Fundamentals of Investing Study Guide Questions
Course Introduction
Fundamentals of Investing introduces students to the principles and practices essential for making informed investment decisions. The course covers key concepts such as risk and return, asset allocation, diversification, financial markets, and the characteristics of major investment vehicles including stocks, bonds, mutual funds, and alternative investments. Students learn how to evaluate investment opportunities, interpret financial statements, and understand the impact of economic factors on investment choices. Through case studies and practical exercises, the course equips students with the foundational knowledge to build and manage a basic investment portfolio, aligning investment strategies with personal financial goals and risk tolerance.
Recommended Textbook
Investments An Introduction 9th Edition by Herbert B. Mayo
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Chapter 1: An Introduction to Investments
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Sample Questions
Q1) Reasons for saving and investing include
1)need for funds to meet emergencies
2)retirement income
3)desire to leave an estate for children
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: D
Q2) Investments are made in anticipation of a return.
A)True
B)False
Answer: True
Q3) Risk
A) depends solely on price fluctuations
B) should be maximized to increase returns
C) is reduced through specialization
D) refers to the uncertainty of returns
Answer: D
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Page 3
Chapter 2: The Creation of Financial Assets
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Sample Questions
Q1) If the initial offer price of a new issue is too low,
A)1 and 3
B)1 and 4
C)2 and 3
D) 2 and 4
Answer: A
Q2) When a seller executes a repurchase agreement,the seller agrees to repurchase the asset at a lower price.
A)True
B)False Answer: False
Q3) A "lock-up" refers to a security transaction with an assured profit.
A)True
B)False
Answer: False
Q4) One of the major advantages associated with liquid money market securities is safety of principal.
A)True
B)False Answer: True
Page 4
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Chapter 3: Securities Markets
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Sample Questions
Q1) The purchase of 53 shares of IBM is an odd lot.
A)True
B)False Answer: True
Q2) The margin requirement is set by the SEC.
A)True
B)False Answer: False
Q3) The P/E ratio is the price of the stock divided by earnings per share.
A)True
B)False
Answer: True
Q4) If a stock is quoted 12-13,an investor can sell the stock for 13.
A)True
B)False Answer: False
Q5) The level of security prices is set by market makers.
A)True
B)False
Answer: False
Page 5
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year).How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments were made at the beginning of the year?
Q2) An investor expects the price of a stock to double after eight years.What is the expected annual rate of growth?
Q3) The present value of an annuity is
1)larger the greater the rate of interest
2)smaller the greater the rate of interest
3)larger as the number of years increases
4)smaller as the number of years increases
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q4) A series of equal payments is called an annuity.
A)True
B)False
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Chapter 5: The Tax Environment
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Sample Questions
Q1) A 401(k)plan is a
A) tax-deferred retirement plan
B) savings plan for the retired
C) plan to increase current tax-exempt income
D) dividend or interest enhancement plan
Q2) Which of the following is not illustrative of a tax-sheltered retirement plan?
A) Keogh account
B) IRAs
C) 401(k) plans
D) cash value of life insurance
Q3) The traditional IRA is
A) a tax-deferred retirement account for individuals not covered by a corporate pension plan
B) a taxable retirement account for individuals not covered by a corporate pension plan
C) a means to generate tax-free income
D) a means to increase current income
Q4) It is primarily the marginal tax rate that affects investment decision making.
A)True
B)False
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Chapter 6: Risk and Portfolio Management
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Sample Questions
Q1) Investors who want to bear less risk should acquire stocks whose beta coefficients are
A) greater than 1.5
B) greater than 1.0
C) less than 1.0
D) less than 0.5
Q2) Arbitrage pricing theory is a multi-variable model used to explain securities returns.
A)True
B)False
Q3) Unsystematic risk is
A) the risk associated with movements in securities prices
B) reduced through diversification
C) higher when interest rates rise
D) the risk of loss of purchasing power
Q4) If a beta coefficient is 1.7,that implies the return on the stock tends to be less volatile than the return on the market.
