Chapter 6

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Toronto Metropolitan University *

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Finance

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Jan 9, 2024

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Exam Name___________________________________ TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 1) Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm's assets. 1) 2) There is a stronger tendency for the stock market to increase in value than decrease in value over time. 2) 3) Between 1930 and 2017, the average return on stocks exceeded 10%. 3) 4) Between 1926 and 2017, approximately 26% of years had positive returns. 4) 5) Over the long term, most of the return on stocks has come from price increases. 5) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 6) Because common shareholders are entitled to the profits that remain after all of a corporation's other obligations have been met, common shareholders are known as A) debt owners. B) temporary owners. C) residual owners. D) owners of last resort. 6) 7) If stocks earn an average rate of return of 11%, their value doubles approximately every A) 9.1 years. B) 6.6 years. C) 5.8 years. D) 7.2 years. 7) 8) Which of the following statements about common stock is true? A) Common stock can provide attractive capital appreciation opportunities. B) The DJIA is the best indicator of the overall performance of common stocks. C) Common stocks generally have a negative rate of return over a ten - year period. D) Dividends generally provide the greatest rate of return on common stocks. 8) 9) Which of the following are benefits related to stock ownership? I. ease of trading II. attractive inflation - adjusted rates of return III. guarantee of long - term positive returns IV. affordability A) II and IV only B) I and II only C) I and III only D) I, II and IV only 9) 10) Benefits of common stock ownership include A) the low trading costs. B) the potential for high returns. C) how easy it is to buy and sell. D) all of these benefits. 10) TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 11) A market correction is defined as a stock market decline of 10% or more. 11) 1

12) A decline of 5% in the S&P 500 would be considered a correction. 12) 13) Over the period beginning in January, 2000, to the present, global stock markets have been relatively stable. 13) 14) Over the long term, the capital gain on most stocks will exceed the dividend income. 14) 15) Although bear markets on average occur about once a decade, the timing of bear markets is very hard to predict. 15) 16) For stocks in the S&P 500 index, returns from dividends exceeded capital gains over the period from 2008 - 2017. 16) 17) Since the financial crisis of 2008, the major indexes have not yet recovered to their 2007 levels. 17) 18) A weakness in the real estate market is very unlikely to affect the stock market. 18) 19) When residential real estate values fell sharply in the United States from 2006 to 2009, the stocks of financial institutions were hardly impacted. 19) 20) Stocks generally have produced positive inflation - adjusted rates of return over the long term. 20) 21) One reason that common stock selection is difficult is because numerous factors can potentially impact future performance. 21) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 22) Which type of investment return should result in the highest investment return over time? A) capital gains B) bond interest C) preferred dividends D) dividends 22) 23) Stock returns that are higher than 16% A) are commonly achieved by most investors. B) can be achieved but require accepting higher risk. C) are only possible in the long run. D) are impossible to achieve. 23) 24) An individual stock generally provides a A) current income that is less predictable than that available from other types of investments. B) predictable annual rate of return. C) dividend payment that ensures total protection from purchasing power risk. D) refuge from event risk. 24) 25) Which of these asset classes is most likely to generate the highest returns over time? A) preferred stocks B) corporate bonds C) government bonds D) common stocks 25) 2

26) One advantage that bonds have over stocks is A) higher rates of return. B) a better chance for capital gains. C) better diversification because they move opposite from stocks. D) less risk. 26) 27) The extraordinary run - up in stock prices during the late 1990s primarily affected A) retail stocks. B) technology stocks. C) pharmaceutical stocks. D) energy stocks. 27) 28) Many companies increased their dividends A) during the market recovery of 2009 - 2011. B) in every year since 1950. C) whenever necessary to compensate shareholders for declining stock values. D) during the market decline of 2007 - 2008. 28) 29) Some investors prefer bonds over commons stocks because A) they are concerned about the preservation of wealth. B) bond income is more predictable. C) stocks are too risky for their level of risk tolerance. D) all of these 29) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 30) Explain how the terms routine decline , correction and bear market differ from one another during a period of negative growth or market decline. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 31) Shares of publicly traded stock can be issued either through a public offering or a rights offering. 31) 32) Companies typically issue new shares through an initial public offering (IPO). 32) 33) Shareholders can either exercise their rights granted via a rights offering or sell them to another investor. 33) 34) Corporations often split their stocks when they believe that the price makes them less attractive to average investors. 34) 35) The total value of an investor's holdings in a company will increase in proportion to the magnitude of a stock split. 35) 36) Stock held in treasury is a means of increasing the number of shares outstanding. 36) 37) Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued. 37) 38) Different classes of stock generally have either different voting rights or different dividends. 38) 39) Electronic trading systems have reduced transaction costs of odd - lot trades. 39) 3

