Question 1

The sale of new common stock by corporations to initial investors occurs in

Accepted Answer

The sale of new common stock by corporations to initial investors occurs in the primary market. This is where the securities are issued and sold for the first time, and the proceeds go to the issuing company. The secondary market is where previously issued securities are bought and sold among investors, and the OTC and dealer markets are subsets of the secondary market.

Question 2

During the 1980s, cross-border equity investment was largely confined

Accepted Answer

During the 1980s, cross-border equity investment was largely confined to the equity markets of developed countries. The emerging equity markets were not as developed or accessible as they are today, and the equity markets of the former Soviet Union were largely closed off to foreign investment.

Question 3

Which investment is likely to be the most liquid?

Accepted Answer

A share of publicly traded company trading on the NYSE is likely to be the most liquid as it can be easily bought or sold on the stock exchange. The NYSE is one of the largest stock exchanges in the world, and thus, there is usually a high volume of trading activity, making it easy to buy or sell shares quickly. Bonds and properties can also be liquid, but not as much as publicly traded stocks.

Question 4

Only in the _______ did world investors start to invest sizable amounts in the emerging equity markets, as the economic growth and prospects of the developing countries improved.

Accepted Answer

In the 1990s, economic growth and prospects of developing countries improved significantly, leading to increased investments by world investors in emerging equity markets. The 1960s and 1970s saw limited investments in these markets, and the 1980s were marked by economic volatility and crisis in several developing countries.

Question 5

Investment in foreign equity markets

Accepted Answer

Investment in foreign equity markets became more common in the 1980s as investors looked to diversify their portfolios. While initially largely confined to developed markets, it is now a widely accepted practice in the field of finance. Therefore, all of the given choices are correct.

Question 6

The market capitalization of the developing world

Accepted Answer

The developing world typically has a smaller share of global market capitalization compared to developed countries, often around 20 percent.

Question 7

The sale of previously issued common stock traded between investors occurs in

Accepted Answer

The secondary market is where stocks that have already been issued and previously traded between investors are bought and sold. In contrast, the primary market is where new securities are issued and sold directly to investors. The on-the-run market refers to the most recently issued and actively traded securities in a specific market, such as Treasury bonds. The dealer market is a subset of the secondary market, where dealers act as intermediaries to facilitate trades between buyers and sellers.

Question 8

Generally, the higher the turnover ratio,

Accepted Answer

The turnover ratio measures the total value of shares traded on the stock market relative to the total market capitalization. A higher turnover ratio means that there is more activity and trading happening, which generally results in a more liquid secondary stock market. Therefore, choice B is the correct answer.

Question 9

A "primary" stock market is

Accepted Answer

A primary stock market is where corporations issue new shares to initial investors, also known as an initial public offering (IPO). This is different from secondary markets, like the NYSE or Nasdaq, where already issued shares are traded among investors.

Question 10

In general, Standard & Poor's Emerging Markets Data Base classified a stock market as "emerging" if

Accepted Answer

Standard & Poor's Emerging Markets Data Base classified a stock market as "emerging" if either it is located in a low- or middle-income economy as defined by the World Bank or its investable market capitalization is low relative to its most recent GNI figures. Therefore, both options are correct.

Question 11

A measure of "liquidity" for a stock market is

Accepted Answer

The liquidity of a stock market is often measured by the turnover ratio, which is the ratio of stock market transactions over a period of time divided by the market capitalization. This indicates how easily assets can be bought or sold in the market.

Question 12

The turnover ratio percentages for 27 equity markets of developed countries for the five years beginning with 2002 were measured. Most national equity markets had very high turnover ratios, with the great majority in excess of

Accepted Answer

Based on the given information, it can be inferred that most national equity markets had turnover ratios exceeding 50 percent per year. This is because the statement mentions that "most equity markets had very high turnover ratios" and the options only go up to 75 percent, which suggests that 50 percent is the most likely answer.

Question 13

The market capitalization of the developed world

Accepted Answer

According to a report by Credit Suisse in 2021, the market capitalization of the developed world is about 80 percent of the market capitalization of the entire world.

Question 14

Public traders do not trade directly with one another in a dealer market.

Accepted Answer

In a dealer market, transactions are conducted through dealers who buy and sell securities for their own accounts, rather than directly between public traders.

Question 15

Which investment is likely to be the least liquid?

Accepted Answer

A house in a nice part of town is likely to be the least liquid of the options given, as selling a house can take time and may require finding a buyer who is willing and able to pay a fair price. Shares of publicly traded companies and bonds issued by well-known companies can typically be sold more easily and quickly through established market channels.

Question 16

A liquid stock market

Accepted Answer

A liquid stock market is characterized by the ability for investors to quickly buy and sell stocks without causing a significant impact on the stock's price, meaning transactions can occur rapidly at prices close to the current quotes.

Question 17

In mutual funds, investment in emerging foreign equity markets

Accepted Answer

Emerging foreign equity markets represent less than one percent of investments in U.S.-based mutual funds.

Question 18

The turnover ratio percentages for 36 equity markets of emerging markets for the five years beginning with 2002 were measured. Many of the small equity markets in each region (e.g., Peru, Venezuela, Sri Lanka, Slovak Republic, Croatia, and Zimbabwe) have relatively low turnover ratios,

Accepted Answer

A low turnover ratio typically indicates poor liquidity, meaning that there are not many buyers or sellers in the market. This can make it difficult for investors to trade securities and can result in price inefficiencies. Therefore, the small equity markets in each region with relatively low turnover ratios may be suffering from poor liquidity. The other choices (B and C) are not supported by the given information.

Question 19

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.

Accepted Answer

In a dealer market, the broker facilitates the trade through the dealer who acts as a principal by buying and selling securities for their own account.

Question 20

A measure of liquidity for a stock market is the turnover ratio; defined as

Accepted Answer

The turnover ratio is defined as the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market. This indicates how easily stocks can be bought and sold in the market, and a higher turnover ratio generally implies higher liquidity. Choice B is incorrect because it is the inverse of the turnover ratio, and choice C is incorrect because it measures company sales, not stock market liquidity.

Quiz 13: International Equity Markets