Practice MCQ Midterm 1

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Economics

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Feb 20, 2024

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ECON 340 Midterm #1 Practice MCQ Chapter 1 1. Stocks are a(n) ________ investment representing ________ of a business. A) direct; ownership B) direct; debt C) indirect; ownership D) indirect; debt 2. Which of the following has declined in both the US and Canada in recent years? A) direct ownership of stock by individual investors B) the percentage of foreign stocks held in typical portfolios C) institutional ownership of common stocks D) the timeliness of information available to investors 3. Investors seeking a diversified, professionally managed portfolio of securities can purchase shares of A) preferred stock. B) convertible securities. C) insurance policies. D) mutual funds. 4. Which of the following represent investment goals? I. saving for major expenditures such as a house or education II. sheltering income from taxes III. increasing current income IV. saving funds for retirement

A) I and IV only B) III and IV only C) I, III and IV only D) I, II, III and IV 5. A well-conceived investment policy statement will take into account A) the investor's current age and economic situation. B) the investor's preference for frequent or infrequent trading. C) the types of investments the investor is willing to consider. D) all of the above. 6. A person's marginal tax rate is the rate they pay A) on the next dollar of income. B) on all income. C) only on investment income. D) only on earned income. 7. The primary risk associated with a short-term investment is A) purchasing power risk. B) default risk. C) interest rate risk. D) economic risk. 8. Which of the following short-term investments provide the most liquidity? A) a guaranteed investment certificate B) a corporate bond C) money market mutual funds D) a chequing account

9. Canada Deposit Insurance Corporation (CDIC) insures up to $100,000 per account for A) deposits in Chequing Accounts. B) deposits in Savings Accounts. C) chequing and savings accounts in Credit Unions. D) all of the above. 10. In Canada, the most prestigious designation for financial planners is A) CFP. B) CPA. C) CLU. D) IA. Chapter 2 11. Short-term securities are bought and sold in the A) capital market. B) primary market. C) money market. D) stock market. 12. The US government agency that oversees the capital markets is the A) Federal Trade Commission. B) Federal Reserve. C) Securities and Exchange Commission. D) Fair Trade and Banking Agency. 13. Stocks and bonds are traded in A) securities and exchange commissions. B) money markets. C) federal trade commissions. D) capital markets.

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14. Which of the following statements concerning the primary market is correct? A) A transaction in the primary market is between two private stockholders. B) The first public sale of a company's stock in the primary market is called a seasoned new issue. C) The first public sale of a company's stock is called an IPO. D) A rights offering is a direct sale of stock to an institution that participates in the primary market. 15. A rights offering is the A) initial offering of securities to the public. B) offering of new securities to current shareholders on a pro-rata basis. C) sale of newly issued shares of stock to the general public. D) sale of securities directly to a select group of investors. 16. The document that describes the issuer of a security's management and financial position is known as a A) balance sheet. B) 10-K report. C) prospectus. D) red herring. 17. When the offer price is lower than the market price on the first day of trading, the difference is known as A) the spread. B) overpricing. C) the underwriter's fee. D) underpricing.

18 . Relative to a traditional IPO process, a direct listing A) can save the issuer millions of dollars in investment banking fees. B) is illegal in Canada. C) is much more costly, so it is rarely used. D) has a much longer road show. 19. Which of the following are correct statements concerning the NYSE? I. Each stock has a designated location, called a post, at which its shares are traded. II. The NYSE is a dealer market. III. Supply and demand determine the price of each security. IV. A designated market maker buys and sells to maintain a market for a particular security. A) I and II only B) I and III only C) I, III and IV only D) I, II, III and IV 20. A market where securities are bought from, or sold to, a market maker is known as a A) broker market. B) dealer market. C) exchange floor. D) board of exchange. 21. Large technology companies such as IBM and Microsoft trade A) exclusively on the NASDAQ. B) exclusively on the NYSE. C) on either the NASDAQ or the NYSE. D) exclusively on alternative trading systems.

