Equity 1.12 Test

The type of efficiency that exists in an economy that distributes capital in the most productive way is best described as:

• A. allocational.
• B. informational.
• C. operational.

Q. The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The latest price of a share of SPDRs is $290. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in six months and have an exercise price of $305 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading:

• A. below $305 per share.
• B. above $305 per share.
• C. above $308 per share.

Q. James Beach is young and has substantial wealth. A significant proportion of his stock portfolio consists of emerging market stocks that offer relatively high expected returns at the cost of relatively high risk. Beach believes that investment in emerging market stocks is appropriate for him given his ability and willingness to take risk. Which of the following labels most appropriately describes Beach?

• A. Hedger.
• B. Investor.
• C. Information-motivated trader.

An index provider launches a new index that will include value stocks in a specific country. This index will most likely be a:

• A. large-capitalization index.
• B. style index.
• C. fundamentally weighted index.

Assuming a 4% required rate of return, what is the intrinsic value per share of an outstanding issue of 5% perpetual preferred stock with a par value of £100 and no embedded options?

• A. £80
• B. £100
• C. £125

Q. In comparison to equity indexes, the constituent securities of fixed-income indexes are:

• A. more liquid.
• B. easier to price.
• C. drawn from a larger investment universe.

None

• A. $46 .
• B. $59 .
• C. $54 .

Q. A book publisher requires substantial quantities of paper. The publisher and a paper producer have entered into an agreement for the publisher to buy and the producer to supply a given quantity of paper four months later at a price agreed upon today. This agreement is a:

• A. futures contract.
• B. forward contract.
• C. commodity swap.

Q. You own shares of a company that are currently trading at $30 a share. Your technical analysis of the shares indicates a support level of $27.50. That is, if the price of the shares is going down, it is more likely to stay above this level rather than fall below it. If the price does fall below this level, however, you believe that the price may continue to decline. You have no immediate intent to sell the shares but are concerned about the possibility of a huge loss if the share price declines below the support level. Which of the following types of orders could you place to most appropriately address your concern?

• A. Short sell order.
• B. Good-till-cancelled stop sell order.
• C. Good-till-cancelled stop buy order.

Q. Which of the following market anomalies is inconsistent with weak-form market efficiency?

• A. Earnings surprise.
• B. Momentum pattern.
• C. Closed-end fund discount.