If the price of an initial public offering of stock rises, the windfall gain goes to the firm selling the securities.FalseInvestors are insured against loss from brokerage firm failure by the SEC.FalseA broker stresses one type of investment makes a market in securities buys securities for customers' accounts underwrites stock but not corporate bondsbuys securities for customers' accountsThe syndicate 1. facilitates the sale of new securities 2. is formed by the originating house 3. creates a secondary market in stocks 1 and 2 1 and 3 2 and 3 all of the above1 and 2Gains will result from a short sale if stock prices rise stock prices fall stock prices remain stable The answer is indeterminate.stock prices fallRegarding the short-interest ratio, it measures the number of shares sold each day it may be used to forecast subsequent movements in the price of a stock an increase in the ratio suggests short sellers expect the price of the stock to rise a reduction in the ratio may be interpreted that stock prices will be stableit may be used to forecast subsequent movements in the price of a stockThe Sarbanes-Oxley lawreduces potential conflicts of interest between securities analysts and investment bankersA new issue of corporate securities sold to the general public must be registered with the SEC initially sold through brokers offered initially to existing stockholders bought by specialists in corporate securitiesregistered with the SECWhich of the following is not part of the underwriting process? the prospectus the originating house the SIPC the SECthe SIPCThe final prospectus does not include the firm's balance sheet the price of the securities sold to the public the underwriter's profit on the sale the underwriting discountthe underwriter's profit on the saleA portfolio consisting of securities whose returns are highly correlated is not truly diversified.TrueIf the return on two stocks is highly and positively correlated (i.e., correlation coefficient=+1.0), combining these stocks will reduce the risk associated with the portfolio.FalseIn a world of certainty, there would be no risk.TrueExchange rate risk refers to fluctuations in the prices of foreign currencies (i.e., foreign exchange).TrueThe numerical value of beta for the market equals 1.TrueThe beta of a portfolio is a weighted average of each asset's beta coefficient.TrueIf a beta coefficient is 1.7, that implies the return on the stock tends to be less volatile than the return on the market.FalseLow beta stocks tend to generate higher returns in rising markets.FalseUnsystematic risk is reduced when markets fluctuate less is increased through diversification is affected by the nature of how a firm finances its operations increases during periods of volatile interest ratesis affected by the nature of how a firm finances its operationsIf the dispersion around a stock's return increases the expected return decreases the standard deviation decreases the stock's price increases the stock's risk increasesthe stock's risk increasesSources of risk to an investor include 1. loss when funds are reinvested at lower rates 2. fluctuations in securities markets 3. the financing decisions of the firm all of the above 1 and 2 2 and 3 1 and 3all of the aboveSources of risk include 1. fluctuating exchange rates 2. a firm's financing decisions 3. higher interest rates 4. loss of purchasing power 2 and 3 all four 1 and 2 2 and 4all fourPortfolio risk encompasses 1. a firm's financing decisions 2. interest rate risk 3. loss of purchasing power 1 and 3 2 and 3 all of the above 1 and 2all of the aboveAccording to the arbitrage pricing theory, the return on a stock equals the market return if the expected rate of inflation is realized is not related to the expected return on the stock is reduced through the construction of diversified portfolios depends on the stock's responsiveness to unexpected changesdepends on the stock's responsiveness to unexpected changesDiversification reduces purchasing power risk unsystematic risk systematic risk market riskunsystematic riskSources of unsystematic risk include 1. the firm's financing decisions 2. the firm's operations 3. fluctuating market prices 2 and 3 1 and 3 all of the above 1 and 21 and 2Beta coefficients of 1.3 indicate the stock is more volatile than the market the stock has less unsystematic risk the stock has more unsystematic risk the stock is less volatile than the marketthe stock is more volatile than the marketReinvestment rate risk refers to fluctuations in rates earned when funds are reinvested a stock's price a stock's dividend the cost of an investmentrates earned when funds are reinvestedNo load mutual funds may increase fees through 1. sales charges 2. commissions 3. 