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Multiple Choice Quiz
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1
A share of common stock represents:
A)A claim from a lender against a borrower.
B)A share in the company's debts.
C)A share of ownership of the company.
D)An unlimited liability to the owner of the stock.
2
The fact that common stockholders are residual claimant's means:
A)The stockholders have a claim against the revenue that remains after everyone else is paid.
B)The stockholders receive their dividends before any other residuals are paid.
C)The stockholders are paid any past due dividends before other claims are paid.
D)The stockholders are paid before the bondholders but after any taxes are paid.
3
The concept of limited liability says a stockholder of a corporation:
A)Is liable for the corporation's liabilities, but nothing more.
B)Cannot receive dividends that exceed his/her investment.
C)Cannot lose more than his/her investment.
D)Is only responsible for any taxes that the corporation may owe but not its other debts.
4
You have a portfolio valued at $1000. Over the next twelve months it loses 80% of its value. What return does the portfolio need to earn over the following twelve months to restore the portfolio to its original value?
A)75%.
B)200%.
C)400%.
D)25%.
5
The theory of efficient markets assumes that:
A)Prices of bonds, but not stocks, reflect all available information.
B)The prices of all financial instruments reflect all available information.
C)Stock prices are relatively rigid because it takes a while for information to efficiently move through the market.
D)The best approach to determining stock prices is to follow the chartists.
6
The notion that stock prices reflect all current available information:
A)Makes the risk of holding stocks greater.
B)Indicates that mutual fund managers will not, on average, outperform market averages.
C)Says stock prices should be more rigid than they are.
D)Makes it easier to predict the movements in the price of a stock.
7
Why are stock market bubbles costly for the economy?
A)They imply that the actual stock price is equal to the fundamental value of the stock.
B)They hurt consumers more than corporations.
C)They lead to a reduction in real investment in both the short-term and long-term.
D)They lead to a misallocation of resources in both the short-term and long-term.
8
Stock market bubbles impact consumers by:
A)Encouraging greater consumption of luxury goods and greater saving.
B)Encouraging greater consumption of luxury goods and less saving.
C)Encouraging more work and delaying retirement.
D)Resulting in less investment in home ownership and more into stocks.
9
If a public corporation goes bankrupt and does not have enough assets to pay off all creditors:
A)The stockholders are personally liable for the balance.
B)The fact that stockholders are residual claimants means they may have to pay in additional capital to cover the obligations.
C)The stockholders receive any dividends due before the other creditors are paid.
D)The stockholders cannot lose more than their investment.
10
The Dow Jones Industrial Average:
A)Gives equal weight to a change in the price of the stock of any company in the index.
B)Reflects that a 10% increase in a share of stock selling for $30 will have the same affect on the index as a 10% increase in the price of a stock selling for $60.
C)Is a value-weighted index.
D)Gives greater weight to shares with higher prices.
11
The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because:
A)It takes into account the stock prices of 500 of the largest firms, which is less than the DJIA.
B)It is a price-weighted index, where the DJIA is a value-weighted index.
C)Larger firms are less important in the S&P 500 than in the DJIA.
D)It takes into account the prices of more stocks and it uses a different weighting scheme.
12
The theory of efficient markets implies:
A)Stock prices should be highly unpredictable.
B)The price at which stocks currently trade only reflects past information.
C)Expectations do not play a role in stock prices because this isn't real information.
D)The chartists are in fact correct that there are patterns in stock prices.
13
The theory of efficient markets means:
A)Professional fund managers should be able to consistently beat the market average.
B)A professional fund manager should really not expect to beat the market average consistently.
C)A professional fund manager who beats the market average one year should expected to beat the market average the next year.
D)A professional fund manager who beats the market average one year should be expected to not beat the market average the next year.
14
Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by the fact that:
A)People are irrational in their investment behavior, only focusing on positive outcomes.
B)People are not very risk-averse and do not require a risk premium for stocks.
C)Investing in stocks over the long run is not as risky as short-term holdings.
D)People are not efficient users of information.
15
The price of a stock is currently $750 and the stock will pay a $43 dividend. The interest rate is 7.5%. Based on the dividend-discount model, what is the expected price of this stock for next year?
A)$651.17.
B)$657.67.
C)$691.17.
D)$763.25.







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