Chapter 3

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Exam Name___________________________________ TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 1) Most brokers charge higher commissions for online trades than for telephone transactions. 1) 2) Online trading has greatly lowered the cost of buying and selling stock and has greatly increased the speed of transactions. 2) 3) For most stocks, charts and tables of historical prices are only available through subscription services. 3) 4) You can utilize the internet to develop financial plans and goals, analyze and select individual investments and organize your portfolio. 4) 5) An investor who mistakenly buys the wrong stock because the symbols are similar has 24 hours to undo the trade. 5) 6) The tools and calculators available on the FINRA website are useful but quite expensive to use. 6) 7) The cost of using industry - sponsored websites such as FINRA usually exceeds the benefits for small investors. 7) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 8) An internet tool that selects stocks to meet specific criteria such as dividend payout or price - earnings ratio is known as a(n) A) screener. B) advisor. C) compiler. D) sorter. 8) 9) 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 9) 10) 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 10) 1

11) Information that can be found on the internet at no cost includes I. P/E ratios. II. recent news about a company. III. financial statements. IV. future earnings and stock prices. A) I and IV only B) II and III only C) I, II and III only D) I, II, III and IV 11) 12) Which of the following can be considered a pitfall for investors new to on - line trading? A) Online trading is available to the average investor. B) Online trading is fast and efficient. C) Online investors pay lower costs per trade than investors using a broker. D) Online investors tend to trade too frequently. 12) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 13) What are some of the tools available to investors on the internet ? (Name at least 4.) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 14) Analytical information would include information such as estimates of growth in sales and future earnings. 14) 15) Reviewing industry and company information may provide guidance on the future outlook of a particular firm. 15) 16) A listing of a firm's major product lines and projections of future sales would both be considered descriptive information. 16) 17) Descriptive information might include the company's lines of business, a list of major competitors, and recent changes in management. 17) 18) Current price information on shares of a company's stock is often accompanied by statistics on the recent price behaviour of that stock. 18) 19) Investors who are aware of current economic, political, and market events tend to make better investment decisions. 19) 20) Often, on short - term trades of less than one year, you'll pay taxes on profits at the higher ordinary income tax rates, not the lower capital gains rate. 20) 21) Investors can usually find the financial statements of a firm on the firm's website. 21) 22) A "pump and dump" scheme involves buying shares of stock, hyping that stock via the internet and then quickly selling the shares at a profit. 22) 2

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 23) Charting is the technique of A) monitoring a stock based on the underlying economic conditions. B) determining the amount of money that must be saved based on a given financial goal. C) sorting through databases of securities to select one based on certain parameters. D) plotting the performance of a security over time. 23) 24) Which of the following types of information is NOT available from printed publications? A) real - time price quotes for widely held stocks and exchange traded funds B) interest rates offered by local and national banks C) stories concerning business leaders D) price quotations for stocks of major companies 24) 25) Which of the following is a general rather than a financial newspaper? A) The Wall Street Journal B) The Financial Post C) The Toronto Star D) Barron's 25) 26) Which of the following is published by the Canadian Government? A) Economic Report of the Prime Minister B) Survey of Current Business C) Canadian Business Bulletin D) Bank of Canada's "Weekly Financial Statistics" 26) 27) The FD in Regulation FD refers to A) financial disclosure. B) fair dividends. C) financial disability. D) fair disclosure. 27) 28) Which of the following websites facilitates the review of financial information in a Canadian company's financial reports? A) CNN B) finance.yahoo.com C) wsj.com D) SEDAR website 28) 29) Which of the following is usually available on a company's website? A) red herrings B) annual reports C) brokerage reports D) back - office reports 29) 30) The published analysis and recommendations of an individual brokerage firm is called a A) back - office research report. B) broker's subscription report. C) comparative data source. D) prospectus. 30) 31) Assume you wanted to find the most current price for Home Depot's stock. Your most likely source would be A) Investor's Business Daily . B) Yahoo! Finance . C) The Wall Street Journal . D) The Granville Market Letter . 31) 32) Recommendations of "strong buy, buy, hold, reduce, sell" are most likely to be found in A) brokerage back - office research reports. B) Barron's . C) Yahoo! Finance . D) Kiplinger Washington Letter . 32) 3