12b-1 plans 2 and 3 only 3 1 and 2 1 and 3only 3If an investor's excess return is negative, the realized return was less than the return earned by the market the required return exceeded the realized return the investor's portfolio had excessive diversification the investor constructed a poorly diversified portfoliothe required return exceeded the realized returnCommercial paper is generally a short-term unsecured debt of a corporation a short-term secured debt of a corporation a long-term secured debt of a corporation a long-term unsecured debt of a corporationa short-term unsecured debt of a corporationA mutual fund with a beta coefficient of 0.8 has less unsystematic risk invests in an index of the stock market invests only in debt instruments has less systematic riskhas less systematic riskIndex funds tend to track the bond market the stock market as a whole the return on other index funds a specific measure of the marketa specific measure of the marketThe net asset value of a mutual fund increases with larger number of shares increased liabilities higher stock prices lower stock priceshigher stock pricesThe advantages offered by investment companies include 1. professional management 2. avoidance of income taxes by the investor 3. portfolio diversification 2 and 3 1 and 3 1 and 2 all of the above1 and 3If mutual funds make investments in efficient financial markets, they will underperform the market when securities prices decline primarily bear unsystematic risk should not outperform the market consistently cannot outperform the market consistentlyshould not outperform the market consistentlyThe cost of investing in a mutual fund includes 1. the loading charges 2. commissions when the fund buys and sells securities 3. management fees 1 and 3 2 and 3 1 and 2 all of the aboveall of the aboveTreasury bills are issued by state treasuries and have no risk of default.FalseIn order to sell securities to the general public, a mutual fund must register its securities and prepare a prospectus detailing its objectives and costs to investors.TrueIf a mutual fund specializes in the securities of one sector of the economy, unsystematic risk may not be reduced.TrueThe Sharpe index standardizes performance by the portfolio's beta.FalseInvestments in mutual funds permit the investor to avoid market risk.FalseThe income earned by a mutual fund is taxed through the stockholders' income tax returns.TrueAn index fund seeks to duplicate an aggregate measure of the market or a segment of the market.TrueEmpirical studies of returns earned by mutual funds suggest they consistently outperform the market.FalseHigh portfolio turnover is associated with high tax efficiency.FalseClosed-end investment companies with beta coefficients less than 1.0 have underperformed the market have less systematic risk than the market have more systematic risk than the market have outperformed the markethave less systematic risk than the marketThe portfolios of international funds are a diversified mix of securities from all countries with security markets stress European securities exclude U. S. securities specialize in the securities of one countryexclude U. S. securitiesIf a closed-end investment company sells for a discount, capital gains exceed dividend income. dividend income exceeds capital gains its price exceeds the net asset value its price is less than the net asset valueits price is less than the net asset valueWhich of the following is not a consideration for investing in real estate investment trusts (REITs)? the federal tax rate paid by the trust fluctuating interest rates affecting securities valuations fluctuations in dividend payments excessive use of debt financing by some REITsthe federal tax rate paid by the trustA real estate investment trust invests in mortgages or rental properties cannot use debt financing retains all of its earnings pays federal income taxesinvests in mortgages or rental propertiesThe net asset value of a closed-end investment company increases with lower stock prices larger number of shares increased liabilities higher stock priceshigher stock pricesSince closed-end investment companies acquire securities in efficient financial markets, they should not outperform the market consistently primarily bear unsystematic risk cannot outperform the market consistently will underperform the market when stock prices declineshould not outperform the market consistentlyHedge funds follow investment strategies such as underwriting new issues (IPOs) shorting "overvalued" stocks while buying "undervalued" stocks acquiring shares in mutual funds limiting their portfolios to money market instrumentsshorting "overvalued" stocks while