Chapter Seven Practice Questions
- 1. Which type of investment offers the potential for limited gain and unlimited loss?
- A. Long
- B. Short
- C. Short put
- D. Long call
- 2. On which exchange would you find a Designated Market Maker?
- A. NASDAQ
- B. OTC
- C. NYSE
- D. All choices listed
- 3. An issuer makes money in what type of market?
- A. Primary market
- B. First market
- C. Secondary market
- D. Fourth market
- 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?
- A. 24%
- B. 12%
- C. 20%
- D. 10%
- 5. What is the appropriate formula to use if you want to calculate an investment’s annualized return, including compound interest?
- A. (appreciation or loss on investment / original investment) / number of years
- B. Geometric mean
- C. Arithmetic mean
- D. ending value of investment / original value of investment – 1
- 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?
- A. 50%
- B. 200%
- C. 12.5%
- D. 33.3%
- 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?
- A. 12.8%
- B. 15.0%
- C. 12.0%
- D. 11.6%
- 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 adjust