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33) Subscription letters are A) descriptive in nature but do not offer investment advice. B) available free on the internet. C) published on an annual basis. D) sometimes geared to specific industries and companies. 33) 34) Which of the following sites is especially valuable for information concerning mutual funds? A) www.bondsonline.com B) www.morningstar.com C) www.investopedia.com D) www.moody's.com 34) 35) Supersites that accumulate tremendous amounts of investing information that typically includes price history, investment screening tools and other personal finance features are known as A) financial portals. B) institutional news sites. C) comparative data sources. D) subscription services. 35) 36) Which of the following services provides bond ratings? A) Standard & Poor's B) Canadian Economic Observer C) Yahoo! Finance D) Value Line Investment Survey 36) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 37) An index measures the current value of a group of stocks in relation to a base value established previously. 37) 38) All the Standard & Poor's indexes are based on the total market values of the companies rather than on the price of a single share. 38) 39) The Dow Jones Corporate Bond Index and the Dow Jones Industrial Average are both price - weighted averages whose divisors are adjusted periodically to maintain continuity. 39) 40) Standard & Poor's and Mergent both publish extensive data on bonds. 40) 41) In addition to the Dow Jones Industrial Average, the Standard & Poor's 500 and NASDAQ indexes are widely quoted measures of market performance. 41) 42) The Value Line Index is a value - weighted index based on a small sample of the 1700 stocks covered by the Value Line investment reports. 42) 43) The Dow - Jones Corporate Bond Index is entirely based on industrial firms. 43) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 44) Stock market averages reflect the arithmetic average price behaviour of a group of stocks A) at a given point in time. B) relative to a base price of 100. C) relative to other indexes. D) relative to a base value set at an earlier point in time. 44) 4

45) Averages and indexes differ from one another in that an index A) is the arithmetic average price behaviour of a group of stocks at a given point in time. B) is of value in and of itself, while an average must be compared to a historical figure to have any meaning. C) measures the current price behaviour of a group of stocks in relation to a base value set at an earlier point in time. D) always moves up before a corresponding average moves up, and always moves down before a corresponding average moves down. 45) 46) The Dow Jones Industrial Average (DJIA) consists of 30 stocks whose price behaviour A) reflects the changes in value of manufacturing stocks only. B) typically has little correlation with the rest of the stock market. C) leads the movements in the general economy by one to two weeks. D) broadly reflects the overall price behaviour of the stock market. 46) 47) Suppose that Pfizer and Boeing are part of the Dow - Jones Industrial Average (DJIA). If, on a given day, Boeing closes at $320 and Pfizer at $40, A) the DJIA will include eight shares of Pfizer for each share of Boeing. B) the effect of each stock on the DJIA cannot be determined without knowing the number of shares outstanding for each company. C) the difference in price will not affect the DJIA. D) changes in the price of Boeing shares will have eight times the effect on the DJIA as changes in the price of Pfizer. 47) 48) The Dow Jones Industrial Average (DJIA) is based on the prices of A) 500 stocks. B) 100 stocks. C) 200 stocks. D) 30 stocks. 48) 49) Which of the following statements about the Dow Jones Industrial Average (DJIA) are correct? I. Higher - priced stocks tend to affect the DJIA more than lower - priced stocks. II. A one - point change in the DJIA correlates to a $1 change in average share value. III. Changes in the DJIA are made to reflect company mergers and acquisitions. IV. The DJIA divisor was determined when the DJIA was created and remains constant. A) I and III only B) II and IV only C) I, III and IV only D) I, II, III and IV 49) 50) 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) The S&P 500 Index is carefully constructed to reflect the values of large, medium and small capitalization companies. C) Because of mergers and bankruptcies, the S&P 500 Index no longer contains 500 stocks. D) The S&P 500 is based on the 500 largest US companies as measured by market value. 50) 5

