Test bank for Fundamentals of Investing, 14th Edition by Scott B. Smart

Test bank for Fundamentals of Investing, 14th Edition by Scott B. Smart 1 Copyright © 2020 Pearson Education, Inc. Fundamentals of Investing, 14e (Smart/Zutter) Chapter 1 The Investment Environment 1.1 Learning Goal 1 1) A non-interest bearing checking account is still considered an investment. Answer: FALSE Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 2) Land and buildings are examples of real property investments. Answer: TRUE Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 3) Since 1900, the average return on stocks has exceeded the average return on savings accounts by more than 6 percentage points. Answer: TRUE Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 4) A United States Savings Bond is an example of an investment as defined in the text. Answer: TRUE Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 5) Most sources of investment information are in print format, expensive, and difficult to access. Answer: FALSE Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 2 Copyright © 2020 Pearson Education, Inc. 6) Which of the following is NOT an investment as defined in the text? A) a certificate of deposit issued by a bank B) a new automobile C) a United States Saving Bond D) a mutual fund held in a retirement account Answer: B Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 7) Stocks are a(n) ________ investment representing ________ of a business. A) direct; ownership B) direct; debt C) indirect; ownership D) indirect; debt Answer: A Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 8) An exchange traded fund that invests in the stocks of large corporations is an example of A) direct investment. B) indirect investment. C) derivative investment. D) tangible investment. Answer: B Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 9) Which of the following has declined in recent years? A) direct ownership of stock by individual investors B) the percentage of foreign stocks held in typical portfolios C) institutional ownership of common stocks D) the timeliness of information available to investors Answer: A Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 3 Copyright © 2020 Pearson Education, Inc. 10) Which of the following has increased in recent years? A) direct ownership of stock by individual investors B) the percentage of domestic stocks held in typical portfolios C) institutional ownership of common stocks D) indirect ownership of stocks through mutual funds and ETFs. Answer: D Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: New Question Learning Goal: Learning Goal 1 11) Debt represents funds loaned in exchange for A) dividend income and the repayment of the loan principal. B) dividend income and an ownership interest in the firm. C) interest income and a partial ownership interest in the firm. D) interest income and the repayment of the loan principal. Answer: D Learning Outcome: F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices AACSB: Analytical thinking Question Status: Previous Edition Learning Goal: Learning Goal 1 1.2 Learning Goal 2 1) Institutional investors manage money for businesses and nonprofit organizations, but not for individuals. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 2) Institutional investors are individuals who invest indirectly through financial institutions. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 4 Copyright © 2020 Pearson Education, Inc. 3) Banks and insurance companies are examples of institutional investors. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 4) In the financial markets, individuals are net suppliers of funds. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 2 5) The government is generally A) not involved in the financial markets. B) the owner of the financial market. C) a supplier of funds to the financial market. D) a demander of funds in the financial market. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 6) On a net basis, funds in the financial markets are generally supplied by A) individuals. B) both individuals and business firms. C) business firms. D) the government. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 5 Copyright © 2020 Pearson Education, Inc. 7) Stocks of large publicly traded companies are A) rarely traded. B) illiquid. C) rarely decline in value. D) highly liquid. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 2 8) Which of the following are true concerning institutional investors? I. Institutional investors are professionals who manage money for other people. II. Banks, insurance companies and mutual funds are all institutional investors. III. Institutional investors are individuals who invest indirectly through financial institutions. IV. Institutional investors invest large sums of money. A) I and II only B) I, II and IV only C) II, III and IV only D) I, II, III and IV Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 9) Which of the following is NOT traded in the securities markets? A) stocks B) bonds C) derivatives D) real estate Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 6 Copyright © 2020 Pearson Education, Inc. 10) Describe the major differences between individual and institutional investors. Answer: Individual investors manage their own funds to achieve individual goals such as increasing financial security or financing a comfortable retirement. Institutional investors such as mutual funds and insurance companies manage funds for individuals who lack the time or expertise to invest individually and for other institutions such as universities or charities. Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 1.3 Learning Goal 3 1) Bond investors lend their money for a fixed period of time and receive interest. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 2) A collection of securities designed to meet an investment goal is called a portfolio. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 3) Call options on common stock are a form of equity. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 4) An option to purchase common stock is a type of derivative security. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 7 Copyright © 2020 Pearson Education, Inc. 5) Bonds represent a lower level of risk than do stocks in the same company. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 6) Exchange traded funds are similar to mutual funds, but are traded like stocks. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 7) Mutual funds invest in diversified portfolios of securities. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 8) Bond prices rise as interest rates decline. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 9) Bond interest and stock dividends are different ways of distributing a corporation's earnings to its owners. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 8 Copyright © 2020 Pearson Education, Inc. 10) Which of the following is an example of a tangible asset? A) bonds B) mutual funds C) real estate D) stocks Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 11) Which one of the following would be the least liquid investment? A) stock B) put options C) money market mutual fund D) real estate Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 3 12) Which of the following investments represents partial ownership of a corporation? A) bonds B) mutual funds C) commercial paper D) common stock Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 9 Copyright © 2020 Pearson Education, Inc. 13) Investors seeking a diversified, professionally managed portfolio of securities can purchase shares of A) preferred stock. B) convertible securities. C) insurance policies. D) mutual funds. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 14) The major difference between mutual funds and exchange traded funds (ETFs) is A) ETFs can be bought or sold at their current price at any time during normal trading hours. B) mutual fund portfolios are always based on one of the major market indexes. C) ETFs invest in broadly diversified portfolios of securities. D) ETFs are actively managed. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 15) Briefly describe three advantages of investing in mutual funds or exchange traded funds. Answer: The investor does not need to spend a great deal of time researching individual securities. Small investors easily achieve diversification by investing indirectly in a broad portfolio of securities. The funds are managed by professionals who presumably have expertise in making investment decisions. Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 10 Copyright © 2020 Pearson Education, Inc. 16) One reason that passively managed mutual funds have grown in popularity relative to actively managed mutual funds is that A) passive fund expense ratios are lower. B) passive fund returns are always higher. C) active funds are too diverse. D) none of these Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 17) Over the past decade, passively managed index funds have A) grown quite a lot. B) declined in popularity. C) attracted almost 100% of investment dollars. D) almost disappeared as a fund type. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 1.4 Learning Goal 4 1) Earning a high rate of return with little or no risk is a realistic investment goal. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 2) Under current tax laws, most taxpayers will pay a lower tax rate on capital gains than on dividends. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 11 Copyright © 2020 Pearson Education, Inc. 3) Investors can postpone or avoid income taxes by investing through Individual Retirement Accounts. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 4) Under current laws, a couple filing jointly with a total income of $75,000 would pay a 15% tax on capital gains. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 5) To qualify for long-term capital gains rates, a stock must be held for at least 12 months. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 6) Retirement plans, such as a 401(k), allow employees to defer taxes on the plan contributions until such time as the funds are withdrawn from the retirement plan. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 7) Contributions to a Roth IRA are taxed up front, but subsequent earnings and withdrawals are tax free. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 12 Copyright © 2020 Pearson Education, Inc. 8) Which of the following represent investment goals? I. saving for major expenditures such as a house or education II. sheltering income from taxes III. increasing current income IV. saving funds for retirement A) I and IV only B) III and IV only C) I, III and IV only D) I,,II, III and IV Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 9) In selecting investments consistent with your goals, you should consider A) rates of return and taxes only. B) the pre-tax rate of return only. C) annual dividends and taxes only. D) risks, returns, and taxes. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 10) Alexandra purchased a stock one year ago at a price of $64 a share. In the past year, she has received four quarterly dividends of $1.50 each. Today she sold the stock for $76 a share. Her capital gain per share is A) $6.00. B) $12.00. C) $(6.00). D) $18.00. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 13 Copyright © 2020 Pearson Education, Inc. 11) A well-conceived investment policy statement will take into account A) the investor's current age and economic situation. B) the investor's preference for frequent or infrequent trading. C) the types of investments the investor is willing to consider. D) all of the above. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 12) Beginning investors with small amounts to invest should A) avoid stock investments completely. B) invest all of their money in one high quality stock. C) buy mutual funds or exchange traded funds (ETFs). D) buy a portfolio of very low priced stocks (penny stocks). Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 13) Research indicates that investors who monitor their portfolios less frequently A) outperform those who hold investments for the long-term and trade infrequently. B) tend to invest in riskier assets. C) earn rates of return similar to those who hold investments for the long-term and trade infrequently. D) are more highly educated and in higher income brackets than those who hold investments for the long term and trade infrequently. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 14 Copyright © 2020 Pearson Education, Inc. Table 1.2 2018 (due April 15, 2019) Tax rates Individual Returns Joint Returns 10% $0 to $9,525 $0 to $19,050 12% $9,526 to $38,700 $19,051 to $77,400 22% $38,701 to $82,500 $77,401 to $165,000 24% $82,501 to $157,500 $165,001 to $315,000 32% $157,501 to $200,000 $315,001 to $400,000 35% $200,001 to $500,000 $400,001 to $600,000 37% Over $500,000 Over $600,000 14) In 2018, Jordan and Kailey earned a combined taxable income of $148,800 from employment plus $1,000 in long term capital gains and they file a joint tax return. What is their total federal income tax? Round to the nearest dollar. A) $33,780 B) $29,063 C) $24,765 D) $24,659 Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 15) Jon earned $82,500 in taxable income, all from wages and interest, and files an individual tax return. What is the amount of Josh's taxes for the year 2018? Round to the nearest dollar. A) $13,750 B) $14,090 C) $18,150 D) $12,285 Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 15 Copyright © 2020 Pearson Education, Inc. 16) For a taxpayer in the 22% marginal tax bracket, a long-term capital gain realized in 2018 will be taxed at A) 5%. B) 10%. C) 15%. D) 25%. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 17) Andrew and Jennifer are in the 22% marginal tax bracket. Three years ago they purchased 100 shares of stock at $20 a share. In 2018, they sold the 100 shares for $29 a share. What is the amount of federal income tax they owe as a result of this sale? A) $135 B) $165 C) $225 D) $435 Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 18) Michelle and Patrick are in the 24% marginal tax bracket. They bought 100 shares of DJN stock at $45 per share and sold them 4 years later in 2018 at $22 per share? By how much did their loss reduce their taxes in the year when they sold the stock? A) $0 B) $345 C) $552 D) $1,260 Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 16 Copyright © 2020 Pearson Education, Inc. 19) Both the holding period to qualify and the tax rate on long-term capital gains A) are subject to political pressure and occasionally change. B) are very stable and have not changed since the 1960s. C) are phased out on incomes over $388,351. D) are adjusted for inflation every year. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 20) Tax planning A) guides investment activities to maximize after-tax returns over the long term for an acceptable level of risk. B) ignores the source of income and concentrates solely on the amount of income. C) is primarily done by individuals with incomes below $200,000. D) is limited to reviewing income for the current year and determining how to minimize current taxes. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 21) Because Doug lost his job in 2018, his income was only $27,000. To make ends meet, he sold stock and realized capital gains of $5,000. Doug is single and files as an individual. The tax on his capital gains will be A) $0. B) $600. C) $750. D) $1,000. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 17 Copyright © 2020 Pearson Education, Inc. 22) Investors seeking to increase their wealth as quickly as possible would invest in A) corporate bonds and preferred stock. B) large company stocks with high dividends. C) smaller companies pursuing rapid growth. D) government bonds and low-risk income stocks. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 23) Discuss the relationship between stock prices and investors' beliefs about the business cycle. Answer: Stock prices tend to anticipate the economic conditions that investors expect in the future. When they believe that economic conditions will deteriorate and profits will decline, stock prices fall. When they expect an improving economy and higher corporate profits, stock prices rise. Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 24) What are some of the important prerequisites to investing? Answer: Before entering into risky investments, individuals need to provide for the necessities of life such as housing, transportation, and taxes. They should have liquid assets available to meet unforeseen emergencies such as job loss, auto repairs or dental treatments. They should also have insurance for catastrophic events involving health or property. Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 18 Copyright © 2020 Pearson Education, Inc. 25) Discuss the general investment philosophy and the types of investments preferred by investors in each phase of the life cycle. Answer: Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 26) A person's marginal tax rate is the rate they pay A) on the next dollar of income. B) on all income. C) only on investment income. D) only on earned income. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 27) The average tax rate is the rate a person pays on their next dollar of income. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 19 Copyright © 2020 Pearson Education, Inc. 28) During which period are stock returns typically the lowest? A) 6 months before a recession B) during a recession C) 12 months after a recession D) there is no discernable pattern Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 1.5 Learning Goal 5 1) U.S. Treasury Bills mature in 1 year or less. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 2) Liquidity is the ability to convert an investment into cash quickly with little or no loss of value. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 3) Short-term investments generally provide liquidity, safety, and a high rate of return. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 4) Money market accounts, certificates of deposit, bonds and commercial paper are all forms of short-term investment vehicles. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 20 Copyright © 2020 Pearson Education, Inc. 5) The primary risk associated with a short-term investment is A) purchasing power risk. B) default risk. C) interest rate risk. D) economic risk. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 6) Short-term investments I. provide liquidity. II. fill an important part of most investment programs. III. provide a high rate of return with low risk. IV. provide resources for emergencies. A) I and IV only B) II and IV only C) I, II and IV only D) I, II, III and IV Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 7) Federal insurance protects passbook savings accounts and money market deposit accounts (MMDAs) up to A) $100,000. B) $150,000. C) $250,000. D) $1,000,000. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 21 Copyright © 2020 Pearson Education, Inc. 8) The amount protected by the Federal Deposit Insurance Corporation in non-interest bearing checking accounts is A) zero. B) $100,000. C) unlimited. D) $250,000. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 5 9) Since 2010, the interest rate on passbook accounts and certificates of deposit has A) been less than the average rate of inflation. B) closely tracked the average rate of inflation. C) exceeded the average rate of inflation by 1.5%. D) fluctuated widely. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 10) Which one of the following has the lowest level of risk? A) commercial paper B) money market mutual fund account C) banker's acceptance D) U.S. Treasury bill Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 5 22 Copyright © 2020 Pearson Education, Inc. 1.6 Learning Goal 6 1) Certified Financial Planners typically manage institutional portfolios. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 2) A major goal of corporate financial management is to increase the value of the firm to investors. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 3) Stringent regulations and vigorous enforcement have all but eliminated unethical behavior by financial professionals in recent years. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 4) Insurance companies invest the premiums and fees collected from customers in order to neutralize the risks assumed from their clients. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 5) Chartered Financial Analyst (CFA) is a degree offered by several prestigious business schools. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 23 Copyright © 2020 Pearson Education, Inc. 6) Funds that merely track a broad index and make no attempt to identify undervalued or exceptional growth stocks are known as A) hedge funds. B) passively managed funds. C) actively managed funds. D) equity funds. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 6 7) Jobs in which of the following fields require an understanding of the investment environment? I. commercial banking II. corporate finance III. financial planning IV.insurance A) I and IV only B) I, II and IV only C) II, III and IV only D) I, II, III and IV Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 8) A major function of investment banking firms is A) assisting businesses when they issue stocks and bonds. B) providing financial planning services to wealthy individuals. C) developing investment strategies to neutralize risk. D) all of these are major functions of investment banking firms. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 24 Copyright © 2020 Pearson Education, Inc. 9) Which of the following has set an outstanding example of ethical behavior in the financial professions? A) Bernard Madoff of Madoff Securities B) Hank Greenberg of AIG C) Ramalinga Raju of Satyam Computers D) none of the above Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 10) In the U.S., the most prestigious designation for financial planners is A) CFP. B) CPA. C) ING. D) SIPC. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 11) Briefly describe three different career paths that require a strong background in investments. Answer: Students may discuss any of the following career paths. Answers will vary. Responsibilities of commercial bankers may include portfolio management, managing shortterm securities, and advising individuals as personal bankers. Corporate financial managers must raise external fuds through the debt and equity markets, manage short-term investments, and understand investor expectations for their business. Financial planners assist individuals in choosing the investments that will help them meet their short and long term goals. The insurance industry employs professionals to invest and manage the large sums collected from premiums. Within the investment management industry, professionals may work as securities analysts, fund managers, or retail brokers. Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 6 1 Copyright © 2020 Pearson Education, Inc. Fundamentals of Investing, 14e (Smart/Zutter) Chapter 2 Securities Markets and Transactions 2.1 Learning Goal 1 1) Stocks, bonds and exchange traded funds (ETFs) are bought and sold in the capital market. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 1 2) Capital markets deal exclusively in stock. Money markets deal exclusively in debt instruments. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 1 3) Primary markets deal in the stocks of larger, well-known companies; secondary markets deal in the stocks of smaller, less well-known companies. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 1 4) Short-term securities are bought and sold in the A) capital market. B) primary market. C) money market. D) stock market. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 1 2 Copyright © 2020 Pearson Education, Inc. 5) The governmental agency that oversees the capital markets is the A) Federal Trade Commission. B) Federal Reserve. C) Securities and Exchange Commission. D) Fair Trade and Banking Agency. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 1 6) Stocks purchased in the secondary market are purchased A) directly from the issuing corporation. B) from other investors. C) from small, little-known brokerages. D) indirectly through financial institutions. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 1 7) Stocks and bonds are traded in A) securities and exchange commissions. B) money markets. C) federal trade commissions. D) capital markets. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 1 8) The primary market tends to be more active when A) the economy is slowing and stock prices are falling. B) the economy is expanding and stock prices are rising. C) interest rates are rising. D) early in the calendar year. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 1 3 Copyright © 2020 Pearson Education, Inc. 9) The over the counter market describes transactions A) that involve the purchase and sale of smaller, unlisted securities. B) that take place in a broker's office. C) that are not reported. D) that are not regulated by the SEC. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 1 2.2 Learning Goal 2 1) Underwriters are responsible for promoting and facilitating the sale of securities. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 2) A red a term referring to false or misleading statements in the prospectus. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 2 3) The purpose of the "quiet period" a company must observe from the time it files a registration statement with the SEC until after an IPO is complete is to assure that all investors receive the same information. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 4 Copyright © 2020 Pearson Education, Inc. 4) IPOs are typically underpriced so that the price rises during the first few days of trading. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 5) IPOs are relatively safe investments. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 6) The price of stock sold in an IPO is set by bids submitted in the month before trading begins. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 7) Which one of the following statements concerning the primary market is correct? A) A transaction in the primary market is between two private stockholders. B) The first public sale of a company's stock in the primary market is called a seasoned new issue. C) The first public sale of a company's stock is called an IPO. D) A rights offering is a direct sale of stock to an institution that participates in the primary market. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 5 Copyright © 2020 Pearson Education, Inc. 8) A rights offering is the A) initial offering of securities to the public. B) offering of new securities to current shareholders on a pro-rata basis. C) sale of newly issued shares of stock to the general public. D) sale of securities directly to a select group of investors. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 9) IPO activity tends to peak when stock prices A) have fallen sharply. B) have risen sharply. C) are volatile and unstable. D) Stock prices have relatively little influence on IPO activity. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 10) The document that describes the issuer of a security's management and financial position is known as a A) balance sheet. B) 10-K report. C) prospectus. D) red herring. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 6 Copyright © 2020 Pearson Education, Inc. 11) Which of these alternatives is NOT an option available to companies offering their stock to the public for the first time? A) a public offering B) private placement C) rights offering D) prospectors Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 2 12) When the offer price is lower than the market price on the first day of trading, the difference is known as A) the spread. B) over pricing. C) the underwriter's fee. D) underpricing. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 2 13) Investment bankers who join together to share the financial risk associated with buying an entire issue of new securities and reselling them to the public is called a(n) A) selling group. B) tombstone group. C) underwriting syndicate. D) primary market group. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 7 Copyright © 2020 Pearson Education, Inc. 14) Describe the initial public offering (IPO) process and explain the role of the underwriter, the Securities and Exchange Commission (SEC), and the red herring. Answer: The underwriter is responsible for promoting the stock and facilitating the sale of the company's IPO shares. The SEC approves the registration statement including the prospectus. This statement includes the key aspects of the issue, the issuer, the company management, and the financial position of the company. The SEC does NOT recommend the investment nor offer an opinion on the value of the stock. The red herring is the preliminary prospectus issued on tentative offerings. The prospectus has red lettering on the front cover. Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 15) Explain the role of investment bankers and brokerage firms in the issuance of new securities. Answer: An investment banker assumes the role of the underwriter and bears the risk of reselling the securities purchased from an issuing corporation. The investment banker earns a profit by reselling at a price higher than the price paid to the issuer. Brokerage firms form a selling group with each firm accepting responsibility for selling a portion of the newly issued securities. The brokerage firms also earn a profit if they can resell the shares at a price higher than their purchase price. Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 2 16) Relative to a traditional IPO process, a direct listing A) can save the issuer millions of dollars in investment banking fees. B) is illegal in the United States. C) is much more costly so rarely used. D) has a much longer road show. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 2 8 Copyright © 2020 Pearson Education, Inc. 17) Direct listings are more common among A) small firms. B) large firms. C) publicly-traded firms. D) established firms with long track records. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 2 2.3 Learning Goal 3 1) The NYSE and AMEX are examples of broker-dealer markets. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 2) Firms that list their stock on an exchange can be delisted for failing to meet the requirements of the exchange. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 3) The NYSE is part of the world's largest international trading network known as NYSE Euronext. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 4) Most commodity futures are traded on the NYSE Amex. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 9 Copyright © 2020 Pearson Education, Inc. 5) Securities that trade in the over-the-counter market are called unlisted securities. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 6) A market maker brings together buyers and sellers in an auction market. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 7) The income paid to a market maker is referred to as the spread. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 8) Federal laws that control the sale of securities are called blue sky laws. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 9) In dealer markets, the market maker buys securities at the bid price and sells at the ask price. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 10 Copyright © 2020 Pearson Education, Inc. 10) Stocks of many large foreign companies such as Toyota trade on the NYSE as well as on exchanges in their own country. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 11) The majority of bonds trade in the OTC market. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 12) Market makers in dealer markets A) bring sellers and buyers together by matching offers. B) earn commissions paid by the sellers of securities. C) buy securities at a bid price and hope to resell them at a higher offer price. D) all of the above. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 13) In a broker market such as the NYSE, the broker A) will not be able to execute a trade if there are no matching buy and sell offers. B) will act as either broker or dealer depending on which will maximize his or her profit. C) will first attempt to sell from his or her own inventory. D) must attempt to match sellers and buyers at the mid-point of the bid/ask spread. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 11 Copyright © 2020 Pearson Education, Inc. 14) The great majority of transactions on the NYSE are executed A) automatically through electronic technology. B) on the trading floor by brokers known as specialists. C) by dealers known as market makers. D) by auction in trading areas known as pits. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 15) Which of the following are correct statements concerning the NYSE? I. Each stock has a designated location, called a post, at which its shares are traded. II. The NYSE is a dealer market. III. Supply and demand determines the price of each security. IV. A designated market maker buys and sells to maintain a market for a particular security. A) I and II only B) I and III only C) I, III and IV only D) I, II, III and IV Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 16) A market where securities are are bought from or sold to a market maker is known as a A) broker market. B) dealer market. C) exchange floor. D) board of exchange. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 12 Copyright © 2020 Pearson Education, Inc. 17) Large technology companies such as IBM and Microsoft trade A) exclusively on the NASDAQ. B) exclusively on the NYSE. C) on either the NASDAQ or the NYSE. D) exclusively on alternative trading systems. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 18) Which of the following is currently a requirement for a stock to be listed on the NYSE? A) A price of at least $10 per share. B) Three consecutive years of profitable operations. C) Gross revenue of at least $15,000,000. D) Global market capitalization of at least $200 million. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 19) The dominant exchange for trading options contracts is the ________. The dominant player in the trading of futures contracts is ________. A) NYSE; Nasdaq OMX BX B) PHLX; CBOE C) CBOE; CME Group D) ISE; CBOT Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 13 Copyright © 2020 Pearson Education, Inc. 20) The dominant options exchange is the A) Chicago Board Options Exchange. B) American Stock Exchange. C) Pacific Stock Exchange. D) Philadelphia Options Exchange. Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 21) The NYSE Euronext includes exchanges in all of the following cities EXCEPT A) Amsterdam. B) Brussels. C) Paris. D) Tokyo. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 22) Options contracts on stocks may A) grant the owner the right to buy the stock at a specified price over a specified period of time. B) grant the owner the right to sell the stock at a specified price over a specified period of time. C) depending on the type of contract, grant the owner the right to either buy or sell the stock at a specified price over a specified period of time. D) legally oblige the owner to buy the stock at a specified price over a specified period of time. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 14 Copyright © 2020 Pearson Education, Inc. 23) The automated system for trading highly active regulated OTC securities is the A) Big Board. B) Kansas City Board. C) Chicago Board of Trade. D) OTC Bulletin Board. Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 24) In recent years A) broker markets have grown at the expense of dealer markets. B) there has been a major consolidation of trading venues. C) dealer markets have grown at the expense of broker markets. D) retail trading has come to be dominated by electronic communication networks while traditional broker and dealer markets have lost ground. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 25) ECNs are A) publicly owned auction markets for listed stocks. B) networks that transact trades between institutional investors. C) facilities used by market makers for trading unlisted securities. D) part of the third market which trades listed securities between individual investors. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 15 Copyright © 2020 Pearson Education, Inc. 26) The price an individual investor will pay to purchase a stock in the OTC market is the A) spread. B) ask price. C) bid price. D) broker price. Answer: B Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 27) Which of the following are associated with bull markets? I. investor pessimism II. government stimulus III. economic recovery IV. low inflation A) I and II only B) II and III only C) I, II and III only D) II, III and IV only Answer: D Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 28) Which of the following are associated with bear markets? I. investor pessimism II. rising profits III. economic slowdown IV. rising security prices A) I and III only B) II and III only C) I, II and III only D) II, III and IV only Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3 16 Copyright © 2020 Pearson Education, Inc. 29) The ask price is always ________ the bid price. A) higher than B) lower than C) equal to D) unrelated to Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 30) At the market close on June 13, 2019 Alphabet Inc. (GOOG) common stock was trading at an ask price of $1,099.99 and a bid price of $1,082.04. What is the bid/ask spread? A) $17.95 B) $14.32 C) 1.017x D) .9837 Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 31) At the market close on June 13, 2019 Apple Inc. (AAPL) common stock was trading at an ask price of $191.10 and a bid price of $190.35. Apple's previous closing price was $194.19. What is the bid/ask spread of Apple? A) $0.75 B) $3.84 C) $3.09 D) -$0.75 Answer: A Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 3 17 Copyright © 2020 Pearson Education, Inc. 2.4 Learning Goal 4 1) Diversification is the inclusion of a number of different investments in a portfolio with the goal of reducing risk. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Revised Learning Goal: Learning Goal 4 2) The financial markets are becoming more globally integrated. Answer: TRUE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 3) Participation in foreign stock markets is complicated and expensive for American investors. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 4) The U.S. stock markets tend to produce the highest rate of return each year. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 5) Adding foreign stocks that are riskier than the portfolio average will always increase the risk of the portfolio. Answer: FALSE Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: New Question Learning Goal: Learning Goal 4 18 Copyright © 2020 Pearson Education, Inc. 6) Including foreign investments in a portfolio A) increases the overall risk of the portfolio. B) reduces the potential rate of return. C) provides potential benefits from changes in currency values. D) limits the diversification amongst industries. Answer: C Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 4 7) Which one of the following statements about foreign investments is true? A) In general, major foreign markets always tend to underperform the U.S. market. B) Investing in foreign markets may involve specific risks not encountered with domestic securities. C) Investing in foreign markets will always produce higher returns because of exchange rate fluctuations. D) Fore