Chapter 6 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 of these would you find a Designated Market Maker?
A. Nasdaq
B. OTC Link
C. NYSE
D. All choices listed
3. An issuer makes money in what type of market?
A. Primary market
B. Auction market
C. Secondary market
D. Fourth market
4. Which of the following statements are true regarding stop orders?
I. Stop orders become market orders to either buy or sell once a target price is reached.
II. If the stop order is triggered, the order is guaranteed to execute, but there is no guarantee on the execution price.
III. Sell stop orders are typically used to limit loss on a short position.
IV. Buy stop orders are typically used to limit loss on a long position.
A. I and II
B. III and IV
C. I and IV
D. II and III
5. Your client is short 300 XOM @ 72 and wishes to limit his potential loss. What would his maximum loss be if he were to place a buy stop for 300 shares @ 74, limit 76?
A. $200
B. $1,200
C. $600
D. Unlimited
6. Which of the following is not true of a dealer?
A. Acts as a principal
B. May make a market in one or more securities
C. Charges a commission
D. Must disclose its role to its clients
7. The third market refers to:
A. Institution to institution transactions
B. Foreign securities traded in the U.S.
C. Exchange-listed securities sold over the counter (OTC)
D. Direct purchase of securities, such as T-bills, from government auctions
8. The maximum loss for an investor who is long100 LMN @ $24 is:
A. Unlimited
B. $2,400
C. Breakeven to zero
D. $1,200
9. The maximum gain for an investor who shorts 100 shares of ABC at $20 per share is:
A. Unlimited
B. $1000
C. $2000
D. Dependent on the limit price the investor se