Name:
Class:
Date:
chapter 12
Indicate whether the statement is true or false.
1. A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the
current market price of the stock.
a. True
b. False
2. Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.
a. True
b. False
3. Electronic communications networks are primarily intended to prevent executives from using inside information when
trading stocks.
a. True
b. False
4. Trading halts are intended to prevent insider trading.
a. True
b. False
5. The short interest represents the amount of interest that borrowers owe on loans used to purchase stock.
a. True
b. False
6. A trading halt prevents a stock from experiencing a loss in response to news.
a. True
b. False
7. A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the
stock.
a. True
b. False
8. The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock’s value
without receiving a margin call.
a. True
b. False
9. The SEC’s Division of Trading and Markets assesses possible violations of the SEC’s regulations and can take action
against individuals or firms.
a. True
b. False
10. When investors place a limit order, they can place it for the day only.
a. True
Name:
Class:
Date:
chapter 12
b. False
11. A market order is an order to buy or sell a stock at the best possible price.
a. True
b. False
12. Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients.
a. True
b. False
13. In naked short selling, short-sellers sell a stock short that they currently own.
a. True
b. False
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. True
b. False
15. It is not illegal for investors to take positions in a stock based on inside information that they received from an insider
at the company, although it would be illegal for the insider to take a position based on that information.
a. True
b. False
16. Under the SEC’s uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a
decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price.
a. True
b. False
17. 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. True
b. False
18. When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that
stock back from the investor to whom they lent it.
a. True
b. False
19. Many high frequency traders are willing to serve as intermediaries (similar to market makers) by accommodating
orders that they believe will ultimately result in profits.
a. True
b. False
Name:
Class:
Date:
chapter 12
20. When the ratio of the number of shares of a stock sold short divided by the total number of shares outstanding is 3
percent or higher, this suggests a large amount of short positions in the market, which implies that a relatively large
number of investors expect the stock’s price to decline.
a. True
b. False
21. Trading halts are intended to ensure that the market has complete information before trading on news.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
22. The bid-ask spread is negatively related to
a. order costs
b. inventory costs
c. risk
d. trading volume
23. Dark pools
a. are computerized platforms used by institutional investors that operate like private stock markets.
b. are stocks issued by firms that have disclosed very limited financial information.
c. are stock option contracts that cover positions in stocks.
d. are contracts used to bet against the default of a debt instrument.
24. ____ may execute transactions on a stock exchange for their clients.
a. Board members
b. Capstone members
c. Floor brokers
d. None of these are correct.
25. The transaction costs associated with international trading of stocks have been reduced by
a. the consolidation of stock exchanges.
b. extensive computerization of stock exchanges.
c. the Eurolist system.
d. All of these are correct.
26. 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. believe that the stock price is currently overvalued AND are selling the stock short.
27. 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.
Name:
Class:
Date:
chapter 12
d. a margin residual claim.
28. 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 these are correct.
29. The strategy of combining the use of futures or options contracts on a stock index with program trading is known as
a. trading with algorithms.
b. downside insurance.
c. portfolio insurance.
d. spread the risk trading.
30. 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.
31. 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.
32. The ____ the trading volume of a stock, the ____ the spread.
a. larger; wider
b. larger; narrower
c. lower; narrower
d. None of these are correct.
33. International trading of stocks has been facilitated by reductions in
a. transaction costs.
b. information costs.
c. exchange rate risk.
d. transaction costs AND information costs.
34. Short selling a stock refers to
a. poor performance from purchasing an overvalued stock.
Name:
Class:
Date:
chapter 12
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.
35. A(n) ____ from a broker requires the investor to put up additional collateral.
a. maintenance margin
b. initial margin
c. margin call
d. trading halt
36. Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?
a. It requires firms to disclose relevant information broadly to investors at the same time.
b. It requires firms to file all relevant information with the SEC before disclosing it to analysts.
c. Some critics suggest that the regulation has caused firms to disclose less information than before to ensure that they
do not violate the regulation.
d. It prohibits firms from communicating with analysts after a news announcement is made to all investors.
e. It requires firms to file all relevant information with the SEC before disclosing it to analysts AND it prohibits firms
from communicating with analysts after a news announcement is made to all investors.
37. Kayla would like to purchase a stock priced at $30. The stock is not expected to pay any dividends in the coming year.
She thinks she can sell the stock for $36 after one year. Her estimated return on the stock would be ____ percent.
a. 6
b. 10
c. 15
d. 20
38. On May 6, 2010, the “__________” occurred, when stocks on the New York Stock Exchange declined by more than 9
percent on average before reversing and recovering most of those losses on that same day. Much of the trading occurred
within a half hour.
a. credit default crisis
b. swap crisis
c. specialist crash
d. flash crash
39. The Division of ____ of the SEC requires the orderly disclosure of securities trades by various organizations that
facilitate the trading of securities.
a. Corporation Finance
b. Enforcement
c. Administration
d. Trading and Markets
40. 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
Name:
Class:
Date:
chapter 12
41. To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap
evidence.
a. dark pool trading
b. naked short selling
c. insider trading
d. accounting fraud
42. Traders that engage in high frequency trading commonly close out their positions in
a. one day.
b. one month.
c. three months.
d. one year.