51) Assume that the S&P 500 composite stock index closes at 2,500. This means that A) an investor would have to pay $2,500 to purchase one share of each of the stocks represented in the index. B) the average value of a company reflected in the Index has doubled from when the Index was at 1,250. C) the share prices of the stocks in the index have risen 25 times since the 1941 - 1943 base period. D) the average stock in the index is selling for $25.00. 51) 52) Which of these market indexes follows the largest number of companies? A) S&P 500 index B) Dow Jones Industrial Average C) Nasdaq 100 D) Nasdaq Composite Index 52) 53) The Value Line Composite Index A) considers only the percentage changes in the prices of the stocks in the index. B) adjusts the number of shares in each stock to produce an equal weighting. C) divides the sum of the closing share prices by a divisor and then multiplies the quotient by 100. D) divides the sum of the closing share prices by an adjusted divisor. 53) 54) EAFE stands for A) England, America, Far East. B) Europe, Australia, Far East. C) England, America, France, European Community. D) Europe, Asia, Far East. 54) 55) Which of the following statements is true concerning bonds? A) Bond yield data is more useful to an investor when compared over time. B) A bond's yield remains constant even when a bond is sold prior to maturity. C) A bond yield represents only the interest earned on a bond. D) Bonds with similar characteristics generally have widely disparate bond yields. 55) 56) Which of the following indexes would best reflect the performance of a large, diversified portfolio with equal amounts of money invested in each company? A) the Value Line Composite Index B) the NASDAQ 100 C) the Russell 3000 D) the S&P 500 Index 56) 57) Which of the following indexes reflects a large sample of small, medium and large companies? A) DJIA B) Value Line composite C) Russell 3000 D) NYSE composite 57) 58) Which of the following is a measure of the performance of small companies? A) Russell 3000 B) Russell 1000 C) Russell 2000 D) Value Line 1700 58) 6

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59) The Dow Jones Corporate Bond Index is based on A) the yield to maturity of bonds in the index. B) annual rates of return and the assumption the bonds were purchased one year ago and sold today. C) the closing prices of bonds in the index. D) the interest rates offered on a sample of newly issued bonds. 59) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 60) The Dow Jones Industrial Average and the Standard & Poor's Industrial Index have a number of similarities and differences. Discuss at least two major similarities and major differences between these two market indicators. 61) Why are market averages and indexes useful to investors? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 62) The basic function of stockbrokers is to execute client orders at the best possible price. 62) 63) Shares of stock owned by an individual but held in a brokerage firm's name for ease of trading are said to be held in street name. 63) 64) Trading stocks is much faster and less complicated if an individual investor has possession of the actual stock certificates. 64) 65) Stockbrokers in Canada must be registered with the Investment Industry Regulation Organization of Canada (IIROC) or as required by provincial or territorial Securities Commissions. 65) 66) Investors who choose to hold stock certificates can receive or submit them electronically in PDF form. 66) 67) Brokerage firms are not allowed to make specific buy or sell recommendations to their clients. 67) 68) Dividends earned on securities held in street name by the brokerage are reported to the Canada Revenue Agency (CRA) and are considered taxable income to the investor. 68) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 69) Which of the following statements about stockbrokers is correct? A) Stockbrokers are regulated by financial consultants. B) Stockbrokers act as dealers in the securities they trade. C) Stockbrokers act as intermediaries between buyers and sellers of securities. D) Stockbrokers execute trades on the floor of the Toronto Stock Exchange on behalf of account executives. 69) 7