A)True
B)False
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Chapter 7: Investment Companies: Mutual Funds
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Sample Questions
Q1) The portfolio manager of a value fund uses analytical techniques such as a price to earnings ratio.
A)True
B)False
Q2) In 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.
A)True
B)False
Q3) The advantages offered by investment companies include
1)professional management
2)avoidance of income taxes by the investor
3)portfolio diversification
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q4) Mutual funds report their returns on a before-tax basis.
A)True
B)False
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Chapter 8: Closed-End Investment Companies
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Sample Questions
Q1) The first exchange-traded funds were a type of index fund.
A)True
B)False
Q2) A closed-end investment company has a variable capital structure.
A)True
B)False
Q3) Exchange-traded funds
A) redeem their shares
B) only buy exchangeable securities
C) are bought and sold in secondary markets
D) cannot be sold short
Q4) Asset allocation affects the investor's return by
A) altering the returns on individual assets
B) weighting the portfolio returns by the allocation
C) assuring diversification
D) increasing the investor's use of mutual funds
Q5) Asset allocation is important to help diversify a portfolio,but the allocation has little impact on the portfolio's return.
A)True
B)False
Page 10
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Chapter 9: The Valuation of Common Stock
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Sample Questions
Q1) An increase in the risk-free rate will tend to decrease stock prices.
A)True
B)False
Q2) The use of P/E ratios to select stocks suggests that
A) high P/E stocks should be purchased
B) low P/E ratio stocks are overvalued
C) a stock should be purchased if it is selling near its historic low P/E
D) a stock should be purchased if it is selling near its historic high P/E
Q3) If a firm retains earnings,total equity increases.
A)True
B)False
Q4) Increases in the market value of a stock generate capital gains when the stock is sold.
A)True
B)False
Q5) The efficient market suggests that,over a period of time,the investor should earn a return that is consistent with the amount of risk the investor bears.
A)True
B)False
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Chapter 10: Investment Returns and Aggregate Measures
of Stock Markets
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Sample Questions
Q1) If inflation occurs and the Dow Jones industrial average is unchanged,that implies
A) security prices rose
B) security prices fell
C) investors' purchasing power diminished
D) investors' purchasing power increased
Q2) Dollar-cost averaging is
A) periodically buying a round lot of stock
B) periodically investing a specified dollar amount in a stock
C) a means to increase the average cost basis
D) a means to insure a positive return
Q3) Stock indices do not consider taxes on capital gains.
A)True
B)False
Q4) Studies of rates of return on large stocks suggest
A) the average return is about 7.4 percent annually
B) over a period of years, the rate is approximately 10 percent
C) equity investors rarely sustain losses
D) dividends account for over half the return
Page 12
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Chapter 11: Dividends: Past, present, and Future
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Sample Questions
Q1) Dividend increases usually occur prior to an increase in earnings.
A)True
B)False
Q2) Which of the following occurs when a stock is split two-for-one?
A) the price of the stock doubles
B) the firm's assets increase
C) the firm's liabilities decrease
D) the par value of the stock is reduced
Q3) Academic studies often suggest that stock splits do not increase the value of the firm.
A)True
B)False
Q4) Dividend reinvestment plans are a means to postpone federal income tax on dividends.
A)True B)False
Q5) Firms in cyclical industries may supplement regular dividends with extra dividends. A)True
B)False
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Chapter 12: The Macroeconomic Environment for Investment Decisions
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Sample Questions
Q1) The anticipation of inflation suggests that the investor should
A) buy bonds
B) anticipate higher interest rates
C) avoid real estate investments
D) sell stocks of gold companies
Q2) If an investor expects interest rates to fall,the individual should sell bonds and preferred stock.
A)True
B)False
Q3) Deflation is a period of rising unemployment.
