Chapter 7 Practice Questions

1. 1. Which type of investment offers the potential for limited gain and unlimited loss?
2. A. Long
3. B. Short
4. C. Short put
5. D. Long call
6. 2. On which exchange would you find a Designated Market Maker?
7. A. NASDAQ
8. B. OTC
9. C. NYSE
10. D. All choices listed
11. 3. An issuer makes money in what type of market?
12. A. Primary market
13. B. First market
14. C. Secondary market
15. D. Fourth market
16. 4. Steve bought 100 shares of XYZ Company at $50. Two years later, he sold the shares for $60. Over the two years, Steve received a total of $2/share in dividends. What was Steve’s annualized total return, not taking into account compound interest?
17. A. 24%
18. B. 12%
19. C. 20%
20. D. 10%
21. 5. What is the appropriate formula to use if you want to calculate an investment’s annualized return, including compound interest?
22. A. (Appreciation or loss on investment / original investment) / number of years
23. B. Geometric mean
24. C. Arithmetic mean
25. D. Ending value of investment / original value of investment – 1
26. 6. Wayne purchased 500 shares of ABC Corporation at $20 per share. Three months later, he sold the shares at $30 per share. What was Wayne’s holding period return?
27. A. 50%
28. B. 200%
29. C. 12.5%
30. D. 33.3%
31. 7. Based on historical information, an analyst has calculated that an investment in ABC Corporation’s common stock has a 20% chance of returning 20% and an 80% chance of returning 10%. What is the expected return on an investment in shares of XYZ Corporation?
32. A. 12.8%
33. B. 15.0%
34. C. 12.0%
35. D. 11.6%
36. 8. Stock A has a return of 11% and a historical SD of 4, whereas Stock B has a return of 12% and a historical SD of 3. Three-month Treasury bills are currently returning 3%, and the S&P returned 7% last year. Using the Sharpe ratio, which stock has the best performance adjusting for risk?
37. A. Stock A
38. B. Stock B
39. C. They have equivalent Sha