22. The dominant exchange for trading options contracts is the ________. The dominant player in the trading of futures contracts is ________. A) NYSE; Nasdaq BX B) PHLX; CBOE C) CBOE; CME Group D) ISE; CBOT 23. ECNs are A) publicly owned auction markets for listed stocks. B) networks that transact trades between institutional investors. C) facilities used by market makers for trading unlisted securities. D) part of the third market, which trades listed securities between individual investors. 24. Which of the following are associated with bull markets? I. investor pessimism II. government stimulus III. economic recovery IV. low inflation A) I and II only B) II and III only C) I, II and III only D) II, III and IV only 25. The ask price is always ________ the bid price. A) higher than B) lower than C) equal to D) unrelated to

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26. At the market close on June 13, 2019, Alphabet Inc. (GOOG) common stock was trading at an ask price of $1,099.99 and a bid price of $1,082.04. What is the bid/ask spread? A) $14.32 B) $17.95 C) $21.32 D) $32.04 27. Including foreign investments in a portfolio A) increases the overall risk of the portfolio. B) reduces the potential rate of return. C) provides potential benefits from changes in currency values. D) limits the diversification amongst industries. 28. Which of the following can be encountered when investing in foreign markets? I. foreign taxation of dividends II. different accounting standards for financial disclosure III. restrictions on types of investments IV. illiquid markets A) II and III only B) II and IV only C) I, II and IV only D) I, II, III and IV 29. The effects of fluctuating foreign exchange rates may I. increase an investor's rate of return. II. decrease an investor's rate of return. III. be avoided by investing in ADRs. IV. be avoided by investing in mutual funds that specialize in foreign stocks.

A) I and II only B) I and III only C) III and IV only D) I, II, III and IV 30. The Investment Industry Regulatory Organization of Canada (IIROC) is responsible for A) insider trading. B) IPOs. C) setting regulatory and investment industry standards, overseeing investment dealers, and monitoring all trading activity in equity and debt markets in Canada. D) accounting and public information. 31. Which of the following statements about margin trading is correct? A) The IIROC sets the minimum margin requirement for margin trading. B) If Arun buys $1,000 worth of stock using a 60% margin, he will need to pay $400 in cash to make the purchase. C) Purchasing stocks on margin is less risky than purchasing stocks by paying cash for the entire purchase. D) Margin trading increases the potential profits while lowering the potential losses on a percentage basis. 32. Megan bought 200 shares of stock at a price of $10 a share. She used her 70% margin account to make the purchase. Megan sold her stock after a year for $12 a share. Ignoring margin interest and trading costs, what is Megan's return on investor's equity for this investment? A) 67% B) 29% C) 14% D) 10%

33. A restricted account is defined as a margin account in which the equity is A) less than the initial margin amount. B) greater than the initial margin amount. C) less than the maintenance margin amount. D) greater than the maintenance margin amount. 34. Mohammed bought 100 shares of stock for $30.00 per share on a 70% margin. Assume Mohammed holds the stock for one year and that his interest costs will be $45 over the holding period. Mohammed also received dividends amounting to $0.30 per share. Ignoring commissions, what is his percentage return on invested capital if he sells the stock for $34 a share? A) 106.17% B) 20.48% C) 18.33 D) 9.16% 35. Kensington Company stock was selling at $132 a share when Charlotte sold 300 shares of the stock short. Today, Charlotte bought 300 shares of the same stock at a price of $140 per share to cover her position. Ignoring trading costs, what is the dollar return on Charlotte's investment? A) $2,400 B) -$800 C) $800 D) $-2,400 36. Which of the following are characteristics of short selling? I. borrowing shares of stock from a brokerage firm or other investors II. selling shares of stock you do not own III. betting the stock price will increase IV. limiting losses per share to the price at which the stock was sold

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A) I and II only B) III and IV only C) I, II and IV only D) I, II, III only Chapter 3 37. Which of the following actions are possible on the internet? A) stock trading directly between individual investors without the use of a brokerage B) accessing financial statements for publicly traded companies C) accessing historical data on popular indexes D) only B and C are correct 38. Individuals can now use the internet to buy and sell I. stocks. II. bonds. III. mutual funds. IV. stock options. A) I and IV only B) II and III only C) I, II and III only D) I, II, III and IV 39. Which of the following can be considered a pitfall for investors new to on-line trading? A) Online trading is fast and efficient. B) Online investors tend to trade too frequently. C) Online trading is available to the average investor. D) Online investors pay lower costs per trade than investors using a broker.

40. Which of the following types of information is NOT available from printed publications? A) price quotations for stocks of major companies B) stories concerning business leaders C) interest rates offered by local and national banks D) real-time price quotes for widely held stocks and exchange traded funds 41. Which of the following websites facilitates the review of financial information in a Canadian company's financial reports? A) SEDAR website B) CNN C) wsj.com D) finance.yahoo.com 42. Assume you wanted to find the most current price for Home Depot's stock. Your most likely source would be A) Yahoo! Finance . B) Investor's Business Daily . C) The Granville Market Letter . D) The Wall Street Journal . 43. Which of the following sites is especially valuable for information concerning mutual funds? A) www.investopedia.com B) www.morningstar.com C) www.moody's.com D) www.bondsonline.com Answer: B 44. The Dow Jones Industrial Average (DJIA) consists of 30 stocks whose price behaviour A) typically has little correlation with the rest of the stock market. B) broadly reflects the overall price behaviour of the stock market. C) reflects the changes in value of manufacturing stocks only. D) leads the movements in the general economy by one to two weeks.