A)True
B)False
Q4) If the country's exports increase,GDP declines.
A)True
B)False
Q5) The economic goals of the Federal Reserve include
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
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Chapter 13: Analysis of Financial Statements
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Sample Questions
Q1) The current ratio and the quick ratio are measures of asset usage.
A)True
B)False
Q2) Senior debt should have a lower times-interest-earned than junior debt.
A)True
B)False
Q3) The quick ratio is a better measure of liquidity than the current ratio for manufacturers.
A)True
B)False
Q4) If the ratio of debt to equity increases,the proportion of assets financed by debt is increased.
A)True
B)False
Q5) Inventory turnover may increase if
A) the firm increases its accounts payable
B) the firm uses less debt financing
C) the firm increases its inventory
D) the firm lowers the prices of its goods
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Chapter 14: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) According to behavioral finance,investors often select investment data that confirms a preconceived position.
A)True
B)False
Q2) If a moving average of the Dow Jones industrial average crosses the Dow Jones industrial average,
A) the direction of security prices has changed
B) stock prices will stabilize
C) stock prices will go through a period of fluctuation
D) the investor should take profits
Q3) Individuals who do the opposite of what investment analysts are suggesting are "contrarians."
A)True
B)False
Q4) Insider purchases of stock are considered bullish.
A)True
B)False
Q5) An X-O chart tracks dividends and earnings.
A)True
B)False
Page 16
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Chapter 15: The Bond Market
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Sample Questions
Q1) A bond's seller pays accrued interest to the buyer.
A)True
B)False
Q2) Virtually all bonds have each of the following except
A) interest payments
B) a maturity date
C) voting rights
D) an indenture
Q3) Risk to bondholders comes from
1)possibility of default
2)higher interest rates
3)higher inflation
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q4) Split coupon bonds offer special tax advantages to investors.
A)True
B)False
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Chapter 16: The Valuation of Fixed-Income Securities
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Sample Questions
Q1) The prices of twenty-year bonds tend to fluctuate less than bonds with five years to maturity.
A)True
B)False
Q2) A bond is more likely to be called after interest rates have fallen.
A)True
B)False
Q3) Analysis of preferred stock uses
A) operating income (EBIT)
B) earnings after dividends to common stock
C) earnings after taxes
D) earnings after interest but before taxes
Q4) Preferred stock is legally equity and represents ownership.
A)True
B)False
Q5) Preferred stock pays a fixed amount of interest.
A)True
B)False
Q6) A bond with a 5 percent coupon ($50 a year)that matures after eight years is selling for $779.What is the yield to maturity?
Page 18
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Chapter 17: Government Securities
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Sample Questions
Q1) Municipal bonds are considered to be safe investments because they may be readily sold with little chance of loss.
A)True
B)False
Q2) The federal government only issues marketable securities such as treasury bills.
A)True
B)False
Q3) A portfolio manager is considering buying $100,000 worth of Treasury bills for $96,211 versus $100,000 worth of commercial paper for $95,897.Both securities will mature in nine months.How much additional return will the commercial paper generate over the Treasury bills?
Q4) The owner of a Ginnie Mae bond receives monthly both interest and principal repayments.
A)True
B)False
Q5) Series EE bonds are designed to tap the funds of savers with modest sums to invest.
A)True
B)False
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Chapter 18: Convertible Bonds and Convertible Preferred Stock
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Sample Questions
Q1) Generally a convertible bond lacks
A)an indenture
B)a call feature
C)a strong sinking fund
D)a maturity date
Q2) When a convertible bond is called,
1)interest ceases to accrue
2)the bondholder receives the principal
3)the bondholder generally converts the bond
4)dividends are paid to the bondholder
A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4
Q3) The longer it takes to overcome the capital gains advantage to the stock,the less attractive is a convertible bond.
A)True
B)False
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Chapter 19: An Introduction to Options
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Sample Questions
Q1) Holders of calls do not receive the cash dividends paid to the company's stockholders.