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 40) Since each share of common stock represents ownership in a company, shares of common stock are often referred to as A) fixed - income securities. B) unit - cost securities. C) illiquid investments. D) equity securities. 40) 41) Which of the following statements about common stock is correct? A) Each share of stock has a specified maturity date. B) Each share of common stock of a given class entitles the holder to an equal ownership position and an equal vote in the corporation. C) Common stock gives stockholders first title to a share of the company's earnings before other corporate obligations. D) Common stock typically provides higher levels of current income than similar grade corporate bonds. 41) 42) Stocks that are readily available to the general public and that are bought and sold on the open market are known as A) treasury stocks. B) blue chip stocks. C) initial public offerings. D) publicly traded issues. 42) 43) When a company offers the investing public a certain number of shares of its stock at a certain price, the company is making what is known as a A) public offering. B) treasury offering. C) stock spin - off. D) rights offering. 43) 44) In a rights offering, the A) underwriter offers the investing public a certain number of shares at a certain price. B) total equity remains constant while the number of shares of common stock outstanding increases. C) existing stockholders are given the first opportunity to purchase new shares in proportion to their current ownership position. D) amount of debt in the capital structure increases by the amount of the rights offering. 44) 45) Kayla owns 200 shares of Blackwood common stock valued at $330 a share. Blackwood has declared a 3 - for - 2 stock split effective tomorrow. After the split, Kayla will own A) 133 shares valued at about $495 a share. B) 600 shares valued at about $220 a share. C) 600 shares valued at about $$110 a share. D) 300 shares valued at about $220 a share. 45) 46) VGG, Inc. declares a 2 - for - 5 stock split. The stock currently sells for $4 a share. A shareholder who owned 1000 shares of VGG stock prior to the split will now own A) 250 shares valued at about $11.60 a share. B) 2500 shares valued at about $1.60 a share. C) 400 shares valued at about $10.00 a share. D) 440 shares valued at about $1.60 a share. 46) 4

47) When a corporation declares a stock split, it usually does so because A) it wants to make its stock more affordable to average investors. B) investors sometimes require nontaxable returns. C) there are too many shares of stock outstanding. D) the firm's retained earnings are excessive. 47) 48) Stock that has been issued and subsequently reacquired by the issuing corporation is called A) classified stock. B) letter stock. C) book stock. D) treasury stock. 48) 49) Seema owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Seema owned A) 10,000 shares worth approximately $0.15 per share. B) 10,000 shares worth approximately $1.50 per share. C) 100 shares worth approximately $15 per share. D) 100 shares worth approximately $1.50 per share. 49) 50) Which of the following is unlikely to be found in an internet stock quotation? A) broker's commission per 100 shares B) earnings per share (EPS) C) beta D) previous day's closing price 50) 51) One motive for issuing classified stock with different voting rights is to A) avoid SEC reporting requirements. B) facilitate the issue of additional shares in the future. C) allow the company's founders to retain control of the company. D) increase the market value of the company. 51) 52) Stock quotes on most internet service providers such as Yahoo! Finance include I. the highest and lowest price over the last 52 weeks. II. the closing price for the previous trading day. III. the opening price for the day. IV. date of the most recent stock split. A) I and III only B) II and IV only C) I, II and III only D) II, III and IV only 52) 53) A round lot consists of A) 1,000 shares. B) 10 shares. C) 100 shares. D) 1 share. 53) 54) Assume the Plum Corporation has two different issues of common stock. One issue carries voting rights, and the other issue does not. In this situation, Plum is said to have issued A) OTC stock. B) buy - back stock. C) classified stock. D) treasury stock. 54) 55) Which of the following will tend to increase transaction costs? A) buying or selling more than 1000 shares in a single trade B) using a full - service broker C) buying or selling shares through an online broker D) buying or selling at times when volume is high and the exchanges are busy 55) 5

