-load fund that doesn’t charge 12b-1 fees and that invests in small-cap stocks.
B. Purchase an index fund that mirrors the S&P 500
C. Buy a WEBS tied to the Ireland stock market.
D. Buy the highest rated growth fund.
13. If you believe a stock’s market value is about to drop, you could profit in the decline by
_______ the stock.
A. assuming a long position in
B. assuming a bearish outlook on
C. assuming a short position in
D. placing a market order in
14. One of the ways investors benefit from federal security laws is through
A. FDIC insurance, which protects investor principal.
B. disclosures requiring that corporations reveal all information about the corporation.
C. SIPC insurance, which protects market values from declining beyond a certain limit.
D. disclosures and prohibitions that reduce the risk of stock price manipulation.
15. If you knew a bond would pay you $50 every year for 10 years and, at the end of the 10
years, you’d also receive a $1,000 payment, how much should you pay to purchase the
bond? Assume similar bonds yield 8 percent, and select the value closest to the
A. Not more than $336
B. Not more than $463
C. Not more than $733
D. Not more than $799
16. If an investor planned to put aside $30 per month for the next 20 years, and the investor
combined that with $1,000 already saved, how much should the investment be worth after
20 years? Assume 9 percent annual growth with monthly compounding, and select the
value closest to the correct answer.
17. Which of the following portfolios with zero risk lies closest to the efficient frontier?
A. Return = 7.8 percent, standard deviation = 3.0
B. Return = 0 percent, standard deviation = 0
C. Return = 8 percent, standard deviation = 3.0
D. Return = 5 percent, standard deviation = 0
18. What is the return on the following portfolio?
Asset 1, representing 50 percent of the portfolio value 6%
Asset 2, representing 30 percent of the portfolio value 10%
Asset 3, representing 20 percent of the portfolio value 12%
A. 8.40 percent
B. 8.60 percent
C. 9.20 percent
D. 9.33 percent
19. Which of the following statements is correct? (Not 100% Sure)
A. When calculating the risk of a portfolio, you should adjust the process by the covariance, or interrelationship, of security price dispersion.
B. When calculating the risk of a portfolio, you should add the weighted average of the standard deviation of each member of the portfolio.
C. When calculating the risk of a portfolio, you should find the weighted average return of the members of the portfolio and divide by the mean standard deviation of the members.
D. When calculating the risk of a portfolio, you should adjust the process by the correlation coefficient of security price dispersion.
20. Which of the following assets would work well in an emergency reserve fund?
A. High-yielding corporate bonds
B. Certificates of deposit with long maturities
C. Income stocks
D. Money market funds
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