Multiple Choice Questions:
1. The interest rate charged by banks with excess reserves at a Federal Reserve Bank to
banks needing overnight loans to meet reserve requirements is called the_________.
A) prime rate
B) discount rate
C) federal funds rate
D) call money rate
E) money market rate
2. You want to purchase XYZ stock at $60 from your broker using as little of your own money
as possible. If initial margin is 50% and you have $3000 to invest, how many shares can
A) 100 shares
B) 200 shares
C) 50 shares
D) 500 shares
E) 25 shares
3. Which of the following statements is (are) true regarding municipal bonds?
I) A municipal bond is a debt obligation issued by state or local governments.
II) A municipal bond is a debt obligation issued by the federal government.
III) The interest income from a municipal bond is exempt from federal income taxation.
IV) The interest income from a municipal bond is exempt from state and local taxation
in the issuing state.
A) I and II only
B) I and III only
C) I, II, and III only
D) I, III, and IV only
E) I and IV only
4. A form of short-term borrowing by dealers in government securities is-
A) reserve requirements.
B) repurchase agreements.
C) banker's acceptances.
D) commercial paper.
E) brokers' calls.
5. Fama and French, in their 1992 study, found that-
A) firm size had better explanatory power than beta in describing portfolio returns.
B) beta had better explanatory power than firm size in describing portfolio returns.
C) beta had better explanatory power than book-to-market ratios in describing
D) macroeconomic factors had better explanatory power than beta in describing
E) none of the above is true.
6. Restrictions on trading involving insider information apply to the following except-
A) corporate officers and directors.
B) relatives of corporate directors and officers.
C) major stockholders.
D) All of the above are subject to insider trading restrictions.
E) None of the above is subject to insider trading restrictions.
7. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%,
the risk premium on the first factor portfolio is 4% and the risk premium on the second
factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second
factor, what is its expected return?
8. Given an optimal risky portfolio with expected return of 14% and standard deviation of 22%
and a risk free rate of 6%, what is the slope of the best feasible CAL?
9. Security X has expected return of 12% and standard deviation of 20%. Security Y has
expected return of 15% and standard deviation of 27%. If the two securities have a
correlation coefficient of 0.7, what is their covariance?
10. You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P,
constructed with 2 risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40,
respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an
expected rate of return of 0.10 and a variance of 0.0081. The correlation is 1.If you want
to form a portfolio with an expected rate of return of 0.11, what percentages of your
money must you invest in the T-bill and P, respectively?
A) 0.25; 0.75
B) 0.19; 0.81
C) 0.65; 0.35
D) 0.50; 0.50
E) cannot be determined
This posting gives the answer key to a set of multiple choice questions based on the financial markets.
Multiple Choice question on investments: financial intermediary, margin, commercial banks, long position, limit order, reserves of commercial banks, specialists, term structure of interest rates, short sell, upward sloping yield curve, pension plans, Money market mutual funds, organized security markets, minimum margin requirement, federally insured investment
1. A financial intermediary transfers
A. savings to households.
B. savings to borrowers.
C. stocks to brokers.
D. new stock issues to buyers.
2. If an individual buys stock on margin and its price rises, the investor
A. must put up additional collateral.
B. must pay tax on the unrealized gain.
C. must pay interest on the borrowed funds.
D. may take delivery of the stock.
3. Since commercial banks have a large amount of debt outstanding, they
A. are highly financially leveraged.
B. earn very little for their stockholders.
C. pay high interest rates on deposits.
D. pay dividends to their stockholders.
4. A stock is currently selling for $10 a share. What is your gain/loss if you take a long position and the stock price rises to $14 a share?
A. You would lose $4 per share.
B. You would gain $4 per share.
C. You would gain $24 per share.
D. You would lose $6 per share.
5. Which of the following assets is the most liquid?
A. Money and antiques
B. Bonds and real estate
C. Savings accounts and checking accounts
D. Stocks and bonds
6. When investing in securities, an investor may place a limit order that
A. limits the amount of commissions.
B. specifies when the stock will be purchased.
C. establishes the exchange on which the security is to be bought or sold.
D. states a price at which the investor seeks to buy or sell the stock.
7. Terry buys 100 shares of XYZ stock on margin at $20 per share. If the margin requirement is 45 percent, the interest rate is 10 percent, and he holds the security for 1 year, how much interest must he pay?
A. $2,000 C. $110
B. $200 D. $90
8. The reserves of commercial banks must be held against
A. the bank as equity. C. savings deposits.
B. losses. D. commercial loans.
9. Which of the following statements about specialists is correct?
A. A specialist stresses one type of investment.
B. A specialist only buys stock.
C. A specialist analyzes corporate securities.
D. A specialist makes a market in securities.
10. The term structure of interest rates involves the relationship between
A. risk and yields.
B. yields and bond ratings.
C. term and yields.
D. stock and bond yields.
11. A stock is currently selling for $36 a share. What is your gain/loss if you sell the stock short and the price rises to $62?
A. You would lose $26 per share.
B. You would gain $26 per share.
C. You would gain $13 per share.
D. You would lose $6 per share.
12. Which of the following is indicated by an upward sloping yield curve?
A. Lower prices for short-term maturity
B. Higher prices for long-term maturity
C. Lower interest rates for long-term maturity
D. Higher interest rates for long-term maturity
13. A stock is currently selling for $40 per share. What is your gain/loss if you buy a round lot and the price declines to $28?
A. You would lose $600.
B. You would lose $1,200.
C. You would gain $1,200.
D. You would gain $6,000.
14. Which of the following statements about pension plans is correct?
A. A pension plan that grants mortgage loans is an example of a financial intermediary.
B. A pension plan that grants mortgage loans can't suffer losses.
C. A pension plan that grants mortgage loans is called a savings and loan association.
D. A pension plan that grants mortgage loans isn't an example of a financial intermediary.
15. Money market mutual funds invest in
A. corporate bonds.
B. corporate stock.
C. federal government treasury bills.
D. federal government bonds.
16. Entering an order to sell stock at $17 when the bid is $18-$19 is an example of a
A. market order. C. margin payment.
B. short sale. D. limit order.
17. Which of the following statements about organized security markets is correct?
A. Organized security markets are examples of financial intermediaries.
B. Organized security markets transfer resources from savers to borrowers.
C. Organized security markets are secondary markets.
D. Organized security markets aren't subject to regulation.
18. The minimum margin requirement is established by
A. brokerage firms. C. the SEC.
B. Congress. D. the Federal Reserve.
19. If an investor sells short, then he or she
A. buys an odd lot of a security.
B. sells securities from his or her portfolio.
C. anticipates a price increase.
D. anticipates a price decrease.
20. Which of the following is a federally insured investment?
A. A savings account in a national commercial bank
B. A certificate of deposit in excess of $100,000
C. A life insurance policy
D. Commercial bank assets