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 56) Why do some companies split their stock? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 57) A stock's market value would normally be higher than its book value. 57) 58) A stock's book value and par value are normally the same or nearly the same. 58) 59) A stock can have only one market value but different investment values for different investors. 59) 60) A stock's investment value and market value are normally not far apart. 60) 61) The investment value for a publicly traded stock can readily be found in the financial section of the newspaper or on the internet. 61) 62) If a firm has 4 million shares outstanding and its stock trades at $50 per share, the company has a market capitalization of $200,000,000. 62) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 63) Another term for the stated value or face value of a stock is its A) par value. B) book value. C) proxy value. D) liquidation value. 63) 64) Which of the following would be typical for a successful company? A) par value greater than book value B) book value greater than market value C) market value greater than book value D) none of the above 64) 65) The balance sheet value of a firm's assets minus the balance sheet amount of its liabilities is known as the A) book value. B) market value. C) liquidation value. D) par value. 65) 66) A firm has 2 million shares outstanding and $10,000,000 in debt. If its stock trades at $25 per share, the firm's market capitalization is A) $50,000,000. B) $40,000,000. C) $60,000,000. D) $49,000,000. 66) 67) Ostend Industries has total assets of $85 million, total debt of $58.6 million, and $4.8 million of 5% preferred stock outstanding. If the company has 500,000 shares of common stock outstanding, its book value per share would be A) $43.20. B) $52.80. C) $32.33. D) $33.60. 67) 68) As a general rule, which of the following statements concerning the various values of common stock is correct? A) Market values are usually below par values. B) Par values are usually above book values. C) Market values are usually below book values. D) Book values are usually below market values. 68) 6

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69) Charbridge Inc. has 4 million shares of stock outstanding. The stock has a par value of $1.00 per share and is currently trading at $36 per share. Nicole estimates the investment value of this stock at $38.50. According to this information, the market capitalization of Charbridge Inc. is A) $4,000,000. B) 72,000,000. C) $144,000,000. D) $154,000,000. 69) 70) You are given the following information on a company. Total Book Value $3,200,000 Total Market Value $25,608,000 Common shares outstanding 600,000 Which of the following statements is correct based on the information provided? A) The investment value is $5.34 per share. B) The par value is $5.34 per share. C) The book value is $48.01 per share. D) The market price is $42.68 per share. 70) 71) The value that investors place on a stock is called its A) book value. B) par value. C) investment value. D) liquidation value. 71) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 72) What is the relationship between a stock's market value and its investment value? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 73) A company's board of directors must declare a dividend if the firm is profitable. 73) 74) Shareholders who sell their stock on or after the ex - dividend date, but before the date of record, will still receive the declared dividend. 74) 75) High dividend yields are typical of rapidly growing companies. 75) 76) Dividend payments are usually more stable than capital gains. 76) 77) Stock dividends do not increase the value of a shareholder's position. 77) 78) Stock dividends and stock splits both increase the number of shares, but only stock dividends increase the value of the company. 78) 79) In Canada, cash dividends are taxed at the same rate as capital gains. 79) 80) In Canada, the reason for the dividend gross - up and tax credit is to mitigate double taxation because dividends are paid from the after - tax earnings of a firm. 80) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 81) The stock listing for a company shows a P/E of 22, a dividend yield of 3.4% and a closing price of $33.67. What is the amount of dividends per share? A) $1.14 B) $0.05 C) $0.75 D) $1.53 81) 7