70) Which of the following statements concerning stock trades is correct? A) Brokerage firms generally hold securities in street name so they can be transferred without the customer's signature. B) Confirmation of a trade is transmitted directly from the TSX to the customer who placed the order. C) Brokerage firms send customer orders to a market maker on the floor of the TSX. D) A broker transmits OTC orders from a customer directly to a floor broker in the OTC market. 70) 71) Unless the investor has requested another arrangement, cash from dividends and the sale of stock is normally A) automatically reinvested in more stock. B) held in escrow by the brokerage until it is reinvested. C) direct deposited into the investor's bank account. D) deposited in a Money Market Account offered by the brokerage. 71) 72) In recent years, the distinctions between discount, premium discount, and full - service brokers A) have been regulated into law. B) have been somewhat blurred. C) have become increasingly well defined. D) mainly concern whether or not the brokerage offers online trading. 72) 73) Which is the correct order of events when an individual buys a stock through a brokerage firm? I. The order is transmitted to the main office of the brokerage firm. II. The customer places the order with their local stockbroker. III. The confirmation of the order is sent to the broker placing the order. IV. The order is sent to the floor of the exchange. A) II, I, IV, III B) I, II, III, IV C) II, IV, I, III D) II, I, III, IV 73) 74) Holding securities in street name A) enables the brokerage firm to collect the stock dividends as compensation for their services. B) means that the brokerage firm actually owns the securities. C) makes the trading of securities easier and more efficient for individual investors. D) allows the brokerage firm to sell securities without the customer's approval. 74) 75) A report describing the transactions in an account, listing the dividend and interest payments received, and detailing the current holdings is called a A) statement. B) street certificate. C) prospectus. D) red herring. 75) 76) A brokerage firm that provides analyst reports, investment advice and information in addition to online brokerage services is called a(n) A) electronic broker. B) full - service broker. C) basic discount broker. D) premium discount broker. 76) 8

77) When deciding between a discount or full - service brokerage, the investor should consider A) their comfort level making unassisted investment decisions. B) their awareness of potential investment opportunities. C) trading costs. D) all of the above. 77) 78) The practice of encouraging a client to trade frequently in order to generate commissions for the broker is known as A) flipping. B) day trading. C) momentum investing. D) churning. 78) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 79) A limit order is an order to buy at the limit price or less. 79) 80) A limit order is an order to sell at the limit price or less. 80) 81) A stop - loss order is activated once the stock reaches the specified price. 81) 82) A stop - loss order on a short sale will be executed if the stock price rises above the specified price. 82) 83) Many day traders are also margin traders. 83) 84) Stop orders are used only when selling a stock. 84) 85) Most day traders avoid holding stocks overnight because they fear large price changes while the markets are closed. 85) 86) It is generally a good idea to use limit orders when trading after hours. 86) 87) Traders who hold stocks for less than a full day can reduce the tax burden on their profits. 87) 88) Commission structures vary with the type of security being traded, the type of broker involved and the size of the order. 88) 89) The CIPF in Canada provides protection in case your brokerage firm fails but will not insure you against bad investment advice or churning. 89) 90) Commissions for online trades are considerably lower than for orders placed with a full - service broker. 90) 91) SIPC insurance is offered by some full - service brokers to protect investors from large losses. 91) 92) Many brokerage firms require that disputes between individual investors and brokers be settled through arbitration. 92) 93) The Securities Investors Protection Corporation protects investors from brokers who offer incompetent advice. 93) 9

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 94) Excessively trading a customer's account to increase a stockbroker's commission income is A) called churning, which is an illegal practice. B) an acceptable method of timing the market to increase rates of return. C) permitted provided that the customer does not object. D) probably unethical but is considered acceptable by the securities industry. 94) 95) Which of the following practices is NOT recommended for online traders? A) Double - check your order to be sure the number of shares and the price are what you intended. B) Use limit orders rather than market orders, especially when trading after hours. C) Double - check stock symbols to be sure you are ordering the right stock. D) Trade as often as possible to maintain a strong relationship with the brokerage. 95) 96) When an investor places a ________ order, he agrees to buy or sell at the best available price when the trade is executed. A) stop B) limit C) market D) stop - limit 96) 97) An individual investor who wishes to borrow money to buy stocks must open a A) joint account. B) custodial account. C) signature account. D) margin account. 97) 98) 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 does not own the stock but will if his trade can ever be executed at $65.00 or less. B) Gurpreet has a gain of $1,900. C) Gurpreet has a loss of $900. D) Gurpreet has a gain of $1,890. 98) 99) A margin account A) allows an investor to borrow a portion of the purchase price at a reasonable rate of interest. B) allows an investor to borrow one hundred percent of the cost of the securities purchased. C) is permitted only in wrap accounts. D) can be opened by any investor who wants to purchase securities by charging them to his/her credit card. 99) 100) Which of the following are characteristics of a wrap account? I. a flat amount of commission per transaction II. an increased probability of account churning III. a money manager IV. detailed performance reports A) I and II only B) III and IV only C) II, III and IV only D) I, III and IV only 100) 10

