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1. How would you explain that, although the efficient market
hypothesis applies to the stock market, you can’t successfully
invest by randomly selecting stocks?
A. The hypothesis fails to fully explain the real market
environment.
B. The hypothesis fails to consider these monopolies, which
dominate certain segments of the market.
C. Random selection of stocks would ignore an individual
investor’s goals.
D. New theories are needed to explain stock price behavior
in the new economy.
6. What is the holding period return on an investment of $1,000 held for 10 months with $30
in dividends and a selling price of $1,250?
A. 28 percent C. 23.3 percent
B. 25 percent D. 3 percent
13. The rationale behind a moving average is that
A. observations falling within one standard deviation of the moving average are expected
in approximately two-thirds of all observations, and when an observation falls outside of
this range, it’s indicative of a future change in the direction of prices.
B. deviation from historical trends may be indicative of a change in trend.
C. when observations fall more than 1.96 standard deviations from the moving average,
their probability is .05.
D. a change in the direction of the moving average indicates an opposite change in the
direction of stock prices.
14. Investors contribute to the efficiency of security markets by
A. using available information to make investment decisions.
B. applying technical analysis to their investment decisions.
C. combining cash flow analysis and ratio analysis to estimate stock value.
D. avoiding hot tips.
16. Which of the following statements is correct?
A. Security selection can be a complex process that’s aided by Internet financial
information services.
B. Security selection is most efficiently practiced by applying both technical and
fundamental analysis.
C. Security selection requires only the use of accounting ratios.
D. Security selection simplifies investment decisions
19. In fundamental analysis, the value added by industry analysis is particularly apparent
A. when inflation rates are high and have a broad negative impact on business in general.
B. in industries where business levels significantly change in certain seasons or in
relation to the business cycle.
C. during recessions when business levels are suppressed across most industries.
D. during the rapid growth stage of an economy.
20. Which of the following reasons best explains why you would include inflation in a fundamental
analysis of stock values?
A. Inflation exerts broad influence on factors that underlie the economy.
B. Inflation generally increases stock prices at a faster rate than other prices.
C. Inflation generally increases stock prices because cash inflows increase.
D. High inflation corresponds with high interest rates and low bond values.
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7. Duration is a better way to compare cash flows than simply comparing present values
because
A. duration incorporates cash flow volatility.
B. present value fails to incorporate the timing of cash flows.
C. when maturities differ among compared cash flows, present value inaccurately
represents the yield to maturity.
D. duration effectively treats cash flows as a perpetuity, incorporating the reinvestment rate.
9. If you want to maximize safety and earn federally tax-exempt interest, you should buy
A. municipal bonds backed by the revenue earned on the project funded by the bond.
B. municipal bonds backed by the taxing authority of the issuing government.
C. U.S. Treasury bonds backed by the taxing authority of the U.S. federal government.
D. U.S. Treasury bills backed by the taxing authority of the U.S. federal government.
11. One strategy for diversifying government-issued bonds and earning tax-exempt interest is
to invest in
A. U.S. Treasury bonds, notes, and bills with diverse maturities.
B. a state-specific municipal bond fund.
C. a combination of state and local bonds plus bonds issued by foreign governments.
D. money market mutual funds and U.S. Treasury bills.
13. Why do bond issuers attach a call feature to their bonds?
A. Increases the marketability of the bond
B. Increases the likelihood of issuing bonds at face value or higher
C. Presents an opportunity to capitalize on rising interest rates
D. Frees the organization from high-interest debt if interest rates drop
14. If you were CEO and decided to finance retirement of a bond issue, you would be most
likely to
A. issue collateral serial bonds, the proceeds of which would fund the bond retirement.
B. rewrite the debenture to include an option to exchange bonds for shares of stock.
C. set up a payment arrangement with a trustee to fund an account designated for
bond retirement.
D. sell production assets and apply the proceeds to bond retirement.
19. Periods of a negatively sloped yield curve have also been times of
A. rising interest rates and inflation.
B. a bull market in stocks.
C. rapid economic growth that reduced the cost of long-term debt.
D. low commodity prices.
20. The impact of inflation as it relates to a bonding arrangement is most devastating to
A. borrowers. C. corporations and governments.
B. lenders. D. trustees.
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12. You know that leverage increases risk because
A. leverage increases the opportunity for greater profits and losses.
B. when you lend money to businesses, you increase your exposure to default risk.
C. leverage magnifies the potential return on an investment.
D. leverage brings with it downside risk caused by the time-limited feature of options.
14. Suppose that you’re a corn farmer preparing to plant. You want to reduce the risk that corn
prices will drop below $2.20 per bushel next September when you harvest. What is the
beststrategy to reduce your risk?
A. Enter a long position in corn futures to accept in September to enhance your profit if
corn prices rise.
B. Enter a futures contract to deliver September corn at a price under $2.20.
C. Enter a long position in corn for futures contracts to accept corn in July.
D. Enter a futures contract to deliver September corn at a price above $2.20.