82) The decision of how much money to pay out in dividends is made by the A) chief financial officer. B) board of directors. C) chief executive officer. D) company shareholders. 82) 83) Factors considered in making a decision on a firm's dividend include the I. cash position of the firm. II. firm's growth prospects. III. the expectations of the shareholders. IV. minimum dividends required by law. A) II and IV only B) I, II and IV only C) I, II and III only D) I, II, III and IV 83) 84) Emmenthaler S.A. ADRs pay a dividend of $2.50 per share. All things equal, one would expect the price to drop by approximately $2.50 on the A) payment date. B) purchase date. C) ex - dividend date. D) date of record. 84) 85) The Limberger Corporation declared a quarterly dividend of $0.10 per share. The ex - dividend date was July 15, the date of record was July 18, and the payment date was July 28. If you had owned 100 shares of the Limberger Corporation and sold them on July 15, then A) you would collect $10.00 in dividends, and the purchaser would not collect any dividends. B) you would collect $5.00 in dividends, and the purchaser would collect $5.00 in dividends. C) neither you nor the purchaser would collect any money in dividends. D) the purchaser would collect $10.00 in dividends, and you would not collect any dividends. 85) 86) The common shares of Chevrotin Ltd have a book value of $43.20 and a market value of $57.20. If the company pays $0.56 in dividends each quarter, what is the dividend yield? A) 1.0% B) 1.3% C) 3.9% D) 5.2% 86) 87) Dividend yield is calculated by dividing A) the market price of one share of stock by the annual dividend per share. B) the annual dividend per share by the market price of one share of stock. C) annual dividend per share by earnings per share. D) earnings per share by market price per share. 87) 88) Gypsum Corp.'s stock price is currently $50 a share. How much will the new stock price be if the firm declares a 10% stock dividend and the firm's market value remains the same? A) $45.45 B) $55.00 C) $55.55 D) not enough information to compute the new stock price 88) 89) Gypsum Corp. pays out 25% of its earnings as dividends. Earnings per share are currently $1.32, book value per share is $16.80, and the market price per share is $22.44. What is the dividend yield? A) 1.5% B) 2.0% C) 5.9% D) 7.9% 89) 8

90) Beaufort Corp. stock currently sells for $50 per share. The annual dividend payment is $2.00 per share, and earnings per share are $6.00. The dividend yield is ________, and the dividend payout ratio is ________. A) 4%; 33% B) 12%; 0.4% C) 8.33%; 25% D) 33%; 4%. 90) 91) Beaufort Corp. stock currently sells for $50. The dividend yield is 4%, and the dividend payout ratio is 25%. The dividend is ________, and the earnings per share are ________. A) $2.00; $8.00 B) $0.50; $12.50 C) $.12.50; $25 D) $.2.50; $10.00 91) 92) To take advantage of the opportunity to acquire additional shares of a company's stock without incurring any brokerage commissions, many investors participate in A) dividend reinvestment plans. B) initial public offerings. C) deferred equity securities. D) corporate trusts. 92) 93) Reinvested dividends A) are taxed at the time the dividend is paid. B) are taxed when the shares purchased with the reinvested dividend are sold. C) are generally sold at a premium over the market price. D) do not increase the value of an investors holdings. 93) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 94) How are dividends taxed in Canada? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 95) Stocks that perform well in a faltering economy are called defensive stocks. 95) 96) Mid - cap stocks are generally classified as those with a market capitalization between $2 and $10 billion. 96) 97) "Baby blues" is a term used to refer to telecom stocks. 97) 98) The term blue - chip is only applied to stocks listed on the NYSE. 98) 99) So - called income stocks pay fixed dividends similar to interest on bonds. 99) 100) American Depositary Receipts (ADRs) are issued against shares of US corporations and are traded on foreign security exchanges. 100) 101) American Depositary Receipts (ADRs) are denominated in US dollars and traded on US security exchanges but track the performance of a foreign corporation. 101) 102) Over the period from 1900 to 2017, US stocks had the highest rate of return of any country. 102) 103) The rate of return on ADRs is unaffected by changes in the exchange rates. 103) 104) An increase in the value of the yen relative to the dollar has a positive effect on the returns of US investors who invest in the stocks of Japanese firms. 104) 9

