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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. |
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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. |
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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. |
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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%. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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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