buying "undervalued" stocksA hedge fund has actively traded shares is a public financial institution is open to a select number of individual investors has its shares registered with the Federal Reserveis open to a select number of individual investorsExchange-traded funds require investors to select individual stocks mimic an index of securities are illustrations of load funds consistently outperform other fundsmimic an index of securitiesDistributions from an investment company may include earnings and capital gains.TrueSince ETFs mimic an index, they do not buy individual shares of stock.FalseReal estate investment trusts (REITs) are illustrative of a closed-end investment company.TrueIf a closed-end investment company were liquidated, the investor should receive the net asset value minus the cost of the liquidation.TrueThe first exchange-traded funds (ETFs) were a type of index fund.TrueA unit trust is a passive investment that holds a fixed portfolio of securities such as federal government bonds.TrueCompared to selecting individual stocks, ETFs ease the process of constructing a well diversified portfolio.TrueThe only costs of investing in a closed-end investment company are the commissions to buy and sell the shares.FalseInventory turnover may increase if the firm uses less debt financing the firm increases its inventory the firm increases its accounts payable the firm lowers the prices of its goodsthe firm lowers the prices of its goodsAn increase in an asset is a cash inflow.FalseAnalysis of preferred stock uses earnings after interest but before taxes operating income (EBIT) earnings after taxes earnings after dividends to common stockearnings after taxesAdvantages of the corporate form of business include deductibility of dividends avoidance of state taxation limited liability for stockholders limited lifelimited liability for stockholdersDays sales outstanding (average collection period or receivables turnover) measures the safety of accounts receivable the safety of accounts payable the speed with which accounts receivable are collected the speed with which accounts payable are paidthe speed with which accounts receivable are collectedAs times-interest-earned increases, net income decreases bondholders' position deteriorates taxes decrease interest payments become more assuredinterest payments become more assuredDividend policy depends on 1. the firm's earnings 2. investment opportunities available to the firm 3. corporate income taxes1 and 2Earnings are distributed retained invested retained and/or distributedretained and/or distributedIf a firm has substantial excess cash, it may 1. repurchase some of its shares 2. increase its cash dividends 3. increase its liabilities1 and 2The current ratio is unaffected by using cash to retire an account payable the collection of an account receivable selling inventory for a profit selling bonds and using the funds to finance inventorythe collection of an account receivableThe ex-dividend date follows the date of record.FalseThe quick ratio is a better measure of liquidity than the current ratio for manufacturers.TrueRatios may be used in both time-series and cross section types of analysis.TrueA higher payout ratio implies a lower growth rate.TrueIf a firm's inventory turnover is 4 and days sales outstanding (average collection period) is 60, then it takes approximately five months for newly acquired inventory to generate cash.TrueIf the ratio of debt to equity increases, the proportion of assets financed by debt is increased.TrueThe greater the numerical value of the debt ratio, the riskier the firm.TrueSince preferred stock represents equity, the holders of the stock never have the right to vote.FalseA P/E ratio depends on 1. the firm's dividends 2. the price of the stock 3. the firm's per-share earnings2 and 3The use of price to book ratios to select stocks suggests that a stock should be purchased if it is selling near its historic high price to book ratio low price to book stocks are overvalued a stock should be purchased if it is selling near its historic low price to book ratio high price to book stocks are undervalueda stock should be purchased if it is selling near its historic low price to book ratioIf the required rate of return is 10 percent and the stock pays a fixed $5 dividend, its value is $75 $25 $100 $50$50The risk-adjusted required rate of return includes 1. the firm's earnings 2. the firm's beta coefficient 3. the treasury bill rate (i.e., the risk-free rate)2 and 3A low price to sales ratio suggests the firm is generating cash the stock may be undervalued the stock valuation is too high the firm has no earningsthe stock may be undervaluedIf the ratio of price to book