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105) An increase in the US dollar relative to the euro has a negative effect on the returns of US investors who invest in European firms. 105) 106) The most common reason for an investor to adopt the quality long - term growth investment strategy is for the long - term accumulation of capital. 106) 107) The total - return approach concentrates solely on capital gains over the long term. 107) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 108) Which of the following is a characteristic of blue chip stocks? A) relatively high - risk exposure B) guaranteed minimum annual dividend of $2 a share C) annual dividends of more than $5 per share D) long and stable dividend and earnings records 108) 109) Which of the following is most likely to provide a stable cash flow with some inflation protection? A) income stocks B) corporate bonds C) growth stocks D) speculative stocks 109) 110) Companies with strong earnings but limited growth opportunities A) do not generally pay any dividends. B) are speculative stocks. C) generally pay high dividends. D) are called blue - chip stocks. 110) 111) Characteristics of established growth companies include all of the following EXCEPT A) high operating margins. B) high dividend payout ratios. C) steady earnings growth. D) adequate cash flow to service their debt. 111) 112) Stocks whose prices are expected to remain stable or even prosper when economic activity is slowing down are known as A) cyclical stocks. B) speculative stocks. C) growth stocks. D) defensive stocks. 112) 113) Which of the following are typical characteristics of small - cap stocks? I. strong balance sheets II. market cap less than $2 billion III. potential for high returns along with high risk IV. potentially dramatic changes in their earnings A) III and IV only B) II and III only C) I, III and IV only D) II, III and IV only 113) 10

114) Which of the following are characteristics of blue - chip stocks? I. solid balance sheets II. generous dividend yields III. immunity from bear markets IV. some growth potential A) III and IV only B) II and III only C) I, II and IV only D) II, III and IV only 114) 115) Aggressive stock management involves A) investing heavily in small, lesser - known companies. B) creating a portfolio heavily weighted toward tech stocks. C) frequent trading in and out of cyclical stocks. D) putting all of one's investments in one or two companies with growth potential. 115) 116) Typical characteristics of growth stocks include A) high rates of growth in operations and earnings. B) acquisitions of competing companies. C) rapidly growing dividends. D) strong performance even in market downturns. 116) 117) One characteristic of mid - cap stocks is that they A) tend to be highly volatile. B) are fairly good - sized companies that offer attractive return opportunities. C) are generally new firms with high growth potential. D) are traded primarily through pink sheet bids. 117) 118) Speculative investors are likely to A) invest in emerging markets. B) invest in small - cap stocks. C) buy and sell frequently. D) all of the above 118) 119) The US stock market A) consistently outperforms the foreign markets once exchange rates are considered. B) is decreasing as a percentage of the world's equity market. C) lists over 25,000 stocks. D) currently represents about 66% of the world's equity market. 119) 120) Advantages of using American Depositary Receipts to participate in foreign markets include I. lower transaction costs than for direct foreign stock purchases. II. reduced exposure to foreign exchange risk. III. dividends are paid in US dollars. IV. quotations are readily available from US sources such as Yahoo! Finance or MSN Money. A) I and II only B) I and III only C) I, II and III only D) I, III and IV 120) 11

121) Laurent buys shares of a Canadian company for CAD$78 per share. Two years later, he sells the shares for CAD$75 per share. At the time of purchase, the exchange rate was CAD$0.81/US$. At the time of sale, the exchange rate was CAD$0.75/US$. What was Laurent's gain or loss per share in US dollars? A) gain of US$1.80 B) loss of US$1.80 C) gain of US$6.93 per share D) loss of US$6.93 per share 121) 122) Ann purchased stock in a German firm at a price per share of 35 euros when the US$/euro exchange rate was $1.20. After six months, she sold the stock for 37 euros when the US$/euro exchange rate was $1.10. The stock does not pay a dividend. What is Ann's rate of return on this investment? A) 3.31% B) - 3.10% C) 9.2% D) 5.7% 122) 123) Aggressive stock management A) requires holding speculative stocks for the long term. B) concentrates on high dividend yielding stocks. C) concentrates on the long - term growth aspects of a security. D) involves active stock trading in the short - term in the quest for capital gains. 123) 124) Which of the following are advantages of the buy and hold strategy? I. rapid accumulation of wealth II. low transaction costs III. capital gains taxed at the long - term rate IV. portfolio requires less time and energy to manage than for most other strategies A) I and II only B) II and III only C) II, III and IV only D) I, II, III and IV 124) 125) Which of the following investment strategies would NOT appeal to an investor who is most concerned with the storage of value? A) quality long - term growth B) buy - and - hold C) speculation and short - term trading D) high income 125) 126) Geraldo is 50 years old and plans to retire in 10 years. A good investments strategy for him would be a A) growth strategy. B) buy - and - hold strategy. C) speculation and short - term trading strategy. D) current income strategy. 126) 127) Aggressive stock management focuses on the pursuit of A) short - term capital gains. B) long - term capital gains. C) dividend income. D) all of the above 127) 12

