1. Shareholders are also called
a. bondholders.
b. brokers.
c. stockholders.
d. debt-holders.
2. Which of the following statements is true?
a. Stockholders benefit when the price of the stocks they hold rises and lose when the price of the stocks they
hold falls.
b. Stockholders benefit when the price of the stocks they hold falls and lose when the price of the stocks they
hold rises.
c. Stockholders have the right to participate in the decision making of a company but are not entitled to dividend
payments.
d. Stockholders are entitled to dividend payments but do not have the right to participate in the decision making
of a company.
3. A place where people buy or sell stocks is known as a stock
a. exchange.
b. index.
c. fund.
d. holding.
4. A stock index tells you
a. the average price of a collection of stocks.
b. the expected changes in the prices of select stocks over a year.
c. where to buy or sell stocks.
d. what stocks to buy or sell.
5. Which of the following statements correctly identifies a difference between a stock exchange and a stock index?
a. A stock exchange refers to a market where stocks of government-owned enterprises are traded, while a
stock index refers to a market where the stocks of privately-owned enterprises are traded.
b. A stock index refers to a market where stocks of government-owned enterprises are traded, while a
stock exchange refers to a market where the stocks of privately-owned enterprises are traded.
c. A stock exchange refers to a market where stocks are traded, while a stock index reflects the average price
of a collection of stocks.
d. A stock index refers to a market where stocks are traded, while a stock exchange reflects the average price
of a collection of stocks.
6. The S&P 500 stock index is an index of
a. all the companies whose shares trade at a price more than $500.
b. all the companies whose shares trade on the New York Stock Exchange.
c. 500 major companies whose shares trade in U.S. markets.
d. the largest 500 companies in the world.
7. An index that measures the average stock prices of small firms in the United States is the
a. Russell 2000 index.
b. NYSE index.
c. Dow Jones Industrial Average.
d. S&P 500.
8. An index of thirty major U.S. industrial companies is the
a. NASDAQ index.
b. NYSE index.
c. Dow Jones Industrial Average.
d. S&P 500.
9. The Wilshire 5000 stock index is
a. an index of the 2000 largest industrial companies whose shares trade in U.S. markets.
b. an index of all the companies with U.S. headquarters whose shares trade in the U.S.
c. an index of 5000 major companies whose shares trade in U.S. markets.
d. an index of the average stock prices of many small firms operating in the U.S.
10. Which of the following statements is true?
a. Different stock indexes normally show the same total returns.
b. Stock indexes do not provide information on dividends.
c. Mutual funds encourage investors to invest in the same security instead of diversifying.
d. The S&P 500 is an example of a mutual fund.
11. A mutual fund is
a. a hedge fund that only wealthy people may invest in.
b. a company that buys a share of each stock in the entire stock market.
c. an investment company that buys stocks in companies that are not growing strongly.
d. an investment company that pools the funds of many investors and buys a large number of different stocks.
12. An index fund is
a. a mutual fund that mimics a stock index.
b. an investment company that pools the funds of many investors and buys government bonds.
c. a mutual fund that buys mortgage-backed securities (MBSs).
d. a company that rates companies in terms of their financial strength.
13. Which of the following statements is true?
a. Dividend payments of firms are independent of how much profit the firm is making.
b. Stock prices of firms are independent of how much profit the firm is making.
c. A share of stock gives an investor complete ownership of the corporation that issued the stock.
d. A share of stock gives an investor partial ownership of the corporation that issued the stock.
14. A stock which was bought for $1,000 pays annual dividends of $250. The first quarter dividend yield of the stock can
be calculated at
a. 1.75 percent.
b. 3 percent.
c. 5.25 percent.
d. 6.25 percent.
15. An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year. At the end of the
year, the stock is worth $9,300. The dividend yield for the year is
a. −2.5 percent.
b. 2.5 percent.
c. 4.5 percent.
d. −7.0 percent.
16. An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year. At the end of the
year, the stock is worth $9,300. The capital-gains yield for the year is
a. 2.5 percent.
b. −2.5 percent.
c. −4.5 percent.
d. −7.0 percent.
17. An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year. At the end of the
year, the stock is worth $9,300. The total return for the year is
a. 2.5 percent.
b. −2.5 percent.
c. −4.5 percent.
d. −7.0 percent.
