Financial Investment Exam 1 Practical Questions.

Which type of fund generally has the lowest average expense ratio?

Indexed funds

All but which one of the following indices is value weighted?

DJIA - Dow Jones Industrial Average

Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called __________.

balanced funds

Commodity and derivative markets allow firms to adjust their __________.

exposure to various business risks

Which of the following is not a type of managed investment company?

Unit Investment Trusts

__________ have become the main way for investors to speculate in precious metals.

Exchange-traded funds

__________ is not a derivative security.

A share of common stock.

The New York Stock Exchange is a good example of __________.

an auction market

The Standard & Poor's 500 is __________ weighted index.

a value

The efficient market hypothesis suggests that __________.

passive portfolio management strategies are the most appropriate investment strategies.

__________ represents an ownership share in a corporation.

Common stock

The yield on tax-exempt bonds is __________.

less than the yield on taxable bonds

The greatest percentage of mutual fund assets are invested in __________.

equity funds.

Which of the following is NOT a true statement regarding municipal bonds?

A municipal bond is a debt obligation issued by the federal government.

The purchase of a futures contract gives the buyer __________.

the obligation to buy an item at a specified price

Commercial paper is a short-term security issued by __________ to raise funds.

large well-known companies

Which of the following funds invest specifically in stocks of fast-growing companies?

Growth equity funds

Which of the following is not a characteristic of a money market instrument?

Maturity greater than 1 year

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called __________.

book building.

The value of a derivative security __________.

depends on the value of another related security

Underwriting is one of the services provided by __________.

Investment bankers

An individual who goes short in a futures position has the __________.

obligation to deliver the underlying commodity at contract maturity

The bid price of a Treasury bill is __________.

the price at which the dealer in Treasury bills is willing to buy the bill

__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

Passive

An investor in a T-bill earns interest by __________.

buying the bill at a discount from the face value to be received at maturity

Net asset value is defined as __________.

market value of assets minus liabilities divided by shares outstanding

When the market is more optimistic about a firm, its share price will __________; as a result, it will need to issue __________ shares to raise funds that are needed.

rise; fewer

Which type of fund is often priced at a significant discount to net asset value?

Closed-end fund

Which of the following is NOT an example of a financial intermediary?

IBM

Investors who want to liquidate their holdings in a closed-end fund may sell their shares __________.

on the open market

In securities markets, there should be a risk-return trade-off with higher-risk assets having __________ expected returns than lower-risk assets.

higher

Security selection refers to __________.

choosing specific securities within each asset class

_________ are examples of financial intermediaries.

All of the choices are correct

Initial public offerings (IPOs) are usually __________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

underpriced

A fund that invests in securities worldwide, including the United States of America, is called __________.

a global fund

Which of the following is NOT a typical characteristic of common stock ownership?

Unlimited liability

The most marketable money market securities are __________.

Treasury bills

The primary market where new security issues are offered to the public is a good example of __________.

a brokered market

Financial institutions that specialize in assisting corporations in primary market transactions are called __________.

Investment bankers

In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

firm-commitment

A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.

call option

Financial intermediaries exist because small investors cannot efficiently __________.

All of the choices are correct

Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or before a specific date, at a specific price.

right; buy

In a market economy, capital resources are primarily allocated by __________.

financial markets

The __________ price is the price at which a dealer is willing to purchase a security.

bid

Advantages of investment companies to investors include all but which one of the following?

Guaranteed rates of return

Market signals will help to allocate capital efficiently only if investors are acting _______.

on accurate information

The top Morningstar mutual fund performance rating is __________.

5 stars

Methods of encouraging managers to act in shareholders' best interest include:
1. Threat of takeover.
2. Proxy fights for control of the board of directors.
3. Tying managers' compensation to stock price performance.

1, 2, and 3

The 2002 law designed to improve corporate governance is titled the _________.

Sarbanes-Oxley Act

A dollar-denominated deposit at a London bank is called __________.

eurodollars

The __________ price is the price at which a dealer is willing to sell a security.

ask

Mutual fund returns may be granted pass-through status if __________.

All of these options combined

Real assets in the economy include all but which one of the following?

Common stock

__________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.

A load

The primary measurement unit used for assessing the value of one's stake in an investment company is __________.

net asset value

Money market securities are sometimes referred to as cash equivalents because they are __________.

safe, marketable, and offer low return

The bid-ask spread exists because of __________.

the need for dealers to cover expenses and make a profit

By June 2023, financial contracts in the U.S. replaced __________ with __________ for short-term interest rates.

LIBOR; SOFR

An example of a derivative security is __________.

a call option on Intel stock

Which of the following is a false statement regarding open-end mutual funds?

They offer investors a guaranteed rate of return.

Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called __________.

commercial paper

Which of the following result in a taxable event for investors in mutual funds?
1. Short-term capital gain distributions from the fund
2. Dividend distributions from the fund
3. Long-term capital gain distributions from the fund

1, 2, and 3 only

__________ funds stand ready to redeem or issue shares at their net asset value.

Open-end

Money market securities are characterized by:
1. Maturity less than 1 year
2. Safety of the principal investment
3. Low rates of return

1, 2 , and 3

Which of the following is not a money market instrument?

Preferred stock

An intermediary that pools and manages funds for many investors is called __________.

an Investment company

Transactions that do not involve the original issue of securities take place in __________.

Secondary markets

In a perfectly efficient market the best investment strategy is probably __________.

a passive strategy

A bond that has no collateral is called a __________.

debenture

Which of the following is an example of an agency problem?

All of the options are examples of agency problems.

__________ is not a money market instrument.

A Treasury bond

The NAV of which funds is fixed at $1 per share?

Money market funds

The __________ is the most important dealer market in the United States, and the __________ is the most important auction market.

Nasdaq; NYSE

Which of the following is not a nickname for an agency associated with the mortgage markets?

Sallie Mae

Treasury notes have initial maturities between __________ years.

1 and 10

__________ is (are) real assets.

Production equipment

Investors who want to liquidate their holdings in a unit investment trust may sell their shares __________.

back to the trustee at net asset value

Purchases of new issues of stock take place __________.

in the primary market

Asset allocation refers to __________.

the allocation of the investment portfolio across broad asset classes

Initial margin requirements on stocks are set by the __________.

Federal Reserve

Which one of the following invests in a portfolio that is fixed for the life of the fund?

Unit investment trust

An official description of a mutual fund's planned investment policy can be found in the fund's __________.

prospectus

The over-the-counter securities market is a good example of __________.

a dealer market

__________ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector.

Asset allocation funds

Which one of the following types of markets requires the greatest level of trading activity to be cost-effective?

Continuous auction market

An order to buy or sell a security at the current price is a __________.

market order

Which type of investment fund is known to invest in options and futures on a large scale?

Hedge funds

A contingent deferred sales load is commonly called a __________.

back-end load

__________blank are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.

Commingled funds

Real assets are __________.

assets used to produce goods and services

__________ portfolio construction starts with selecting attractively priced securities.

Bottom-up

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

hedge fund

Firms that specialize in helping companies raise capital by selling securities to the public are called __________.

investment banks

The difference between balanced funds and asset allocation funds is that __________.

balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds

Deposits of commercial banks at the Federal Reserve are called __________.

federal funds

__________ are often called mutual funds

Open-end investment companies

The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________.

in proportion to the market value weight of the firm's equity in the S&P 500

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a price-weighted average of 30 large industrial stocks.

When computing the bank discount yield, you would use __________ days in the year.

360