Fundamentals of Investments, 8e (Jordan)
Chapter 2 The Investment Process
1) Market timing is the:
A) placing of an order within the last half-hour of trading for a day.
B) period of time between the placement of a short sale and the covering of that sale.
C) buying and selling of securities in anticipation of the overall direction of the market.
D) staggering of either buy or sell orders to mask the total size of a large transaction.
E) placing of trades within the last half-hour prior to the commencement of daily trading.
2) Asset allocation is the:
A) selection of specific securities within a particular class or industry.
B) division of a purchase price between a cash payment and a margin loan.
C) division of a portfolio into short and long positions.
D) distribution of investment funds among various broad asset classes.
E) dividing of assets into those that are hypothecated and those that are not.
3) Jack is researching chemical companies in an effort to determine which company’s stock he
should purchase. This process is known as:
A) market timing.
B) purchase shorting.
C) marketing research.
D) asset allocation.
E) security selection.
4) A Roth IRA:
A) is a form of “tax-deferred” account.
B) funds are taxed at the time you begin withdrawals.
C) are well-suited to investors nearing retirement.
D) invests after-tax dollars.
E) is the type of account offered by most employers.
5) A brokerage account in which purchases can be made using credit is referred to as which type
of account?
A) clearing
B) funds available
C) cash
D) call
E) margin
6) Kay just purchased $5,000 worth of stock. She paid $3,000 in cash and borrowed $2,000. In
this example, the term margin refers to:
A) the total amount of the purchase.
B) the percentage of the purchase that was paid in cash.
C) the percentage of the purchase paid with borrowed funds.
D) any future increase in the value of the stock.
E) any future decrease in the value of the stock.
7) Which one of the following best describes the term “initial margin”?
A) Amount of money that must be deposited to open a margin account with a broker
B) Amount of cash that must be paid to purchase a security on margin
C) Amount of cash that must be paid when a broker issues a margin call
D) Amount of money borrowed when a security is purchased
E) Total loan amount offered to a customer by a brokerage firm to cover future purchases
8) The minimum equity that must be maintained at all times in a margin account is called the:
A) initial margin.
B) initial equity position.
C) maintenance margin.
D) call requirement.
E) margin call.
9) When your equity position in a security is less than the required amount, your brokerage firm
will issue a:
A) margin call.
B) margin certificate.
C) cash certificate.
D) limit order.
E) leverage call.
10) Sam purchased 500 shares of Microsoft stock which he has pledged to his broker as
collateral for the loan in his margin account. This process of pledging securities is called:
A) margin calling.
B) hypothecation.
C) leveraging.
D) maintaining the margin.
E) street securitization.
11) Staci owns 1,000 shares of stock in a margin account. Those shares are most likely held in:
A) transit.
B) her registered name.
C) street name.
D) a wrap account.
E) a discretionary account.
12) This morning, Josh sold 800 shares of stock that he did not own. This sale is referred to as a:
A) margin sale.
B) long position.
C) wrap trade.
D) hypothecated sale.
E) short sale.
13) The amount of common stock held in short positions is referred to as the short:
A) margin.
B) shares.
C) proceeds.
D) sale.
E) interest.
14) A company that owns income-producing real estate such as an apartment complex or a retail
shopping center is called a(n):
A) REIT.
B) SIPC.
C) REEF.
D) EAR.
E) SPIC.
15) An investor who has a resource constraint:
A) pays no income taxes.
B) has insufficient funds to purchase a security.
C) has a relatively high marginal tax rate.
D) has only one source of income.
E) will only invest in socially acceptable securities.
16) To be considered liquid, a security must:
A) be held in a cash account.
B) pay dividends.
C) be able to be sold on short notice.
D) be held for less than one year.
E) be able to be sold quickly with little, if any, price concession.
17) Walter is trying to decide whether he wants to purchase shares in General Motors, Ford, or
Honda, all of which are auto manufacturers. Walter is making a(n) _______ decision.
A) security selection
B) tax-advantaged
C) risk aversion
D) active strategy
E) asset allocation
18) Brooke has decided to invest 55 percent of her money in large company stocks, 40 percent in
small company stocks, and 5 percent in cash. This is a(n) _____ decision.
A) market timing
B) security selection
C) tax-advantaged
D) active strategy
E) asset allocation
19) Kay plans to retire in two years and wishes to liquidate her account at that time. Kay has a
________ constraint.
A) resource
B) horizon
C) liquidity
D) tax
E) special circumstances
20) The SIPC:
A) guarantees investors against any loss related to an investment account held at a brokerage
firm.
B) guarantees cash balances held in brokerage accounts up to $500,000.
C) is an agency of the federal government.
D) protects private brokerage firms from bankruptcy.
E) protects investors from missing assets when a brokerage firm closes.
21) The determination of which individual stocks to purchase within a particular asset class is
referred to as:
A) security selection.
B) asset allocation.
C) security analysis.
D) market timing.
E) market selection.
22) An investor who follows a fully active strategy will:
A) move money between asset classes as well as try to select the best performers in each class.
B) move money between asset classes but will not be concerned about which individual
securities are owned.
C) focus on picking individual stocks only.
D) maintain a relatively constant mix of asset classes while continually buying and selling
individual securities.
E) concentrate solely on asset allocation to maximize potential returns.
23) Which one of the following decisions falls under the category of asset allocation?