18. An investor earns dividends of $450 during the course of a year. At the end of the year, the stock is worth $10,700.
If the capital-gains yield on the stock over the year is calculated at 8 percent the approximate worth of the stock at
the beginning of the year was
a. $9,007.
b. $9,457.
c. $9,907.
d. $10,357.
19. An investor earns dividends of $450 on a stock during the course of the year. At the end of the year, the stock is
worth $10,142. Over the year, the total return on the stock was 12 percent. At the beginning of the year, the stock
must have been approximately worth
a. $9,007.
b. $9,457.
c. $9,907.
d. $10,357.
20. An investor earns dividends of $360.27 during the course of the year. At the end of the year, the stock is worth
$10,700. If the dividend yield on the stock over the year was calculated at 4%, the approximate worth of the stock at
the beginning of the year was
a. $9,007.
b. $9,457.
c. $9,907.
d. $10,357.
21. Identify the correct statement from the following.
a. Dividend payments are subject to taxes while realized capital gains are not.
b. Realized capital gains are subject to taxes while dividend payments are not.
c. Both dividend payments and realized capital gains are subject to taxes.
d. Neither dividend payments nor realized capital gains are subject to taxes.
22. Implicit capital gains are
a. increases in the capital stock required to operate stock markets.
b. capital gains realized by foreign investors.
c. capital gains that have been realized by domestic investors.
d. capital gains that have been accrued but not yet realized.
23. Which of the following statements is true?
a. If a company retains profits instead of paying dividends, the price of their stock is expected to rise.
b. Investors need not pay taxes on dividend earnings.
c. Dividend earnings are legally not allowed to be invested and can only be used for consumption.
d. The annual dividend yield on a stock is always greater than the annual capital-gains yield on the same stock.
24. Which of the following statements is true?
a. Both realized and implicit capital gains are taxed.
b. Realized capital gains are taxed, while implicit capital gains are not taxed.
c. Implicit capital gains are taxed, while realized capital gains are not taxed.
d. Neither realized capital gains, nor implicit capital gains are taxed.
25. Realized capital gains are
a. increases in the value of a firm that occur because a firm has retained earnings that are exempt from
corporate profits taxes.
b. capital gains that are owned by foreigners.
c. capital gains that an investor receives from actually selling stock.
d. capital gains that have been accrued but not yet received because the stock has not been sold.
26. The lock-in effect occurs when
a. the price of all stocks traded in an exchange appreciates.
b. short selling of stocks is not allowed.
c. stock prices decline more than 5 percent in one day.
d. an investor doesn’t sell a stock so she can avoid paying capital-gains taxes.
27. The lock-in effect
a. allows stocks to be priced efficiently.
b. will be smaller in magnitude if tax rates are lower.
c. is likely to reduce the volume of stocks being traded in a market.
d. states that when stock prices rise, they will continue to do so for prolonged time periods.
28. An investor earns $400 in dividends and $800 in capital gains over a year. If the tax rate on these earnings is 15%,
what is the total tax that the investor is liable to pay on these earnings?
a. $0. b.
$60. c.
$120. d.
$180.
29. An investor buys a stock for $1,200 at the beginning of a year. The stock pays him a dividend of $150 over the year,
and the worth of the stock appreciates by $300 at the end of the year. If the annual rate of inflation is 6%, what is
the loss in principal value due to inflation?
a. $18
b. $27
c. $72
d. $247.5
30. An investor buys stock for $10,000 at the beginning of the year. She earns dividends of $300 during the course of the
year. At the end of the year, the stock is worth $10,800. The tax rate on dividends and capital gains is 15 percent.
The inflation rate is 3 percent. What is the real return accrued on the stock at the end of the year, provided the
investor does not sell the stock?
a. 6.35 percent.
b. 6.95 percent.
c. 7.55 percent.
d. 8 percent.
31. An investor buys stock for $10,000 at the beginning of the year. She earns dividends of $300 during the course of the
year. At the end of the year, the stock is worth $10,800.The tax rate on dividends and capital gains is 15 percent.
The inflation rate is 3 percent. What is the investor’s after tax real return if she sells the stock at the end of the year?
a. 6.35 percent.
b. 6.95 percent.
c. 7.55 percent.
d. 8.15 percent.
