Chapter 12: Market Microstructure and Strategies
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Page 1
1. A ____ order to buy or sell a stock means to execute the transaction at the best possible price.
a.
market
b.
limit
c.
stop-loss
d.
stop-buy
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
2. With a ____ order, the investor specifies a purchase price that is above the current market price.
a.
market
b.
limit
c.
stop-loss
d.
stop-buy
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
3. When investors buy stock with borrowed funds, this is sometimes referred to as
a.
use of proxy.
b.
purchasing stock on margin.
c.
a margin call.
d.
a margin residual claim.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
4. The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the
stock’s initial purchase price.
a.
b.
ANSWER:
b
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Page 2
5. Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and
borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the
end of one year?
a.
50 percent
b.
30 percent
c.
10 percent
d.
16 percent
e.
8 percent
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Application
6. When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy
stocks, it is making a
a.
margin call.
b.
short sale.
c.
proxy fight.
d.
hedge.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
7. Which of the following statements is incorrect?
a.
In a short sale, investors place an order to sell a stock that they do not own.
b.
Investors sell a stock short when they anticipate that its price will rise.
c.
When investors sell short, they will ultimately have to provide the stock back to the investor from whom they
borrowed it.
d.
Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend
payments that the investor would have received of the stock had not been borrowed.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
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Page 3
8. Which of the following statements about program trading is incorrect?
a.
It represents a computerized response by institutional investors to either buy or sell a large basket of stocks in
response to movements in a particular stock index.
b.
It may involve the purchase of stocks that have become “underpriced.”
c.
It may involve the sale of stocks that have become “overpriced.”
d.
It is designed to capitalize on Federal Reserve monetary policy announcements.
e.
None of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
9. You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60
percent cash and 40 percent borrowed funds, your return on your investment would have been
a.
positive
b.
more negative than if you had covered the entire investment with cash.
c.
negative, but more favorable than if you had covered the entire investment with cash.
d.
zero
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Application
10. Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark
does not borrow any money from his brokerage firm, what is the estimated return on the stock?
a.
30.00 percent
b.
−42.86 percent
c.
−30.00 percent
d.
42.86 percent
e.
none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
Chapter 12: Market Microstructure and Strategies
Copyright Cengage Learning. Powered by Cognero.
Page 5
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
14. The short interest ratio is commonly measured as the number of shares sold short divided by the number of shares that
the firm has repurchased in the last quarter.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
15. Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
16. A short seller
a.
anticipates that the price of the stock sold short will increase.
b.
earns the difference between what was initially paid for the stock versus what the stock is later sold for.
c.
makes a profit equal to the difference between the original selling price and the price paid for the stock, after
subtracting any dividend payments made.
d.
is essentially lending the stock to another investor and will ultimately receive that stock back from that
investor.
e.
none of the above
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
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Page 6
17. ____ are enforced to restrict the amount of credit extended to customers by stockbrokers.
a.
Limit orders
b.
Margin requirements
c.
Maintenance margins
d.
Initial margins
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
18. Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on
margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after
one year, the stock is sold at a price of $65.25 per share, the return on the stock is
a.
60 percent
b.
44 percent.
c.
30 percent.
d.
69 percent.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Application
19. Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock,
using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of
$65.25 per share, the return on the stock is
a.
26.5 percent.
b.
28.5 percent.
c.
30.5 percent.
d.
34.5 percent.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Application
KEYWORDS:
Comprehension
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Page 8
24. A short interest ratio of 20 or higher indicates that many investors
a.
believe that the stock price is currently overvalued.
b.
believe that the stock price is currently undervalued.
c.
are selling the stock short.
d.
both A and C
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
25. Short selling a stock refers to
a.
poor performance from purchasing an overvalued stock.
b.
the new issuance of low-priced stocks by firms.
c.
the new issuance of stocks by financially weak firms.
d.
the borrowing of stock owned by someone else and selling it in the market.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
26. Trading halts are imposed by
a.
the SEC.
b.
brokers.
c.
stock exchanges.
d.
the Treasury.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
Chapter 12: Market Microstructure and Strategies
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Page 9
27. The size of the spread on stocks that have relatively little trading is
a.
smaller to reflect the lower degree of uncertainty.
b.
the same as that of stocks with higher volumes of trading.
c.
wider to reflect the higher degree of uncertainty.
d.
not affected by trading volume.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
28. The ____ the trading volume of a stock, the ____ the spread.
a.
higher; wider
b.
higher; narrower
c.
lower; narrower
d.
none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Comprehension
29. Electronic communications networks are primarily intended to prevent executives from using inside information when
trading stocks.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
30. A ____ is a trading platform on a computer website that allows investors to trade stocks without the use of a broker.
a.
direct access broker
b.
program trader
c.
market maker
d.
communication network
ANSWER:
a
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Page 10
31. The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are
valued at more than $1 million.
a.
direct access brokering
b.
electronic communication networking
c.
program trading
d.
regulation of stock trading
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
32. Trading halts are intended to ensure that the market has complete information before trading on news.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge
33. The Division of ____ of the SEC requires the orderly disclosure of securities trades by various organizations that
facilitate the trading of securities.
a.
Corporate Finance
b.
Enforcement
c.
Administration
d.
Market Regulation
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.12.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Knowledge