6. KHANH HOA_ CHUONG 12

A____________ order to buy or sell a stock means to execute the transaction at the best possible price.

A) market B) limit C) stop-loss D) stop buy

• market

• limit

• stop-loss

• stop buy

With a ___________ order, the investor specifies a purchase price that is above the current market price.

A) market B) limit C) stop-loss D) stop buy

• market

• limit

• stop-loss

• stop buy

When investors buy stock with borrowed funds, this is sometimes referred to as _______

A) use of proxy.

B) purchasing stock on margin.

C) a margin call.

D) a margin residual claim.

• use of proxy.

• purchasing stock on margin.

• a margin call.

• a margin residual claim.

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock’s initial purchase price.

• True

• False

Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year?

• 50 percent

• 30 percent

• 10 percent

• 16 percent

• 8 percent

When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a _____

• margin call.

• short sale.

• proxy fight.

• hedge

Which of the following statements is incorrect?

• In a short sale, investors place an order to sell a stock that they do not own.

• Investors sell a stock short when they anticipate that its price will rise.

• When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it.

• Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.

Program trading _______

• is commonly used to reduce the susceptibility of a stock portfolio to stock market movements.

• may involve the purchase of stocks that become “underpriced.”

• may involve the sale of stocks that become “overpriced.”

• can be combined with the trading of individual bonds to create portfolio insurance.

• none of the above

You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been____

• positive

• more negative than if you had covered the entire investment with cash.

• negative, but more favorable than if you had covered the entire investment with cash.

• zero

The following information refers to questions 10 and 11.

Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. He can either put up the entire amount and purchase the stock, or borrow $35 from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year.

10. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?

• 30.00 percent

• –42.86 percent

• –30.00 percent

• 42.86 percent

• none of the above