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Student name:__________
1) The sale of new common stock by corporations to initial investors occurs in
A) the primary market.
B) the secondary market.
C) the OTC market.
D) the dealer market.
2) The sale of previously issued common stock traded between investors occurs in
A) the primary market.
B) the secondary market.
C) the on-the-run market.
D) the dealer market.
3) A “primary” stock market is
A) a big internationally-important market like the NYSE.
B) a market where corporations issue new shares to investors.
C) where brokers and market makers trade.
D) none of the options
4) During the 1980s, cross-border equity investment was largely confined to the equity
markets of
A) developing countries.
B) developed countries.
C) both developing and developed countries.
D) none of the options
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5) Investment in foreign equity markets became common practice in the
A) 1960s.
B) 1970s.
C) 1980s.
D) none of the options
6) Only in the ________ did world investors start to invest sizable amounts in the emerging
equity markets.
A) 1970s
B) 1980s
C) 1990s
D) none of the options
7) Investment in foreign equity markets became common practice in the 1980s as investors
became aware of the benefits of
A) international portfolio diversification.
B) debt forgiveness.
C) international portfolio diversification and debt forgiveness.
D) none of the options
8) Only in the 1990s did world investors start to invest sizable amounts in the emerging
equity markets, as
A) the economic growth and prospects of the developing countries improved.
B) the economic growth and prospects of the developing countries declined.
C) the economic growth and prospects of the developed countries stagnated.
D) none of the options
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9) At year-end 2018, total market capitalization of 80 organized stock exchanges tracked by
the World Federation of Exchanges stood at
A) $74,667 billion.
B) $74,667 trillion.
C) $67,125 billion.
D) $67,125 trillion.
10) Total market capitalization for exchanges increased by about ________ percent over
2014 to 2018.
A) 10
B) 20
C) 30
D) 40
11) Which investment is likely to be the most liquid?
A) A share of a publicly traded company trading on the NYSE.
B) A bond issued by a Fortune 500 company.
C) A house in a expensive part of town.
D) A painting by Picasso.
12) Which investment is likely to be the least liquid?
A) A share of publicly traded company trading on the NYSE.
B) A bond issued by a Fortune 500 company.
C) A house in an expensive part of town.
D) An exchange-traded fund that invests in commodities such as precious metals.
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13) A liquid stock market
A) is one in which prices reflect all relevant information quickly.
B) is one in which prices reflect all publicly available information quickly.
C) is one in which prices reflect price and volume information quickly.
D) is one in which investors can buy and sell stocks quickly at close to the current
quoted prices.
14) A measure of liquidity for a stock market is the turnover ratio; defined as
A) the ratio of stock market transactions over a period of time divided by the size, or
market capitalization, of the stock market.
B) the ratio the size, or market capitalization, of the stock market divided by the value of
the stock market transactions over a period of time.
C) the ratio of aggregate company sales over a period of time divided by the size, or
market capitalization, of the stock market.
D) none of the options
15) Generally, the higher the turnover ratio,
A) the less liquid the secondary stock market, indicating ease in trading.
B) the more liquid the secondary stock market, indicating ease in trading.
C) the more liquid the primary stock market, indicating ease in trading.
D) the more efficient the stock market is.
16) The turnover velocity percentages for 74 of the stock exchanges for 2018 were measured.
Over 40 percent of the exchanges, in most years, had in excess of
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A) 15 percent turnover per month.
B) 25 percent turnover per month.
C) 30 percent turnover per month.
D) 75 percent turnover per month.
17) Relatively low turnover ratios indicate
A) poor liquidity.
B) good liquidity.
C) strong investment performance.
D) low market concentration.
18) A measure of “liquidity” for a stock market is
A) the times interest earned ratio.
B) the ratio of stock market transactions over a period of time divided by the size, or
market capitalization, of the stock market.
C) the LIBOR rate.
D) the ratio of the market capitalization of the largest ten companies divided by the total
market capitalization.
19) As a measure of liquidity,
A) generally, the lower the turnover, the greater the liquidity of a secondary stock
market.
B) generally, the higher the turnover, the greater the liquidity of a secondary stock
market.