43. 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
44. Mark uses his own funds to purchase a stock priced at $70. He thinks he can sell the stock for $100 after one year.
What is Mark’s estimated return on the stock?
a. 30.00 percent
b. −42.86 percent
c. −30.00 percent
d. 42.86 percent
e. None of these are correct.
45. Which of the following is incorrect with regard to taxes imposed on stock transactions?
a. Stock transactions are subject to dividend and capital gains tax at the federal level and may be subject to state
income tax as well.
b. Stocks have to be held for at least one year to qualify for the long-term capital gains tax.
c. The maximum federal tax on dividends and long-term capital gains is 14 percent.
d. Higher tax rates are imposed on the dividends and capital gains of individuals in high tax brackets.
46. ____ may facilitate stock transactions by taking positions in specific stocks.
a. Board members
b. Capstone members
c. Market makers
d. None of these are correct.
47. Under the present margin requirements, at least ____ percent of an investor’s invested funds must be paid in cash.
a. 20
b. 30
c. 40
d. 50
e. None of these are correct.
Name:
Class:
Date:
chapter 12
48. A criticism of dark pools is that they
a. reduce transparency.
b. are more expensive than the public stock exchanges.
c. are not accessible to institutional investors.
d. cannot be used to trade large blocks of stock.
49. Which of the following statements is incorrect with respect to the structure of the SEC?
a. It is composed of seven commissioners appointed by the president of the United States.
b. The president selects one commissioner to chair the commission.
c. Each commissioner serves a five-year term.
d. Commissioners’ terms are staggered.
e. Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the
regulations as needed.
50. ____ 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
51. 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.
52. Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants
(“experts”) by a hedge fund to provide insight about the company
a. are illegal under Regulation FD.
b. are legitimate if the consultants divulge only information that is already public.
c. have raised concerns that the consultants provide inside information.
d. are legitimate if the consultants divulge only information that is already public AND have raised concerns that the
consultants provide inside information.
53. 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
54. High frequency traders set up their own _________ that specify the conditions under which a specific stock should be
purchased or sold, the size of the transaction, and the price that should be paid.
a. algorithms
b. inverse programs
c. circuit breakers
Name:
Class:
Date:
chapter 12
d. nextron networks
55. Which of the following is incorrect in regard to short selling?
a. Naked short selling involves selling a stock short without first borrowing the stock.
b. During the credit crisis, the SEC temporarily protected more than 800 firms from short selling.
c. The SEC’s uptick rule prevents speculators from taking a short position in stocks that have declined at least 30
percent for the day, except when the most recent trade resulted in an increase in the stock price.
d. During the credit crisis, some short-sellers focused particularly on the stocks of financial institutions.
e. None of these are correct.
56. Mark purchases a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark thinks
he can sell the stock for $100 after one year. If Mark uses his own funds for half of the investment amount and borrows
the remainder from his brokerage firm at an annual interest rate of 12 percent, his estimated return on the stock would be
____ percent.
a. 42.86
b. 85.71
c. 73.71
d. 30.00
57. The SEC’s ____ reviews the registration statement filed when a firm goes public, corporate filings for annual and
quarterly reports, and proxy statements that involve voting for board members or other corporate issues.
a. Division of Corporation Finance
b. Division of Trading and Markets
c. Division of Enforcement
d. None of these are correct.
58. 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
59. 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 these are correct.
60. When the price of a company’s stock increases or decreases significantly in advance of a public announcement of an
event affecting the company, there are suspicions that __________ may have occurred.
a. bid rigging
b. default inversion
Name:
Class:
Date:
chapter 12
c. insider trading
d. an increase in margin requirements
61. ____ is defined as 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.
a. Direct access brokering
b. Electronic communication networking
c. Program trading
d. High-volume stock trading
62. ____ offer advice to customers on stocks to buy or sell.
a. Full-service brokers
b. Discount brokers
c. Floor brokers
d. Specialists
e. Market makers
63. 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 if the stock had not been borrowed.
64. Trading halts are imposed by
a. the SEC.
b. brokers.
c. stock exchanges.
d. the Treasury.
65. ______________ represents the use of electronic platforms to execute orders based on an algorithm with programmed
instructions.
a. High frequency trading
b. Mechanical analysis
c. Liquidity trading
d. Technical analysis
66. The Division of ____ of the SEC assesses possible violations of SEC regulations and can take action against
individuals or firms.
a. Corporation Finance
b. Enforcement
c. Administration
d. Trading and Markets
Name:
Class:
Date:
chapter 12
67. 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.
68. The risk of a short sale is that the stock price
a. may decrease over time.
b. will remain the same.
c. may increase over time.
d. None of these are correct.
69. Karen purchased a stock priced at $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at
15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of
$50, what is her return on the stock?
a. 27.60 percent
b. 82.61 percent
c. 76.09 percent
d. 58.70 percent
e. None of these are correct.
70. While an investor’s ability to simultaneously consider multiple markets to accommodate orders was perceived to
allow for more competitive pricing (lower transactions costs), it also led to a form of “_______________” whereby
traders with relatively faster access to specific markets can use another trader’s planned orders and move ahead of that
order.
a. randomized algo
b. front running
c. circuit breaking
d. specialist surfing
Name:
Class:
Date:
chapter 12
Answer Key
Name:
Class:
Date:
chapter 12
Name:
Class:
Date:
chapter 12