45. Which of the following statements is correct? A) The S&P 500 Index is based on 500 large companies that trade on US exchanges. B) Because of mergers and bankruptcies, the S&P 500 Index no longer contains 500 stocks. C) The S&P 500 Index is carefully constructed to reflect the values of large, medium and small capitalization companies. D) The S&P 500 is based on the 500 largest US companies as measured by market value. 46. Assume that the S&P 500 composite stock index closes at 2,500. This means that A) the average stock in the index is selling for $25.00. B) an investor would have to pay $2,500 to purchase one share of each of the stocks represented in the index. C) the average value of a company reflected in the Index has doubled from when the Index was at 1,250. D) the share prices of the stocks in the index have risen 25 times since the 1941-1943 base period. 47. Which of these market indexes follows the largest number of companies? A) S&P 500 index B) Nasdaq Composite Index C) Dow Jones Industrial Average D) Nasdaq 100 48. Which of the following statements concerning stock trades is correct? A) Brokerage firms send customer orders to a market maker on the floor of the TSX. B) Confirmation of a trade is transmitted directly from the TSX to the customer who placed the order. C) A broker transmits OTC orders from a customer directly to a floor broker in the OTC market. D) Brokerage firms generally hold securities in street name so they can be transferred without the customer's signature.

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49. In recent years, the distinctions between discount, premium discount, and full-service brokers A) have been regulated into law. B) have become increasingly well defined. C) have been somewhat blurred. D) mainly concern whether or not the brokerage offers online trading. 50. When deciding between a discount or full-service brokerage, the investor should consider A) trading costs. B) their comfort level making unassisted investment decisions. C) their awareness of potential investment opportunities. D) all of the above. 51. The current price of HAR stock is $75. Gurpreet places a limit order for 100 shares at $65, GTC. The price falls to $65.10 and then rises over the course of a month to $84. A) Gurpreet has a gain of $1,900. B) Gurpreet has a gain of $1,890. C) Gurpreet does not own the stock but will if his trade can ever be executed at $65.00 or less. D) Gurpreet has a loss of $900. 52. A margin account A) can be opened by any investor who wants to purchase securities by charging them to his/her credit card. B) allows an investor to borrow one hundred percent of the cost of the securities purchased. C) allows an investor to borrow a portion of the purchase price at a reasonable rate of interest. D) is permitted only in wrap accounts. 53. Which of the following statements about limit orders is correct? A) The execution of the trade will occur prior to the close of trading on the day the trade is placed. B) The execution will occur at the regular open on the day following the day the trade is placed. C) The trade may be executed only at the limit price or better at any time prior to the expiration or cancellation of the order. D) The trade will be executed at the market price at the end of the third business day, if it is not executed previously at the limit price.

54. A fill-or-kill order will be A) executed immediately upon order arrival on the floor of the exchange. B) cancelled if not immediately executed at the stated price or better. C) cancelled at the end of the trading day if not executed by that time. D) in effect until cancelled by the customer who placed the order. 55. Dr. Balcom is a busy ophthalmologist who has no time to trade during market hours. She likes Allergan products and thinks the stock is attractively priced at the day's close of $148.20. Over the past week, Allergan has traded between $145 and $160, fluctuating widely within each day. It is now 8:00 P.M. on a Wednesday evening. If Dr. Balcom wants to buy 200 shares of Allergan, she should A) place a limit order to buy 200 shares at $148.20. B) place a market order to buy 200 shares. C) place a limit order to buy 200 shares at $145. D) wait to see what happens the next day. 56. Delroy bought 200 shares of EG stock two years ago at $16 per share. The stock has traded in a range of $21 to $44 a share over the past year. EG is now selling for $43.60 a share. EG announces its earnings today, and Delroy feels the stock could go to $60 on good news or fall to $30 on bad. To protect his profits, the most appropriate order for him to place is A) a market order to sell immediately. B) a limit sell order at $60.00. C) a stop-loss order at $42. D) a stop-limit order to sell at $45. 57. An informal, voluntary agreement to solve disputes between an investor and his/her broker by utilizing a person to facilitate negotiations between the two parties is called A) voluntary arbitration. B) binding arbitration. C) mediation. D) litigation.