C) the more a financial asset gurgles when shook the greater the liquidity.
D) none of the options
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20) Generally, the lower the turnover ratio,
A) the less liquid the secondary stock market, indicating difficulty in trading.
B) the more liquid the secondary stock market, indicating difficulty in trading.
C) the more liquid the primary stock market, indicating difficulty in trading.
D) the more efficient the stock market is.
21) Many of the small foreign equity markets (e.g., Argentina, Sri Lanka)
A) have poor liquidity at present.
B) are very liquid stock markets.
C) have fairly high turnover ratios indicating strong liquidity.
D) none of the options
22) In general, if an investment
A) has poor liquidity, it should offer investors a liquidity premium.
B) can be sold fairly quickly at a fair price, it has good liquidity.
C) both of the options
D) none of the options
23) Many of the larger emerging equity markets (e.g., China, India)
A) have poor liquidity at present.
B) are more liquid stock markets than the developed world.
C) have high turnover ratios.
D) none of the options
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24) In which type of market can liquidity “dry up”?
A) A bull market
B) A bear market
C) A speculative bubble
D) A financial panic
25) In which type of policy actions by the Fed can liquidity “dry up”?
A) Easy money
B) Tight money
C) Decrease in the reserve requirement
D) Decrease in the discount rate
26) Fair prices for existing issues is established in the secondary market due to
A) competitive trading between buyers and sellers.
B) decreased trading activity between buyers and sellers.
C) destructive competition between buyers and sellers.
D) none of the options
27) A limit order is an order away from the market price that is held in a ________ until it
can be executed at the desired price.
A) continuous order book
B) limit order book
C) dealer book
D) none of the options
28) Over-the-counter stocks are generally
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A) unlisted stocks.
B) listed stocks.
C) traded at a discount due to their high risk.
D) none of the options
29) The exchange markets in the U.S. are
A) agency markets only.
B) auction markets only.
C) both agency/auction markets.
D) none of the options
30) The first automated national stock market was the
A) NASDAQ.
B) TMX.
C) AMEX.
D) none of the options
31) The secondary stock markets
A) are the markets for “pre-owned” or “used” shares of stock.
B) provide marketability to shares.
C) provide price discovery or share valuation.
D) all of the options
32) Price discovery in the secondary stock markets
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A) occurs due to the competitive trading between buyers and sellers, just like on eBay.
B) is set once a day at the close.
C) is set by the investment bankers at the IPO.
D) all of the options
33) A market order
A) is an instruction from a customer to a broker to buy or sell at the best price available
when the order is received (immediately).
B) is an instruction from a customer to a broker to buy or sell in a particular market
(e.g., NYSE).
C) is always and everywhere “fill-or-kill.”
D) is always and everywhere “good-till-cancelled.”
34) A limit order
A) is an instruction from a customer to a broker to buy or sell in at a particular price (or
better).
B) can be a “day order”—that is the order is cancelled if not executed during that day’s
trading.
C) can be “good-till-cancelled.”
D) all of the options
35) A stop-limit order is an order to buy or sell a stock that combines the features of a stop
order and a limit order. Once the stop price is touched in the market, the stop-limit order
becomes a limit order to buy or to sell at the limit price. Which of the following are true?
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A) The benefit of a stop-limit order is that the investor can control the price at which the
trade will get executed.
B) A stop-limit order may never get filled if the stock’s price never reaches the specified
limit price.
C) The use of stop limit orders is much more frequent for stocks that trade on an
exchange than in the over-the-counter (OTC) market.
D) all of the options
36) Which of the following are true?
A) Unless you give your broker specific instructions to the contrary, orders to buy or
sell a stock are day orders.
B) Orders that have been placed but not executed during regular trading hours will
automatically carry over into after-hours trading but not the next regular trading day.
C) Day orders placed during after-hours trading will automatically carry over into the
next regular trading day.
D) If your order is not executed during a trading session, you are not allowed to place a
new order in the next trading session.
37) A stop order is an order to buy or sell a stock once the price of the stock reaches a
specified price, known as the stop price. When the specified price is reached, your stop order
becomes
A) a market order.