exceeds 1.0, the price of the stock is greater than the accounting value of the firm the firm's assets are understated the stock is overvalued the accounting value of the firm is greater than the market value of the firmthe price of the stock is greater than the accounting value of the firmThe use of P/E ratios to select stocks suggests that high P/E stocks should be purchased low P/E ratio stocks are overvalued a stock should be purchased if it is selling near its historic low P/E a stock should be purchased if it is selling near its historic high P/Ea stock should be purchased if it is selling near its historic low P/EAccording to the dividend-growth model, the valuation of common stock depends on 1. the firm's dividends 2. investors' required rate of return 3. the prior year's dividends1 and 2The price to sales ratio may be a preferred analytical tool if the dividend-growth model suggests the stock is undervalued the P/E ratio is too high the firm is not generating earnings the firm is not generating cashthe firm is not generating earningsHigher required returns are associated with higher dividends increase dividends decrease stock prices are required by the efficient market hypothesisdecrease stock pricesValue investors tend to prefer stocks with low price to sales and price to book ratios.TrueAccording to the efficient market hypothesis, purchasing low P/S stocks should produce superior investment results.FalseThe expected return depends on future dividends and future price appreciation.TrueThe dividend-growth model requires that dividends grow annually at the same rate.FalseHigh P/E stocks should be preferred because they pay larger dividends.FalseAn increase in the risk-free rate will tend to decrease stock prices.TrueThe required return includes the risk-free rate and a risk premium.TrueAccording to the efficient market hypothesis, purchasing companies with high cash flow should produce superior investment results.FalseIf the anticipated return exceeds the required rate of return, the investor should buy the stock.TrueThe efficient market hypothesis suggests that the current prices of stocks reflect what the investment community believes the stocks are worth.TrueDollar cost averaging is a means to increase the average cost basis periodically buying a round lot of stock periodically investing a specified dollar amount in a stock a means to insure a positive returnperiodically investing a specified dollar amount in a stockThe Russell 1000 index is a broad-based measure of bonds combines 1000 stocks and bonds is a broad measure of NYSE-listed and over-the-counter (Nasdaq) stocks uses the 1000 largest Nasdaq stocksis a broad measure of NYSE-listed and over-the-counter (Nasdaq) stocksTo determine the realized return on an investment, the investor needs to know 1. income received 2. the cost of an investment 3. the sale price of the investmentall of the aboveHistorical studies of rates of return on large stocks suggest the average return is about 6.4 percent annually dividends account for over half the return over a period of years, the rate approximates 9-10 percent equity investors rarely sustain lossesover a period of years, the rate approximates 9-10 percentWhich of the following is the least broad-based measure of stock prices? S&P 500 stock index Nasdaq market index Russell 3000 Dow Jones industrial averageDow Jones industrial averageIf a stock rose from $10 to $30 over ten years, the annual rate of return was 20 percent was less than 20 percent cannot be determined was greater than 20 percentwas less than 20 percentThe Standard & Poor's 500 stock index illustrates a simple average a value-weighted index an exponential index a geometric indexa value-weighted indexThe S&P 500 uses a geometric average a value-weighted average a simple average a compound averagea value-weighted averageA strategy of averaging down will be profitable if the price of the stock continues to fall the price of the stock subsequently rises the firm retains earnings the firm pays more dividendsthe price of the stock subsequently risesThe calculation of a rate of return assumes dividend income is reinvested at the current dividend yield.FalseThe S&P 500 stock index is value-weighted.TrueThe Wilshire 5000 stock index is more broad based than the S&P 500 stock index.TrueIndices of Nasdaq stocks tend to be less volatile than the S&P 500 index.FalseStock indices do not consider taxes on capital gains.TrueIf a stock increased from $25 to $50 in five years, the annual rate of return was 20 percent.FalseComparisons of stock performance should use percentage changes instead of absolute price changes.TrueStudies of realized rates of return assume that Dividend income is