101) An odd - lot trade involves a trade A) of 100,000 shares or more. B) that is generally priced at a discount to the market price. C) of only 100 shares. D) consisting of any number of shares that is not a multiple of 100. 101) 102) Amina places an order to buy 525 shares of stock. This is an order for A) 21 round lots of 25. B) five hundred round lots and twenty - five odd lots. C) five round lots and one odd lot. D) one odd lot. 102) 103) An order to sell 300 shares of ABC stock at the best available price is called a A) market order. B) fill - or - kill order. C) limit order. D) stop - loss order. 103) 104) Market orders are usually executed A) before the price can change significantly if the order is placed while the markets are in session. B) only after all limit orders have been executed. C) at the closing price for the day's trading. D) at the average price during the previous trading session. 104) 105) McDonald's stock is now selling for $190 per share. Kim wants to buy 100 shares but only if she can do so at $180 or less. She should place a(n) A) market order. B) limit order. C) stop order. D) odd - lot order. 105) 106) Which of the following statements about limit orders is correct? A) The execution will occur at the regular open on the day following the day the trade is placed. B) 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. C) The execution of the trade will occur prior to the close of trading on the day the trade is placed. D) The trade may be executed only at the limit price or better at any time prior to the expiration or cancellation of the order. 106) 107) A fill - or - kill order will be A) executed immediately upon order arrival on the floor of the exchange. B) cancelled at the end of the trading day if not executed by that time. C) cancelled if not immediately executed at the stated price or better. D) in effect until cancelled by the customer who placed the order. 107) 108) Stefan places a good - 'til - cancelled (GTC) order to sell 200 shares of MRK at $76 a share. When his order reaches the trading floor, MRK is trading at $76.48. Which of the following statements is true concerning Stefan's order? A) The trade will not be executed and will be immediately cancelled. B) The order will only be executed if it can be matched with an order to buy at $76. C) The order will be executed at $76.48 with the proceeds credited to Stefan's account. D) The broker will sell the 200 shares at $76.48 and keep the additional $0.48 as a commission. 108) 11

109) Which of the following statements concerning market, stop loss and limit orders are correct? I. Market orders guarantee both a price and an execution. II. Market orders guarantee an execution but not a price. III. Limit orders guarantee a price but not an execution. IV. Stop - loss orders may never be executed. A) I and III only B) I and IV only C) II, III and IV only D) II and IV only 109) 110) On March 15, Jacqueline placed a limit order, GTC, to buy 200 shares of CAKE at $40 a share. CAKE sold between $40.50 and $44.00 on that day. Over the following two months, the stock price continued to rise, and Jacqueline forgot about the order. After the markets closed on June 30, some bad news concerning CAKE was released. The stock opened on July 1 at a price of $32.00 a share. Which of the following statements is correct concerning Jacqueline's order? A) The order was executed on March 15 at $40.50 a share since that was the best available price of the day. B) The order was executed on July 1 at a price of $32.00 a share. C) The order was executed on July 1 at a price of $40.00 a share. D) The order was cancelled on May 15 because it had not been executed within the allowable two - month time period. 110) 111) Which of the following statements is correct about a good - 'til - cancelled (GTC) order? A) The order will automatically renew unless cancelled by the customer. B) The order generally expires after six weeks. C) The order will be cancelled at the end of the trading day if not executed. D) The order helps customers obtain a specific price without watching the market continuously. 111) 112) 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 $145. B) wait to see what happens the next day. C) place a market order to buy 200 shares. D) place a limit order to buy 200 shares at $148.20. 112) 113) Ryan bought a stock three years ago for $6 a share. Today, June 22, the stock is selling for $72 a share. Ryan is afraid that the price will fall and does not want to lose his profits, so he places a stop - loss order to sell at $70. The stock sells between $71 and $75 throughout the remainder of the day on June 22. On the morning of June 23, the stock opens at $9 a share based on rumours of a possible bankruptcy due to inappropriate accounting procedures. Which of the following statements is true concerning this situation? A) Ryan received a call from the specialist asking him what he wanted to do about his order. B) Ryan's stock was sold for $9 a share causing him to lose most of his profits. C) Ryan was able to sell his stock for $70 a share, thus protecting his profits. D) Ryan still owns his shares of stock since his order was never executed at the $70 price. 113) 12