B) a good-till-cancelled (GTC) order.
C) a day order.
D) none of the options
38) To avoid buying a stock at a price higher than you intend, you need to place ________
rather than a market order.
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A) a stop-loss order
B) a day order
C) a good-till-cancelled order
D) a limit order
39) A stop order is an order to buy or sell a stock once the price of the stock reaches a
specified price, known as
A) the stop price.
B) the limit price.
C) the last price.
D) the sell price
40) The advantages of a market order include the fact that
A) since you are not guaranteed the order will be fulfilled, the price is typically
discounted.
B) since there is a high probability that the market order will not be executed.
C) market orders increase your liquidity.
D) you are pretty much guaranteed that your order will be executed, and a market order
typically has lower commissions than a limit order.
41) Dealers in an OTC market
A) stand ready to buy at the bid and sell at the ask price.
B) set their own bid and ask prices.
C) do not charge commissions.
D) all of the options
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42) A stop order is an order to buy or sell a stock once the price of the stock reaches a
specified price, known as the stop price. When the specified price is reached, your stop order
becomes a market order. The advantage of a stop order is that
A) you don’t have to monitor how a stock is performing on a daily basis.
B) the stop price can be activated by a short-term fluctuation in a stock’s price.
C) once your stop price is reached, your stop order becomes a market order and the
price you receive may be much different from the stop price, especially in a fast-moving market
where stock prices can change rapidly.
D) all of the options
43) The OTC market
A) does not accept credit—the dealers “only take cash.”
B) is a dealer market.
C) includes the NASDAQ in the U.S.
D) is a dealer market and includes the NASDAQ in the U.S.
44) A “specialist”
A) makes a market by holding an inventory of a particular security, like IBM or Intel.
B) is a participant on the floor of the exchange, like the NYSE.
C) has a designated station on the floor of the exchange.
D) all of the options
45) A crowd of floor traders on the NYSE
A) may arrive at a more favorable price for their clients “inside” the specialist’s bid and
ask quotes.
B) are obliged to execute their trades through a specialist.
C) are allowed to “front run” their own trades ahead of customer trades.
D) all of the options
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46) A specialist on the NYSE
A) is obliged to fill limit orders if they are more favorable than the specialist’s posted
bid and ask quotes.
B) is obliged to fill limit orders at the specialist’s posted bid and ask quotes.
C) is actually a computer program, not a human.
D) is obliged to fill limit orders if they are more favorable than the specialist’s posted
bid and ask quotes, and is actually a computer program, not a human.
47) A “call market”
A) is OTC and over-the-phone.
B) features an agent of the exchange that accumulates a batch of orders that are
periodically executed by written or verbal auction throughout the day.
C) provides traders with execution at certain prices.
D) features an agent of the exchange that accumulates a batch of orders that are
periodically executed by written or verbal auction throughout the day and provides traders with
execution at certain prices.
48) The Toronto Stock exchange
A) is a fully automated.
B) features electronic matching of public orders.
C) has continuous order flow.
D) all of the options
49) In an agency market, the broker takes the client’s order through the agent, who matches it
with another public order. The agent can be viewed as
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A) a dealer.
B) a specialist.
C) a broker’s broker.
D) none of the options
50) In an agency market, the broker takes the client’s order through the agent, who matches it
with another public order. Names for the agent are
A) official broker.
B) central broker.
C) a broker’s broker.
D) all of the options
51) The Paris Bourse was traditionally a call market. In a call market, an agent of the
exchange accumulates, over a period of time, a batch of orders that are periodically executed by
written or verbal auction throughout the trading day. Both market and limit orders are handled in
this way.
The major disadvantage of a call market is that
A) traders are not certain about the price at which their orders will transact because bid
and ask quotations are not available prior to the call.
B) traders are not certain about how many shares will be able to sell or buy at the price
they quote because order volume is not available prior to the call.
C) there is a lack of liquidity inter call.
D) none of the options
52) A type of non-continuous exchange trading system is crowd trading.
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A) Unlike a call market in which there is a common price for all trades, several bilateral
trades may take place at different prices in crowd trading.