not reinvested.FalseZero coupon and split coupon bonds conserve the firm's cash reduce the firm's use of financial leverage experience stable prices pay interest only at maturityconserve the firm's cashVirtually all bonds have each of the following except maturity date an indenture voting rights interest paymentsvoting rightsAs the length of time to maturity (i.e., the term) of a bond increases, generally the riskiness of the bond falls the price of the bond rises the coupon rate falls the coupon rate risesthe coupon rate risesEquipment trust certificates are riskier than convertible bonds secured debt obligations bonds with low credit ratings a type of debenturesecured debt obligationsWhen an investor purchases a bond, he or she pays accrued interest receives accrued dividends pays accrued dividends receives accrued interestpays accrued interestSerial bonds are primarily issued by the federal government are a type of income bond are issued and retired in a series have a sinking fundare issued and retired in a seriesBonds may be retired by 1. being called 2. a sinking fund 3. being repurchasedall of the aboveA company may call a bond if the company's dividend is increased interest rates have fallen interest rates have risen the company's dividend is decreasedinterest rates have fallenThe accrued interest on a bond applies only to zero coupon bonds is paid by the buyer of the bond to the seller of the bond avoids personal income taxation is the result of the possibility of the bond defaultingis paid by the buyer of the bond to the seller of the bondZero coupon bonds are sold at a discount accrue interest at maturity are sold for a premium cannot be calledare sold at a discountThe term of an extendible bond is known with certainty.FalseThe indenture specifies the terms of a bond.TrueEuro-bonds are denominated in dollars.TrueCalculation of the returns earned on a high-yield security should include the sale price of the bond as well as the interest received.TrueSince bonds are legal obligations, there is little risk associated with purchasing these securities.FalseA zero coupon only pays interest when it is sold.FalseIncome taxation on the interest earned from an investment in a zero coupon bond occurs when the bond matures.FalseInterest on a convertible bond may be exchanged for stock instead of cash.FalseA bond's call feature may be exercised if 1. the yield to maturity exceeds the current yield 2. the yield to maturity is less than the current yield 3. interest rates have risen 4. interest rates have fallen2 and 4If interest rates in general were to fall, 1. the prices of existing bonds would rise 2. the prices of existing bonds would fall 3. yields to maturity would rise 4. yields to maturity would fall1 and 4If a $1,000 bond costs $1,000 and pays $50 interest, 1. the current yield is 5 percent 2. the yield to maturity is 5 percent 3. the bond is selling for parall of the aboveIf interest rates rise, the price of preferred stock rises falls is not affected rises or fallsFallsThe value of a bond depends on 1. the coupon rate 2. the terms of the indenture 3. the maturity dateall of the aboveAn individual may purchase preferred stock 1. in anticipation of lower interest rates 2. in anticipation of higher interest rates 3. to receive a flow of tax-free income 4. to receive a flow of income1 and 4If an investor were to anticipate that interest rates were going to fall, that individual should take no action buy bonds sell bonds acquire money market securitiesbuy bondsIf a 7 percent, $1,000 bond matures after ten years and current interest rates are 9 percent, the current price of the bond should not be 1. $1,000 2. $872 3. $1,1401 and 3If a bond is selling for a premium, the yield to maturity exceeds the current yield the current yield exceeds the yield to maturity the current yield has risen the bond cannot be calledthe current yield exceeds the yield to maturityThe concept of duration considers the timing of interest payments the timing of principal repayment the current rate of interest the timing of both interest and principal repaymentthe timing of both interest and principal repaymentthe timing of both interest and principal repaymentTrueIf a $1,000 bond has a coupon of 8 percent and matures after eight years, the price of the bond will exceed $1,000 if the current interest rate is 9 percent.FalseSince preferred stock pays a fixed dividend, it is often valued as if it were a bond.TrueIf investors expect interest rates to rise, they should sell preferred stock and buy bonds.FalseMost bonds pay interest semi-annually.TrueIf bond prices were to decline, the current yield would increase.True

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