Chapter 4. 58. Krishna bought a stock at a price of $33.75. She received a $1.25 dividend and sold the stock for $36.10. What is Krishna's capital gain on this investment? A) $(2.35) B) $3.65 C) $2.35 D) $1.25 59. Over the long term, which of the following has historically had the lowest risk and lowest average annual rate of return? A) US common stock B) long-term government bonds C) short-term government bills D) German common stock 60. Christopher invests $400 today at a 4% rate of return which is compounded annually. What is the future value of this investment after four years? A) $342 B) $416 C) $464 D) $468 61. When the rate of return is equal to the discount rate, A) the present value of an investment's benefits must be greater than its cost. B) the cost of an investment equals the sum of its benefits. C) the cost of an investment equals the future value of its benefits. D) the cost of an investment equals the present value of its benefits. 62. The risk-free rate is equal to the real rate of return plus A) an expected inflation premium. B) a risk premium. C) both an inflation and a risk premium. D) the prevailing prime rate.

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63. The markets, in general, are paying a 1% real rate of return. Inflation is expected to be 3%. RJH stock commands an 8% risk premium. What is the expected rate of return on RJH stock? A) 1% B) 4% C) 9% D) 12% 64. The required return on Beta stock is 14%. The risk-free rate of return is 4%, and the real rate of return is 2%. How much are investors requiring as compensation for risk? A) 8% B) 10% C) 12% D) 14% 65. A holding period return (HPR) is calculated by adding the current income to the capital gains and dividing this sum by the A) average investment value. B) beginning investment value. C) total income received. D) selling price of the investment. 66. Jason purchased ABC stock at $40 per share and DEF stock at $35 per share on the same day in 2020. Exactly six months later, the ABC stock is worth $42.00 per share and has not paid a dividend while the DEF stock is worth $36 per share and has paid two quarterly dividends of $0.50 each. The holding period returns are A) ABC, $2.00 and DEF $2.00. B) ABC 5% and DEF 2.9%. C) ABC 5% and DEF 5.7%. D) The holding period return cannot be determined because we do not know the discount rate.

67. Seven years ago, Matias invested $7,000. Today his investment is worth $11,500. The internal rate of return on this investment is A) 7.35%. B) 9.18%. C) 64.23%. D) 15.53%. 68. Mason purchased 100 shares of XOM for $76.63 per share at the beginning of 2016. He received dividends per share of $1.37 (2016), $1.55 (2017), $1.66 (2018), $1.74 (2019), $1.85 (2020). At the end of 2020 just after receiving the last dividend, he sold the stock for $84.76. What was his average annual rate of return from both dividends and capital gains? (Hint: compute the IRR, assume that all dividends were received at the end of the year.) A) 9.831% B) 3.774% C) 3.423% D) 4.076% 69. A business has strong sales and profits, but its stock price falls anyway because stock prices in general are declining. This is an example of A) business risk. B) financial risk. C) market risk. D) liquidity risk. 70. Which of the following choices is in the correct order from less risk to more risk? A) corporate bonds, certificates of deposit, mutual funds that invest in stock, common stock B) certificates of deposit, corporate bonds, common stock, mutual funds that invest in stock C) certificates of deposit, mutual funds that invest in stock, common stock, corporate bonds D) certificates of deposit, corporate bonds, mutual funds that invest in stock, common stock

71. Which of the following statements about the standard deviation are correct? I. The standard deviation is a measure of relative dispersion. II. Standard deviations should be considered in conjunction with expected returns to compare investments. III. The standard deviation is calculated by taking the square root of the variance. IV. The higher the standard deviation of an investment, the lower its risk. A) I and IV only B) II and III only C) I, III and IV only D) I, II and III only 72. The expected rate of return and standard deviations, respectively, for four stocks are given below: OPQ 11%, 8% RST 11%, 9% UVW 12%, 10% XYZ 12%, 8% Which investment offers the highest expected return relative to its standard deviation? A) OPQ B) RST C) UVW D) XYZ Answer: D

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73. Assume that $100 is deposited at the end of each year for five years at 10% compound interest and that no withdrawals are made over the five-year period. Based on this data, which of the following statements is correct? A) The future value will be $550. B) The present value can be determined by computing the present value of $500 in five years at 10%. C) The present value can be determined by computing the present value of a $100 ordinary annuity for five years at 10%. D) The present value will be $500. 74. Compute the future value three years from now of the following end-of-year cash flows growing at a rate of 6% per year. 1 $450 2 $400 3 $300 A) $1,357.00 B) $1,032.41 C) $1,220.38 D) $1,229.61 75. A business has strong sales and profits, but its stock price falls anyway because stock prices in general are declining. This is an example of A) business risk. B) financial risk. C) market risk. D) liquidity risk.

Practice MCQ Midterm 1

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