B) Unlike a continuous market in which there is a common price for all trades, several
bilateral trades may take place at different prices.
C) Unlike a call market in which several bilateral trades may take place at different
prices there is a common price for all trades in a call market.
D) none of the options
53) Which type of trading system is desirable for actively traded issues?
A) Continuous trading systems
B) Call trading systems
C) Crowd trading systems
D) none of the options
54) Call markets and crowd trading offer advantages for ________ because they mitigate the
possibility of sparse order flow over short time periods.
A) thinly traded issues
B) actively traded issues
C) stocks but not bonds
D) none of the options
55) The over-the-counter (OTC) market is a dealer market. Almost all OTC stocks trade on
the National Association of Security Dealers Automated Quotation System (NASDAQ), which is
a computer-linked system that shows
A) the limit orders of all available counterparties.
B) the last price at which a security was sold.
C) the bid (buy) and ask (sell) prices of all dealers in a security.
D) the bid (sell) and ask (buy) prices of all dealers in a security.
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56) On the NYSE, limit order prices receive preference in establishing the posted bid and ask
prices if they are more favorable than the specialist’s. Therefore,
A) a specialist must fill a limit order, if possible, from his own account before trading
the flow of public orders.
B) specialists must fill a limit order, if possible, from the flow of public orders before
trading for his own account.
C) a specialist must change his posted bid and ask prices to reflect the available limit
orders.
D) none of the options
57) The large exchange markets in the United States are
A) agency markets.
B) call markets.
C) auction markets.
D) agency/auction markets.
58) “Call market” and “crowd trading” take place on
A) a non-continuous exchange trading system.
B) a continuous trading exchange system.
C) non-continuous markets and continuous markets, respectively.
D) continuous markets and non-continuous markets, respectively.
59) On September 22, 2000, Euronext was formed as a result of a merger of the
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A) Amsterdam Exchanges
B) Brussels Exchanges
C) Paris Bourse
D) All of the options
60) In June 2001, the ________ merged with Euronext, and Dublin followed suit acquiring
the ________ in March 2018
A) Amsterdam Exchanges; Brussels Exchanges
B) Brussels Exchanges; Paris Bourse
C) Lisbon Stock Exchange; Irish Stock Exchange
D) none of the options
61) A market-value index
A) is calculated such that the proportion of the index a stock represents is determined by
its proportion of the total market capitalization of all stocks in the index.
B) is calculated as the average price of all the stocks in the index that trade that day, one
example is the NASDAQ.
C) is calculated like the DJIA.
D) none of the options
62) Transactions in shares of the iShares Funds will typically generate tax consequences.
This is because
A) iShares Funds are obliged to distribute portfolio gains to shareholders.
B) iShares Funds are not allowed to be held in tax-qualified accounts such as IRAs.
C) iShares Funds feature daily resettlement.
D) none of the options
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63) iShares MSCI are
A) exchange traded funds that are subject to U.S. SEC and IRS diversification
requirements.
B) open-end mutual funds sold OTC.
C) exchange traded funds that are NOT subject to U.S. SEC and IRS diversification
requirements.
D) none of the options
64) A firm may cross-list its share to
A) establish a broader investor base for its stock.
B) establish name recognition in foreign capital markets, thus paving the way for the
firm to source new equity and debt capital from investors in different markets.
C) expose the firm’s name to a broader investor and consumer groups.
D) all of the options
65) Which of the following statements regarding cross-listing is not true?
A) Cross-listing provides a means for expanding the firms base for an investor’s stock.
B) Cross-listing establishes name recognition of the company in a new capital market
C) Cross-listing mitigates the possibility of a hostile takeover of the firm through the
broader investor base created for the firm’s shares.
D) none of the options
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66) Stock in Daimler AG, the famous German automobile manufacturer trades on both the
Frankfurt Stock Exchange in Germany and on the New York Stock Exchange. On the Frankfurt
bourse, Daimler closed at a price of €54.34 on Wednesday, March 5, 2008. On the same day,
Daimler closed in New York at $83.55 per share. To prevent arbitrage trading between the two
exchanges, the shares should trade at the same price when adjusted for the exchange rate. The
$/€ exchange rate on March 5 was $1.5203/€1.00. Thus, €54.34 × $1.5203/€ = $82.61, while the
closing price in New York was $83.55. The difference is easily explainable by the fact that
A) transactions costs exceeded the price difference, so no arbitrage was possible even
for market makers.