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128) Which of the following strategies appeal to investors who place primary emphasis on the storage of value aspects of an investment? I. buy and hold II. short - term trading III. quality long - term growth IV. consistent dividend record A) I and IV only B) I and III only C) I, II and III only D) I, III and IV only 128) 129) Which strategy applies to investors who fund long - term goals with high - quality stocks which they retain for the entire investment period? A) current income B) quality long - term growth C) buy and hold D) speculation 129) 130) Income stocks are well suited for retirees because A) dividend income is tax - free. B) the capital gains are predictable. C) dividends tend to increase over time. D) dividend yields tend to exceed bond yields. 130) ESSAY. Write your answer in the space provided or on a separate sheet of paper. 131) Explain why a conservative stock portfolio should include some defensive stocks. 13

Answer Key Testname: UNTITLED6 1) FALSE 2) TRUE 3) TRUE 4) FALSE 5) TRUE 6) C 7) B 8) A 9) D 10) D 11) TRUE 12) FALSE 13) FALSE 14) TRUE 15) TRUE 16) FALSE 17) FALSE 18) FALSE 19) FALSE 20) TRUE 21) TRUE 22) A 23) B 24) A 25) D 26) D 27) B 28) A 29) D 30) A drop of 5% or more in one of the major market indexes, like the Toronto Stock Exchange (TSX), is called a routine decline . A correction is a drop of 10% or more in an index, while the term bear market is reserved for severe market declines of 20% or more. 31) TRUE 32) TRUE 33) TRUE 34) TRUE 35) FALSE 36) FALSE 37) TRUE 38) TRUE 39) TRUE 40) D 41) B 42) D 43) A 44) C 45) D 46) C 47) A 48) D 14

Answer Key Testname: UNTITLED6 49) C 50) A 51) C 52) C 53) C 54) C 55) B 56) A stock split reduces the number of shares outstanding while decreasing the price per share. Firms often declare splits when their stock is trading at a price that they consider to be too high to attract the types of investors they seek. 57) TRUE 58) FALSE 59) TRUE 60) TRUE 61) FALSE 62) TRUE 63) A 64) C 65) A 66) A 67) A 68) D 69) C 70) D 71) C 72) A stock's market value is its actual price at any given time; its investment value is what an investor thinks the stock is worth. If the investor thinks the investment value is higher than the market value, they should buy the stock. However, the market value is a kind of consensus estimate of all investors who are willing to buy or sell at the current price, so it is unlikely that a stock's investment value will be very far above or below its market value. 73) FALSE 74) TRUE 75) FALSE 76) TRUE 77) TRUE 78) FALSE 79) FALSE 80) TRUE 81) A 82) B 83) C 84) C 85) A 86) C 87) B 88) A 89) A 90) A 91) A 92) A 93) A 15

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Answer Key Testname: UNTITLED6 94) Canadian investors get dividend tax credits when they receive dividend income from eligible Canadian companies. Investors have to calculate the gross - up amount of all dividend income from the Canadian companies and calculate their tax break. 95) TRUE 96) TRUE 97) FALSE 98) FALSE 99) FALSE 100) FALSE 101) TRUE 102) FALSE 103) FALSE 104) TRUE 105) TRUE 106) TRUE 107) FALSE 108) D 109) A 110) C 111) B 112) D 113) D 114) C 115) C 116) A 117) B 118) D 119) B 120) D 121) D 122) B 123) D 124) C 125) C 126) B 127) A 128) D 129) C 130) C 131) Stocks generally move in direct correlation to the overall economy. Defensive stocks are the exception as they tend to remain relatively stable or even increase in value when the economy moves into a recession. Thus, defensive stocks offer good downside protection in a faltering economy and also provide the benefits of diversification. 16

Chapter 6

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