Principles of Finance, 6e
Besley/Brigham
Chapter 16
Principles of Finance, 6e
Besley/Brigham
Chapter 16
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DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Holding Period Return
Portfolio
Market Value
Stock
1/1/11
12/31/11
12/31/12
Intertech
$2,500
$3,500
$4,375
Data Move
$1,000
$1,200
$1,300
Biofix
$2,100
$2,310
$2,079
Portfolio Value
$5,600
$7,010
$7,754
51. Refer to Portfolio. What was the one-year holding period return for the portfolio in 2011? Assume any dividend
payments are included in the market value shown above.
a.
11.8%
b.
20.1%
c.
39.9%
d.
10.5%
e.
25.2%
ANSWER:
e
RATIONALE:
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Holding Period Return
52. Refer to Portfolio. What was the one-year holding period return for the portfolio in 2009? Assume any dividend
payments are included in the market value shown above.
a.
11.8%
b.
15.0%
c.
25.2%
d.
10.6%
e.
−5.0%
ANSWER:
d
RATIONALE:
Principles of Finance, 6e
Besley/Brigham
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Page 25
a.
stocks; equity
b.
stocks; cash
c.
cash; stocks
d.
bonds; stocks
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Asset Allocation
56. To be broker or to trade securities you must
a.
abide by ethical standards established by the SEC.
b.
abide by any licensing or registration requirements of state in which you trade.
c.
be licensed by the exchanges on which the traded securities are listed.
d.
All of the above.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Brokers
57. A ____ order is an order to execute at the best price available when the transaction reaches the market.
a.
limit
b.
stop
c.
trade
d.
market
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Types of Orders
58. A ____ order is an order to buy or sell a stock at no worse than a specified price.
a.
price
Principles of Finance, 6e
Besley/Brigham
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Page 26
b.
limit
c.
market
d.
stop
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Types of Orders
59. The Securities Investor Protection Corporation insures the cash and securities held by the brokerage company from
theft or loss of the security. Each investor is covered to a maximum of ____.
a.
$100,000
b.
$200,000
c.
$500,000
d.
$1,000,000
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Securities Insurance
60. The expected return on a portfolio is
a.
the sum of the square root of the expected returns on the individual stocks included in the portfolio times the
beta of the individual stocks.
b.
the simple arithmetic average of the expected returns on the individual stocks included in the portfolio.
c.
the geometric average of the expected returns on the individual stocks included in the portfolio.
d.
the weighted average of the expected returns on the individual stocks included in the portfolio.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Portfolio Return
61. To determine the weighted average returns of stocks held in a portfolio, the weights are determined as the fraction
Principles of Finance, 6e
Besley/Brigham
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
a.
of the total portfolio value of each stock at the midpoint of the holding period.
b.
of the total portfolio value of each stock at the end of the holding period.
c.
of the total portfolio average value of each stock during the holding period.
d.
of the total portfolio invested in each stock at the beginning of the holding period.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Portfolio Return
62. The total value of a firm’s stock which can be computed by multiplying the number of shares outstanding by the
market price per share is called what?
a.
Market weighted
b.
Market capitalization
c.
Market beta
d.
Market return
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Market Capitalization
63. All of the following are examples of transactions costs for buying securities except
a.
time costs
b.
bid/ask spread
c.
brokerage fees
d.
telephone calls
e.
all of the above are example of transaction costs
ANSWER:
e
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Transactions Costs
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Besley/Brigham
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64. An investor purchased a share of AutheTec stock (AUTH) for $12.50. Three months later the stock was sold for
$14.25. What is the holding period return earned by the investor?
a.
14%
b.
20%
c.
18%
d.
16%
ANSWER:
a
RATIONALE:
($14.25 − $12.50)/$12.50 = 14%
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-2 – Application
Business Program-3 – Analytic
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Holding Period Return
65. Investors are individuals who try to make a quick profit based on short-term market adjustments.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Investors
66. Once realistic goals have been formulated based on investment objectives and risk attitudes, the costs associated with
the selection and purchase of the investment instruments is minimal.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Investment Costs
67. The primary reason people invest is to supplement current income.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
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ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Reason People Invest
68. Speculators are investors who view investments as instruments that produce growth over a long period of time.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Speculators
69. Financial instruments that offer steady interest or dividend payments are called income securities because they are
good income-producing investments.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Income Securities
70. An investor who wants to have a “hands on” approach to managing his or her investment portfolio in order to take
advantage of market anomalies would want to follow the passive management style of investing.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Principles of Finance, 6e
Besley/Brigham
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a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Types of Orders
75. More stock certificates are registered in the names of individual investors than in street names (i.e., brokerage firms).
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Stock Ownership
76. When the market is rising, it is called a bull market.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Market Movement
77. The average return earned by a portfolio of stocks can be computed by summing the returns associated with the
individual stocks and then dividing the result by the number of stocks in the portfolio.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Principles of Finance, 6e
Besley/Brigham
Chapter 16
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81. The return on an investment is generated by any income produced by the investment and any change in the value, or
the price, of the investment.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Returns
82. Because the simple arithmetic average return does not consider compounding, its value is always less than or equal to
the geometric average return.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Arithmetic versus Geometric Return
83. Even though the simple arithmetic average does not consider compounding, it is useful for determining the average
return for a group of investments at one point in time.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Simple Arithmetic Average Return
84. The holding period return associated with an interest-paying bond is computed by determining the change in the
market value of the bond over a particular time period.
a.
True
b.
False
ANSWER:
False
Principles of Finance, 6e
Besley/Brigham
Chapter 16
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Page 36
must be repaid.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Trading
92. Margin trading allows investors to magnify the returns earned on their investments. This means that if a stock that is
purchased on margin experiences a price increase of 15 percent, the investor actually receives a return greater than 15
percent, even if no dividends are paid, and vice versa.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Trading
93. An investor who trades on margin generally will receive a margin call when the stock price increases significantly
because the broker needs to determine whether the investor wants to liquidate the position to take advantage of the profits
that are available.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Call
94. When an investor short sells a stock, which entails borrowing a stock from another investor and selling it in the market
with the promise to replace the stock at some later date, the investor who owns the stock that is borrowed must be
informed that his or her stock is being used for a short sale.
a.
True
Principles of Finance, 6e
Besley/Brigham
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b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Short Selling
95. An investor who short sells a stock will receive a margin call if the price of the stock decreases substantially.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Short Selling
96. All else equal, investors who are risk averse will pay more for a security with a higher level of risk.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Risk Aversion
97. The degree of risk adversity exhibited by investors varies among individuals at any point in time and changes for
individuals across time.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Principles of Finance, 6e
Besley/Brigham
Chapter 16
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Margin Trading
102. An individual’s risk tolerance level depends on existing economic conditions. For example, when the economy is
doing well an individual is more likely to have lower risk tolerance level.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Risk Tolerance Level
103. Asset allocation refers to the proportion of funds invested in various categories of assets.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 – Knowledge
Business Program-6 – Reflective Thinking
DISC-FIN-09 – Investments
Time Estimate-a – 5 min.
TOPICS:
Asset Allocation