B) no one noticed the arbitrage that day, but in a day or so the opening price will adjust.
C) the New York market closes several hours after the Frankfurt exchange, and thus
market prices or exchange rates had changed slightly.
D) none of the options
67) Companies domiciled in countries with weak investor protection can reduce agency costs
between shareholders and management
A) by moving to a better country.
B) by listing their stocks in countries with strong investor protection.
C) by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
D) by having a press conference and promising to be nice to their investors.
68) Advantages of cross-listing include
A) providing their shareholders with a higher degree of protection than may be available
in the home country.
B) a possible signal of the company’s commitment to shareholder rights.
C) possibly making investors, both at home and abroad, more willing to provide capital
and to increase the value of the pre-existing shares.
D) all of the options
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69) “Yankee” stock offerings are
A) shares in foreign companies originally sold to U.S. investors.
B) dollar-denominated shares in foreign companies originally sold to U.S. investors.
C) U.S. stocks held abroad.
D) none of the options
70) Following the monetary union and the advent of the euro:
A) The countries of the European Union have enacted common securities regulation.
B) A pan-European stock exchange has developed in London, similar to the NYSE in
scope and trading practices.
C) Development of a common securities regulations, even among the countries of the
European Union, has not yet occurred.
D) none of the options
71) The European Stock Exchange, comparable in volume to the NYSE
A) is located in Milan.
B) is located in London.
C) is located in Frankfurt.
D) none of the options
72) The first ADRs began trading ________ as a means of eliminating some of the risks,
delays, inconveniences, and expenses of trading the actual shares.
A) in 1997
B) in 1987
C) in 2017
D) in 1927
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73) American Depository Receipt (ADRs) represent foreign stocks
A) denominated in U.S. dollars that trade on European stock exchanges.
B) denominated in U.S. dollars that trade on a U.S. stock exchange.
C) denominated in a foreign currency that trade on a U.S. stock exchange.
D) non-registered (bearer) securities.
74) At the end of 2018, there were how many DR programs representing issuers from around
the world trading on the world’s exchanges according to the DR market review by BNY Mellon?
A) 3,049
B) 40,390
C) 34,090
D) 4,309,000
75) Yankee stocks
A) never trade as ADRs and have higher risks than trading the actual shares.
B) often trade as ADRs and have lower risks than trading the actual shares.
C) are bank receipts representing a multiple of foreign shares deposited in a U.S. bank.
D) often trade as ADRs, have lower risks than trading the actual shares, and are bank
receipts representing a multiple of domestic shares deposited in a foreign bank.
76) ADRs
A) are American Depository Receipts.
B) are denominated in U.S. dollars and may trade on a U.S. stock exchange.
C) are depository receipts for foreign stocks held by the U.S. depository’s custodian.
D) all of the options
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77) Sponsored ADRs
A) are created by a bank at the request of the foreign company that issued the
underlying security.
B) can trade on the NASDAQ.
C) can trade on the NYSE.
D) all of the options
78) ADR trades
A) clear in three days, just like trades in U.S. shares.
B) settle only after the trade in the underlying stocks clear, which can take time
depending on the clearing practices of the national market.
C) are priced in the currency of the underlying security.
D) all of the options
79) On the Paris bourse, shares of Avionelle trade at €45. The spot exchange rate is $1.40 =
€1.00. What is the no-arbitrage U.S. dollar price of an Avionelle ADR? Assume that transactions
costs are negligible and that one ADR represent one underlying share.
A) $63.00
B) $32.14
C) $45.00
D) $45.50
80) In the London market, Rolls-Royce stock closed at £0.875 per share. On the same day,
the British Pound sterling to the U.S. dollar spot exchange rate was £0.6366/$1.00. Rolls Royce
trades as an ADR in the OTC market in the United States. Five underlying Rolls-Royce shares
are packaged into one ADR. The no-arbitrage U.S. price of one ADR is
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A) $4.87.