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114) Three years ago, Mila bought 200 shares of HQ at $27.00 per share. HQ shares have risen to $57.50 per share. If the stock continues to rise, she wants to hold it, but Mila fears that the price could fall quickly, and she will lose most of her profit. Which of the following decisions would be best? A) place a stop - limit order at $55.00 B) place a limit order to sell at $60.00 C) place a stop - loss order at $55.00 D) place a stop - loss order at $27.00 114) 115) 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 stop - loss order at $42. C) a limit sell order at $60.00. D) a stop - limit order to sell at $45. 115) 116) Angela placed a stop - limit order to sell 100 shares of RST stock at $28 when the market price of RST was $31. Shortly after Angela placed her order, trading on RST was halted due to a pending news announcement. When trading re - opens RST is priced at $24 a share. Within minutes the price of RST began to drop further until it reached $19 a share. Which of the following statements is correct concerning Angela's stop - limit order to sell? A) Angela's stock was sold for $24 a share. B) Angela's stock was sold at a price between $19 and $24 a share. C) Angela's stock was sold for $28 a share. D) Angela still owns her 100 shares of stock. 116) 117) At 10:45 a.m., Ashley placed a stop - loss order to sell 200 shares of Alpha stock at $43 a share. At 2:15 p.m., the price of Alpha fell to $42.90 and then rose to $43.40 a share by the end of the trading day. Ashley's order was executed that day. Ashley would have received a price A) between $42.90 and $43.40 a share depending upon when her trade was executed. B) equal to the average prices paid by the designated market maker during that trading day. C) of $42.90 a share for her stock since her order was already recorded in the designated market maker's book. D) of $43.40 a share for her stock since that was the closing price on the day of execution. 117) 118) Which of the following statements concerning day traders are correct? I. Day traders generally do not hold securities over night. II. Day trading is a relatively low - risk approach to investing. III. Some day traders sell stocks short. IV. Day trading was declared illegal by the Market Stabilization Act of 2002. A) I and II only B) I and III only C) I, II and IV only D) II, III and IV only 118) 119) The Canadian Investor Protection Fund (CIPF) insures A) losses incurred up to $1,000,000 due to churning by a broker. B) market losses of $500,000 total or $100,000 per transaction. C) customer accounts up to $1,000,000 per account. D) losses of up to $100,000 incurred due to innocent online trading errors. 119) 13

120) In which of the following cases might an investor receive help by requesting the SRO to take the case to arbitration after mediation fails? A) The investor purchased a stock at $40 per share because his broker recommended it. Over the next six months, it fell to $20 per share. B) A broker took money sent by investors to cover stock purchases but never invested it and sent falsified statements to cover the fraud. C) The investor holds $100,000 worth of stock in certificate form. The certificates are destroyed in a fire. D) The investor purchases stock in a company that a little later was forced into bankruptcy because of accounting fraud. 120) 121) 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) mediation. C) litigation. D) binding arbitration. 121) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 122) Describe several appropriate uses of stop - loss orders. 123) When is it appropriate to use limit orders? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 124) A person can become a Certified Financial Planner merely by filling out an application and paying an annual fee. 124) 125) Investment clubs are legal partnerships. 125) 126) Investment clubs may only operate under the guidance of a registered investment advisor. 126) 127) Investment advisors are legally responsible for losses incurred by their clients. 127) 128) Studies have shown that when it comes to investment advice, you usually get what you pay for. 128) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 129) Which of the following designations does NOT have formal education and testing requirements? A) Certified Financial Planner B) Robo - advisors C) Certified Public Accountant D) Chartered Financial Analyst 129) 130) Recent studies suggest that, on average, investments clubs A) underperform broad market indexes by several percentage points. B) earn average rates of return. C) outperform broad market indexes by several percentage points. D) No data is available on investment club performance. 130) 131) Which of the following is required by the Investment Advisors Act to disclose their background and any conflicts of interest? A) accountants and lawyers B) professional investment advisors C) stockbrokers D) all of the above 131) 14

