Question 1

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

Accepted Answer

A stop-buy order is used to purchase a stock at a specified price above its current market price, often to limit loss on a short sale or to initiate a new long position in anticipation of the stock's price rising.

Question 2

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

Accepted Answer

A market order instructs the broker to execute the transaction immediately at the prevailing market price. This means that the order will be filled at the best possible price available at the time the order is placed.

Question 3

Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?
A)30.00 percent
B)-42.86 percent
C)-30.00 percent
D)42.86 percent
E)none of the above

Accepted Answer

The estimated return on the stock can be calculated using the following formula:
((Price at which Mark can sell the stock - Price at which Mark purchased the stock)/Price at which Mark purchased the stock)) x 100
= (($100 - $70)/$70) x 100
= 42.86 percent

Question 4

The short interest ratio is commonly measured as the number of shares shorted divided by the number of shares that the firm has repurchased in the last quarter.

Accepted Answer

The correct definition of short interest ratio is the number of shares that have been sold short divided by the total number of shares outstanding. It does not involve the number of shares that the firm has repurchased.

Question 5

Karen just purchased a stock costing $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 the return on the stock?
A)27.60 percent
B)82.61 percent
C)76.09 percent
D)58.70 percent
E)none of the above

Accepted Answer

First, let's calculate how much Karen borrowed:

Amount borrowed = Stock cost - Amount paid upfront
Amount borrowed = $33 - $23
Amount borrowed = $10

Karen pays 15% interest on this $10 for one year:

Interest paid = Amount borrowed x Interest rate
Interest paid = $10 x 0.15
Interest paid = $1.50

Now let's calculate Karen's gain from the dividend and the sale of the stock:

Dividend gain = Annual dividend x Number of shares
Dividend gain = $2 x 1
Dividend gain = $2

Sale gain = Sale price - Stock cost
Sale gain = $50 - $33
Sale gain = $17

Karen's total gain is the sum of the dividend gain and the sale gain:

Total gain = Dividend gain + Sale gain
Total gain = $2 + $17
Total gain = $19

Karen's total cost includes the amount paid upfront and the interest paid on the borrowed amount:

Total cost = Amount paid upfront + Interest paid
Total cost = $23 + $1.50
Total cost = $24.50

Finally, we can calculate the return on the stock as a percentage:

Return on stock = Total gain / Total cost
Return on stock = $19 / $24.50
Return on stock = 0.7759 or 77.59%

Therefore, the answer is choice C, 76.09 percent (rounded to two decimal places).

Question 6

Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.

Accepted Answer

Purchasing a stock on margin actually increases the investor's risk as they are borrowing funds to purchase the stock and will have to pay back the loan plus interest regardless of the stock's performance. Using all cash to buy the stock eliminates the risk of having to pay back a loan.

Question 7

A short seller
A)anticipates that the price of the stock sold short will increase.
B)earns the difference between what they initially paid for the stock versus what they later sell the stock for.
C)makes a profit equal to the difference between the original sell 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 the above

Accepted Answer

A short seller anticipates that the price of the stock sold short will decrease. They sell borrowed shares of a stock that they believe will decrease in value, and later buy back the same number of shares at a lower price. The profit is equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made.

Question 8

The present margin requirement is that 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 the above

Accepted Answer

The current margin requirement set by the Federal Reserve Board is 50%, meaning investors must pay at least 50% of the purchase price of securities in cash.

Question 9

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.

Accepted Answer

The answer of Assume that a stock is priced at...

Question 10

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.

Accepted Answer

When you purchase a stock with a combination of cash and borrowed funds (leveraging), and the stock's value decreases, the negative return is magnified because you still owe the borrowed amount plus any interest on it. Therefore, the return on your investment would be more negative than if you had used only cash, since you would not have the additional burden of repaying the borrowed funds.

Question 11

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.

Accepted Answer

The maintenance margin is the minimum amount of equity that must be maintained in a margin account after the stock has been purchased, expressed as a percentage of the total market value of the securities, not the initial purchase price.

Question 12

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.

Accepted Answer

The answer of Assume that a stock is priced at...

Question 13

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.
D)a margin residual claim.

Accepted Answer

Purchasing stock on margin refers to buying stock with borrowed funds. The term "margin" refers to the percentage of the purchase price that the investor must pay with their own cash, while the rest is borrowed. This increases the potential return on investment, but also increases the risk. A margin call occurs when the value of the investor's account falls below a certain level, at which point the broker may require the investor to deposit more cash to cover the potential losses. A margin residual claim does not refer to anything related to buying stock on margin. A proxy is a person appointed to vote on behalf of another shareholder.

Question 14

Program trading
A)is commonly used to reduce the susceptibility of a stock portfolio to stock market movements.
B)may involve the purchase of stocks that become "underpriced."
C)may involve the sale of stocks that become "overpriced."
D)can be combined with the trading of individual bonds to create portfolio insurance.
E)none of the above

Accepted Answer

Program trading is often used to hedge against market movements, reducing the susceptibility of a stock portfolio to such fluctuations.

Question 15

Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent.
A)42.86
B)85.71
C)73.71
D)30.00

Accepted Answer

The answer of Mark would like to purchase a stock...

Question 16

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a
A)stop-loss order with a specified selling price of $55 per share.
B)stop-buy order with a specified purchase price of $55 per share.
C)stop-loss order with a specified selling price of $45 per share.
D)stop-buy order with a specified purchase price of $45 per share.

Accepted Answer

A stop-buy order with a specified purchase price of $55 per share would limit the investor's loss to $5 per share, as it would trigger a buy to cover the short position if the stock price rises to $55.

Question 17

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 of the stock had not been borrowed.

Accepted Answer

Investors sell a stock short when they anticipate that its price will fall, not rise.

Question 18

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.

Accepted Answer

A margin call occurs when a brokerage firm demands more collateral from investors who have borrowed to buy stocks. This is done to protect the brokerage firm from losses in case the stock value decreases.

Question 19

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

Accepted Answer

The investor pays $25 in cash and borrows $25 at 12% interest, which amounts to $28 in total payment at the end of one year ([$25 + ($25*0.12)] = $28).

At the end of the year, the investor receives a $2 dividend per share in addition to the $55 selling price, for a total of $57.

The investor's total profit would be $57 - $28 = $29.

The return would be calculated as the profit ($29) divided by the initial cost ($25), which equals 1.16 or 16%.

Question 20

____ 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

Accepted Answer

Margin requirements are enforced to restrict the amount of credit extended to customers by stockbrokers. Margin requirements determine the amount of cash or securities that customers must deposit with the broker as collateral for a loan to buy securities. This helps to protect the broker from the risk that customers will not repay the loan. Margin requirements can be set by regulatory bodies such as the Securities and Exchange Commission (SEC), or by individual brokers according to their own policies.

Quiz 12: Market Microstructure and Strategies

With a ____ order, the investor specifies a purchase price that is above the current market price.

A ____ order to buy or sell a stock means to execute the transaction at the best possible price.

Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?

The short interest ratio is commonly measured as the number of shares shorted divided by the number of shares that the firm has repurchased in the last quarter.

Karen just purchased a stock costing $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 the return on the stock?

Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock.

A short seller

The present margin requirement is that at least ____ percent of an investor's invested funds must be paid in cash.

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

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.

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

When investors buy stock with borrowed funds, this is sometimes referred to as

Program trading

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a

Which of the following statements is incorrect?

When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a

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?

____ are enforced to restrict the amount of credit extended to customers by stockbrokers.