B) $5.87.
C) $6.87.
D) $7.87.
81) ADRs
A) frequently represent a multiple of the underlying shares.
B) can trade on the NYSE.
C) can trade on the NASDAQ.
D) all of the options
82) In the London market, Rolls-Royce stock closed at £0.875 per share. On the same day,
the British Pound sterling to the U.S. dollar spot exchange rate was £0.6366/$1.00. Rolls Royce
trades as an ADR in the OTC market in the United States. Five underlying Rolls-Royce shares
are packaged into one ADR. If the Rolls Royce ADRs were trading at $5.75 when the underlying
shares were trading in London at £0.875, ignoring transaction costs, the arbitrage trading profit
would be
A) $0.00.
B) $1.12.
C) $2.12.
D) $3.12.
83) In the Frankfurt market, Aldi stock closed at €5 per share. On the same day, the euro-U.S.
dollar spot exchange rate was €.625/$1.00. Aldi trades as an ADR in the OTC market in the
United States. Five underlying Aldi shares are packaged into one ADR. The no-arbitrage U.S.
price of one ADR is
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A) €25.00.
B) $15.63.
C) $40.00.
D) none of the options
84) Global Registered Shares
A) are created when a MNC issues shares globally.
B) purchased on one exchange (say NYSE) is fully fungible with shares purchased on
another exchange (e.g., Frankfurt Stock Exchange).
C) can trade in multiple currencies.
D) all of the options
85) Factors affecting international equity returns are
A) macroeconomic variables that influence the overall economy.
B) exchange rate changes.
C) the industrial structure of the country.
D) all of the options
86) Cross-correlations among major stock markets are
A) relatively high.
B) relatively low.
C) essentially perfect.
D) practically zero.
87) Macroeconomic factors affecting international equity returns include
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A) exchange rate changes.
B) interest rate differentials.
C) changes in inflationary expectations.
D) all of the options
88) Changes in exchange rates
A) explain a larger portion of the variability foreign bond indexes than foreign equity
indexes.
B) do not affect all foreign equity markets equally.
C) affect dollar-denominated foreign equity returns, but this risk can be hedged.
D) all of the options
89) A common set of factors that affect equity returns include
A) macroeconomic variables that influence the overall economic environment in which
the firm issuing the security conducts its business.
B) exchange rate changes between the currency of the country issuing the stock and the
currency of other countries where suppliers, customers, and investors of the firm reside.
C) the industrial structure of the country in which the firm operates.
D) all of the options
90) Solnik (1984) examined the effect of exchange rate changes, interest rate differentials, the
level of the domestic interest rate, and changes in domestic inflation expectations. He found that
A) international monetary variables had only weak influence on equity returns in
comparison to domestic variables.
B) international monetary variables had a stronger influence on equity returns in
comparison to domestic variables.
C) international monetary variables had no influence at all on equity returns.
D) none of the options
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91) Adler and Simon (1986) examined the exposure of a sample of foreign equity and bond
index returns to exchange rate changes. They found that
A) changes in exchange rates generally explained a smaller portion of the variability of
foreign bond indexes than foreign equity indexes.
B) changes in exchange rates generally explained none of the variability of foreign bond
indexes but completely explained the variability in foreign equity indexes.
C) changes in exchange rates generally explained a larger portion of the variability of
foreign equity indexes than foreign bond indexes.
D) changes in exchange rates generally explained a larger portion of the variability of
foreign bond indexes than foreign equity indexes.
92) Studies examining the influence of industrial structure on foreign equity returns
A) conclusively show a connection.
B) have been inconclusive.
C) show that industrialized economies outperform lesser developed economies.
D) none of the options
93) In a dealer market, the broker takes the trade through the dealer, who participates in
trades as a principal by buying and selling the security for his own account.
⊚ true
⊚ false
94) Public traders do not trade directly with one another in a dealer market.
⊚ true
⊚ false
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Answer Key
Test name: chapter 13
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