132) Which of the following are advantages of investment clubs? I. Small investors can pool their money to build a portfolio. II. Members can share research responsibilities. III. Individual members may have different goals and tolerance levels for risk. IV. Investment clubs typically buy stocks for the long term rather than short - term profits. A) I and III only. B) III and IV only. C) I, II and IV only D) I, II, III and IV 132) 133) So - called robo - advisors may A) make investment recommendations. B) assess an investor's financial position and goals. C) be a service offered by one of the major investment firms. D) all of the above 133) 15

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Answer Key Testname: UNTITLED3 1) FALSE 2) TRUE 3) FALSE 4) TRUE 5) FALSE 6) FALSE 7) TRUE 8) A 9) D 10) D 11) C 12) D 13) Price histories, charts, screening for various attributes such as dividends, calculators and portfolio trackers are all available on the internet, often at no cost. 14) TRUE 15) TRUE 16) FALSE 17) TRUE 18) TRUE 19) TRUE 20) TRUE 21) TRUE 22) TRUE 23) D 24) A 25) C 26) D 27) D 28) D 29) B 30) A 31) B 32) A 33) D 34) B 35) A 36) A 37) TRUE 38) TRUE 39) FALSE 40) TRUE 41) TRUE 42) FALSE 43) FALSE 44) A 45) C 46) D 47) D 48) D 49) A 16

Answer Key Testname: UNTITLED3 50) A 51) B 52) D 53) A 54) B 55) A 56) A 57) C 58) C 59) C 60) Similarity: Both the DJIA and the S&P Industrial Index are meaningful only when compared to values in other time periods or to a base value. Over the long - run and on a relative basis, they seem to move together remarkably well. Both track only established companies with large market capitalizations. Difference: The DJIA and the S&P Industrial Index are constructed very differently. The DJIA is a price average of only 30 stocks, while the S&P is a market - weighted index of 500 stocks. 61) By comparing the values of various averages and indexes over time, investors can capture the "mood" of the market and assess the market's relative strength or weakness. Averages and indexes are also convenient benchmarks to assess the performance of individual portfolios and mutual funds against the broader markets. 62) TRUE 63) TRUE 64) FALSE 65) TRUE 66) FALSE 67) FALSE 68) TRUE 69) C 70) A 71) D 72) B 73) A 74) C 75) A 76) B 77) D 78) D 79) TRUE 80) FALSE 81) TRUE 82) TRUE 83) TRUE 84) FALSE 85) TRUE 86) TRUE 87) FALSE 88) TRUE 89) TRUE 90) TRUE 91) FALSE 92) TRUE 93) FALSE 17

Answer Key Testname: UNTITLED3 94) A 95) D 96) C 97) D 98) A 99) A 100) B 101) D 102) C 103) A 104) A 105) B 106) D 107) C 108) C 109) C 110) B 111) D 112) D 113) B 114) C 115) B 116) D 117) A 118) B 119) C 120) B 121) B 122) Stop - loss orders are appropriate when an investor who cannot continuously monitor her investments wants to limit potential losses on a newly purchased stock. They are also used to protect profits or limit additional losses on stocks that the investor has held for a period of time. 123) It is especially appropriate to use limit orders when buying or selling outside of normal trading hours. The limit order protects the investor from large, unanticipated price changes when the markets open. Limit orders are also useful when an investor has decided to sell but wants to profit a little longer from rising prices or wants to catch what he hopes is a temporary dip in the price before he buys. 124) FALSE 125) TRUE 126) FALSE 127) FALSE 128) FALSE 129) B 130) A 131) B 132) C 133) D 18

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Chapter 3

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