A)True
B)False
Q2) A call is an option to
A) sell stock at a specified price
B) buy stock at a specified price
C) deliver stock at a specified price
D) deliver bonds at a specified price
Q3) An option's intrinsic value exceeds the option's price.
A)True
B)False
Q4) The intrinsic value of an option sets
A) the minimum price of an option
B) the maximum price of an option
C) neither an option's minimum nor its maximum price
D) both the maximum and the minimum price of an option
Q5) Buying a stock index option reduces systematic risk.
A)True
B)False
21
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Chapter 20: Option Valuation and Strategies
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Sample Questions
Q1) If the hedge ratio is 0.7,the number of call options necessary to offset a long position in a stock is 7.0.
A)True
B)False
Q2) If investors believe that a stock's prices will fluctuate but they are not certain as to the direction,these investors may buy a straddle.
A)True
B)False
Q3) The "collar strategy" is used to lock in profits from an increase in the price of a stock.
A)True
B)False
Q4) Writing both a put and a call at the same strike price and expiration date is an illustration of a straddle.
A)True
B)False
Q5) The protective call strategy is an illustration of a short position.
A)True B)False
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Chapter 21: Commodity and Financial Futures
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Sample Questions
Q1) Hedging using commodity futures locks in a price for the supplier of a commodity.
A)True
B)False
Q2) If a firm expects to buy a commodity in the future,it may hedge against a price increase by taking a short position in the futures contract.
A)True
B)False
Q3) If speculators anticipate interest rates will rise,they enter into contracts to sell bonds.
A)True
B)False
Q4) A farmer hedges by simultaneously buying and selling futures contracts.
A)True
B)False
Q5) Investing in futures is
A) investing in physical goods
B) entering into contracts for future delivery
C) executing contracts for prior delivery
D) selling a contract in anticipation of price increases
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Chapter 22: Investing in Foreign Securities
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Sample Questions
Q1) Foreign securities markets may be less efficient than American securities markets.
A)True
B)False
Q2) Which of the following is recorded in the current account of the balance of payments?
A) a purchase of a foreign money market security
B) a foreign company's buying equipment in the U.S.
C) a foreign government spending in the U.S.
D) the statistical adjustment for differences in imports and exports
Q3) The devaluation (depreciation)of one currency implies the revaluation (appreciation)of other currencies.
A)True
B)False
Q4) Correlation coefficients relating U.S.stock markets and foreign stock markets
A) tend to be negative
B) diminish over time
C) are equal to beta coefficients relating U.S. and foreign markets
D) suggest possible diversification
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Page 24
Chapter 23: Investing in Nonfinancial Assets: Collectibles, resources, and Real Estate
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Sample Questions
Q1) Commissions on art works at major auction houses are less than 5 percent of the value of the asset.
A)True
B)False
Q2) Changes in the price of gold are often related to the anticipation of inflation.
A)True
B)False
Q3) The value of a REIT's shares depends on future dividends and the investor's required rate of return.
A)True
B)False
Q4) Depreciation of real estate
A) allocates the cost of the real estate over time
B) is a cash expense covering required maintenance
C) reduces profits and cash flow
D) increases the property's value
Q5) Gold's general acceptability as a currency makes it a good store of value.
A)True B)False
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Chapter 24: Portfolio Planning and Management in an Efficient Market Context
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Sample Questions
Q1) The amount of an outstanding mortgage appears on the individual's balance sheet. A)True
B)False
Q2) Long-term bonds subject the investor to interest rate risk,purchasing power risk,and the possibility of default.
A)True
B)False
Q3) If an investor believes that financial markets are inefficient,that argues for the individual to pursue a more active portfolio strategy.
A)True
B)False
Q4) Investors seeking to avoid actively managing their portfolios will prefer which of the following assets?
A) common stock
B) index funds
C) financial futures
D) real estate
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