FIL241 Chapter 10 Exam Questions with complete solutions 2022

FIL241 Chapter 10 Exam Questions with complete solutions 2022What are the characteristics of common stock? Ownership in corporation; residual (everything that is left after paying all obligations) claim against the firm's cash flows; dividends and share appreciation; voting (ultimate control over the firm); limited liability (shareholders cannot lose more than they invested in corporations). What are the types of voting? To elect directors; other major issues Cumulative (helps minorities get some representation); straight voting Single class shares; dual class shares (different voting rights for different classes) What are the characteristics of preferred stock? Mixture of common stock and bond characteristics: dividend is fixed or adjustable (like interest on bonds); usually no voting rights (like bonds); not tax deductible; cannot force a firm to bankruptcy if dividends are not paid. What are the characteristics of convertible stock or bonds? They can be converted to a predetermined number of other securities at the discretion of the holder (buyer) of these characteristics. What are the differences between primary and secondary markets? New securities are issued in primary markets. What are initial public offerings (seasoned equity offerings)? How are they organized? Selling securities to general public for the first time. Usually made through underwriters with underwriters guaranteeing the offer price. What are private placements? Sold to a small number of sophisticated investors (government definition). Fewer regulations to comply than when making public offering. Easier to reveal information to a small number of investors. What are right offerings? Current shareholders get a right to buy enough new shares, so the percentage they own would not decline after the offering. What is shelf registration? One registration for a number of offerings during the next two years. Which secondary market characteristics are important? Why? Number of traders for the stock; the size of conditional orders to buy and sell; ability to attract buyers (sellers) when stock price decreases (increases). They increase liquidity. What are the ways to bring buyers and sellers together? Direct search; brokers (bring buyers and sellers together for a commission); dealers (trade on their own account); auctions (different types) When are percentage bid-ask spreads wider? Low priced stocks; trades of a few shares (multiples of 100 shares are normal for trading); large block trades; less frequently traded stocks; stocks with more inside information. How is equity traded? Over-the-counter; on stock exchanges What are the different types of risks? How are two of them measured? Total risk (standard deviation, variance); systematic risk (beta: 0 - no systematic risk; 1 - the same systematic risk as the stock market) What effect does the diversification have on risk? It reduces the total risk of a portfolio. What effect does diversification have on returns? It does not reduce returns (average return). How can we create systematic risk? By imposing uniform regulations on the financial industry (making all firms behave in a similar way). What do stock market indexes show? Stock market performance (some exclude dividends); they are affected by currency devaluations. How are stock market indexes created? By creating a portfolio of stocks (without actually investing in them): choose stocks, decide how much to invest in each. How are price-weighted indexes created? Choose one share from each firm in the index. How are market value-weighted indexes created? "Buy" all shares in each index firm (better at reflecting the market performance). What are the characteristics of Dow Jones Industrial Average (S&P 500)? DIJA: the oldest index; leading companies in their industries (about 30 companies); price-weighted index; does not include dividends; represents US stock market. S&P 500: 500 largest companies; market value-weighted index; does not include dividends; represents US stock market. How does the stock market react to the news? Stock market reacts to the unexpected portion of the news. Sometimes, the reaction is incorrect (mistakes, behavioral biases).