A) Purchasing Ford stock rather than General Motors stock
B) Determining that thirty percent of a portfolio should be invested in bonds
C) Adopting a passive investment strategy
D) Deciding to actively analyse individual securities
E) Deciding to use an online broker
24) Tom recently inherited a large sum of money that he wants to invest in the stock market.
Since he has no investment experience, he has decided that he would like to work with a
professional who can explain the market to him and also manage his funds for him. Ted most
likely needs the services offered by a(n):
A) deep-discount broker.
B) discount broker.
C) full-service broker.
D) online broker.
E) cyber broker.
25) Which one of the following statements is correct?
A) Most brokerage agreements require disputes be settled in a court of law.
B) Arbitration is a formal legal process for settling disputes related to brokerage accounts.
C) Churning is the preferred method of providing deep-discount brokerage services.
D) Discount brokers only provide order execution services.
E) Full service brokers frequently provide financial planning services to clients.
26) Martin has an investment account with William, who is a broker with City Brokerage. Martin
believes that William has mishandled his account by churning it. If he files a complaint against
William seeking compensation, the case will most likely be decided by:
A) the office manager of City Brokerage.
B) a civil suit judge.
C) a jury.
D) an arbitration panel.
E) the SEC Hearing Board.
27) You currently have $5,000 in cash in your brokerage account. You decide to spend $8,000 to
purchase shares of stock and borrow $3,000 from your broker to do so. Which type of brokerage
account do you have?
A) Cash
B) Wrap
C) Margin
D) Short
E) Asset allocation
28) Which one of the following statements is correct?
A) The call money rate is the rate of interest brokerage firms charge on margin loans.
B) The spread is the fee a deep-discount broker charges to execute a trade.
C) The percentage of a purchase paid for with borrowed funds is referred to as the margin.
D) A margin loan is treated as an asset on an account balance sheet.
E) Margin is equal to account equity divided by the value of the securities owned.
29) Staci just used $5,000 of cash plus a $2,500 margin loan to purchase $7,500 worth of stock.
This is the only transaction in her brokerage account. According to her account balance sheet,
she now has account equity of:
A) $2,500.
B) $5,000.
C) $7,500.
D) $12,500.
E) $15,000.
30) Ann just purchased $10,000 of stock. She paid $8,000 in cash and borrowed the remaining
$2,000 needed to pay for this purchase. If you constructed a balance sheet reflecting this
transaction, the total assets would be:
A) $3,000.
B) $9,000.
C) $10,000.
D) $15,000.
E) $21,000.
31) Anita wants to buy $10,000 of securities in her margin account. Her advisor has informed her
that she must pay a minimum of $7,000 in cash and maintain a minimum equity position of 30
percent. The initial margin requirement is ________ percent and the maintenance margin is
________ percent.
A) 30; 30
B) 30; 70
C) 70; 30
D) 70; 50
E) 70; 70
32) The absolute minimum initial margin requirement is set by the:
A) individual investor.
B) brokerage firm.
C) Federal Reserve.
D) Security Investors Protection Corporation.
E) Securities and Exchange Commission.
33) You open a margin account with a local broker and purchase shares of stock. The house
maintenance margin requirement for your account is set by:
A) your broker.
B) the stock exchange.
C) the SEC.
D) the SIPC.
E) the Federal Reserve.
34) If you opt to purchase shares of stock on margin rather than with cash, you will:
A) decrease your maximum potential rate of return.
B) increase your maximum potential rate of return.
C) guarantee yourself a profit.
D) eliminate any potential profit.
E) have equal rates of return regardless of how the purchase is made.
35) What is the purpose of a margin call?
A) to inform you that your margin loan is due and payable
B) to demand funds to increase your margin position
C) to let you know the amount of funds that are now available for you to borrow
D) to advise you that the interest rate on your loan has changed
E) to remind you of the upcoming monthly payment due on your margin loan
36) If you ignore a margin call, your broker:
A) will seize all the assets in your account.
B) will close your account.
C) may place a short sale on your behalf to cover the amount of the call.
D) may sell some of your securities to repay the margin loan.
E) will increase both your margin loan and the rate of interest on that loan.
37) Lauren Mitchell has a margin account with a local brokerage firm, RL Brokers. She recently
purchased 200 shares of Abbot Industries common stock that trades on the New York Stock
Exchange (NYSE). These shares are held in street name and are registered under the name of:
A) Lauren Mitchell.
B) RL Brokers.
C) Abbot Industries.
D) the New York Stock Exchange.
E) the Securities and Exchange Commission.
38) Which one of the following is generally true concerning securities held in street name?
A) The securities are registered under your mailing address rather than your name.
B) There is a greater likelihood the security may be stolen.
C) All dividend checks are mailed to your street address.
D) The annual stock report is mailed directly to your street address.
E) The brokerage firm is the owner of record.
39) Sarah has a brokerage account with Jeff, who is a money manager with Downtown Brokers.
Sarah pays an all-inclusive annual fee to the firm and Jeff manages her funds. She pays no
trading costs or commissions. Which one of the following best describes this type of account?
A) wrap
B) cash
C) margin
D) mutual
E) advisory
40) A discretionary account:
A) authorizes a broker to trade securities on your behalf.
B) charges an annual fee to cover all trading and management services.
C) is the term applied to brokerage accounts with check-writing and credit card services.
D) is the same as a wrap account.
E) is the account used to pledge securities as collateral for a margin loan.