32. A benefit of mutual funds that mainly buy stocks and hold them is that
a. the price of the stocks they hold always appreciate.
b. dividend payments on such stocks are not taxed.
c. they help avoid taxes as the capital gains on these stocks are implicit.
d. they promise annual returns of more than 50% of the principal amount.
33. Which of the following statements is true?
a. When an investor diversifies his investments, the total risk involved reduces.
b. Dividends paid on stocks are legally not liable to attract taxes.
c. When a company increases its retained earnings, the dividends paid by it increases.
d. As a company increases its retained earnings, the stock price of the company is expected to reduce.
34. In the United States, an investor who bought the average stock in 1929 and sold it in 1959 would have had a
a. negative or zero real capital gain on his stock.
b. 50 percent real capital gain on his stock. c.
100 percent real capital gain on his stock. d.
1000 percent real capital gain on his stock.
35. In recessions, the average real return to the stock market is often
a. negative.
b. between 0% to 5%. c.
between 5% to 10%. d.
between 10% to 20%.
36. In the second half of the 1990s, the average annual real return to the stock market was about each year.
a. 23 percent.
b. 10 percent.
c. 5 percent.
d. 2 percent.
37. The idea that stock prices fully reflect all available information is called
a. asymmetric information.
b. random walk theory.
c. volatile markets hypothesis.
d. the efficient markets hypothesis.
38. The efficient market hypothesis assumes that
a. there are only a few buyers and sellers in a stock market and stocks are illiquid.
b. there are many buyers and sellers in a stock market and stocks are illiquid.
c. there are only a few buyers and sellers in a stock market and stocks are liquid.
d. there are many buyers and sellers in a stock market and stocks are liquid.
39. If sales of a firm exactly equals investor expectations, stock price of the firm
a. is expected to increase.
b. is expected to decrease.
c. is expected to remain the same.
d. can increase or decrease depending on the volume of stocks being traded.
40. When stock prices are unpredictable, they are said to
a. be riskless.
b. follow a random walk.
c. lack a martingale.
d. be ex-dividend.
41. If the stock market is efficient and investors are risk neutral, then
a. capital gains are always positive.
b. stock prices are predictable.
c. the CAPM model works perfectly.
d. stock prices follow a random walk.
42. An anomaly is
a. a stock that has greater than average risk.
b. a mutual fund that only invests in government securities.
c. an odd lot of stock.
d. an incident of predictable patterns to stock prices, that investors could exploit.
43. An observation that does not fit a model is called
a. a martingale.
b. an anomaly.
c. a random walk.
d. a beta coefficient.
44. Which of the following is an example of an anomaly?
a. The discovery that stock prices fully reflect all available information.
b. The discovery that stock prices follow a random walk.
c. The discovery that returns to stock tend to be negative in periods of recessions.
d. The discovery that stocks have a higher than average return in early January.
45. According to the capital asset pricing model (CAPM), the return to a stock
a. follows a random walk.
b. depends on oil prices, interest rates, and economic growth.
c. depends on how risky the stock is compared with the market average.
d. depends on the stock’s risk and the risk to bonds.
46. In the CAPM, the risk to a stock‘s return that is attributable to the fluctuations in the overall stock market is referred
to as
a. idiosyncratic risk.
b. explicit risk.
c. systematic risk.
d. unsystematic risk.
47. In the CAPM, the risk to a stock’s return that is not attributable to the fluctuations in the overall stock market is
referred to as
a. idiosyncratic risk.
b. explicit risk.
c. systematic risk.
d. market risk.
48. Which of the following statements is true?
a. Systematic risk is also referred to as idiosyncratic risk, while unsystematic risk is also referred to as implicit
risk.
b. Unsystematic risk is also referred to as implicit risk, while systematic risk is also referred to as idiosyncratic
risk.
c. Systematic risk can be reduced by diversification, while unsystematic risk cannot be reduced by
diversification.
d. Unsystematic risk can be reduced by diversification, while systematic risk cannot be reduced by
diversification.
49. In the CAPM, the only source of systematic risk is
a. changes in government policy.
b. changes in inflation rates.
c. fluctuations in the foreign exchange rate.
d. overall movement of the stock model.