12Student:

1. Many people do not know where to get the information they need to evaluate potential investments. True False

2. Stocks are guaranteed to have large returns. True False

3. Since 1926, the average annual return for stocks is just over 12% as measured by the Standard & Poor 500 stock index.True False

4. Stocks are equity financing. True False

5. Companies need to repay money from equity financing. True False

6. Sandy has invested in a stock. She is assured of receiving a dividend. True False

7. When companies experience low earnings, they may choose to reduce or omit their dividends. True False

8. Preferred stockholders elect the board of directors. True False

9. Dividends for common stock must be in cash. True False

10. If the record date is Friday, April 7, the ex-dividend date is Tuesday, April 11. True False

11. If Jodi owns 200 shares of stock, a 2-for-1 stock split will double the value of her holdings. True False

12. Many people purchase investments without doing any research. True False

13. Before investing in a company's stock, an investor should analyze the industry in which the company operates.True False

14. A micro cap stock is one issued by a company that has a capitalization of $500 million or less. True False

15. A midcap stock is one issued by a company that has a capitalization of up to $300 million. True False

16. The Internet provides many valid sources of stock information. True False

17. The Yahoo! Finance website provides company-specific news, quotes, and charts. True False

18. Detailed research for stock investors can be found on the Yahoo! Finance website instead of at a stock advisory service such as Value Line.True False

19. An investor can rely completely on the findings of a stock advisory service in order to make decisions about buying or selling stocks.True False

20. A prospectus is sent annually to stockholders of publicly owned corporations. True False

21. Many analysts believe that a corporation's ability or inability to generate dividends in the future may be one of the most significant factors that accounts for an increase or decrease in the value of a stock. True False

22. Corporate earnings are reported in the firm's annual report. True False

23. Earnings per share equals the corporation's after-tax earnings divided by the number of outstanding shares of a firm's common stock.True False

24. The EPS of a company can be compared to the industry's average EPS. True False

25. The total return can be calculated only if a company pays dividends. True False

26. The book value of a stock is equal to the result of total assets less total liabilities divided by the number of outstanding shares of common stock.True False

27. The market value must be higher than the book value. True False

28. If you purchase stock from your cousin Sam, you are buying stock on the primary market. True False

29. Buying 100 shares of stock in an IPO is a primary market transaction. True False

30. Any company's stock can be listed on the NYSE. True False

31. Most securities that are considered "over-the-counter" are traded through the NYSE. True False

32. Joseph has been Leon's account executive for several years. Leon has been questioning Joseph's integrity because it appears as though Joseph might be churning. If Leon wants to take formal action about his concern, he likely will be required to use an arbitration board.True False

33. A.J. wants to buy a stock at its current market price. He should use a market order. True False

34. Kenny wants to sell his stock at a specified price or higher. He should use a stop order. True False

35. The execution of a limit order will be the highest priority above previously received orders if and when the specified price is reached.True False

36. If you want to guarantee that your order to sell a stock will be executed, you should place a stop order instead of a limit order.True False

37. Typically the commission paid for a stock sale will be lower with a full-service broker than for an online brokerage firm.True False

38. Glen bought XYZ stock on November 8, 2009, at a price of $39.20 and then sold it on March 19, 2011, at$11.20. Glen can be classified as a speculator. True False

39. Gloria bought GE stock on March 4, 2009, at a price of $5.87 and then quickly sold it on March 19, 2009, at $11.20. Gloria is classified as a speculator.True False

40. An investor must be classified as using the long-term buy-and-hold technique in order to receive dividends.True False

41. An example of dollar cost averaging is an employee purchasing shares of his or her company's stock through payroll deduction as part of a retirement plan.True False

42. The main goal of dollar cost averaging is buying high and selling low. True False

43. Either you can take advantage of dollar cost averaging, or you can use a direct investment plan. True False

44. Long-term investing techniques are generally more risky than short-term investing techniques. True False

45. An investor may receive a margin call when selling stock short. True False

46. A put option is the right to buy 100 shares of stock at a guaranteed price before a specified expiration date.True False

47. Which of the following is incorrect?A.There is no substitute for researching a potential investment.B. Beginning investors sometimes worry that they won't know what the information they find about

stocks really means.C. Some investors do not know where to get the information they need to evaluate potential investments.D. The amount of information available about stocks is limited.E. All of these statements are correct.

48. Since 1926, the average annual return for stocks has been about A. 8%.B. 10%.C. 12%.D. 14%.E. 16%.

49. Amanda wants to be part of the ownership for a corporation. She should invest inA. Bonds.B. Common stock.C. Dividends.D. A savings account.E. A proxy.

50. Equity financing is money received from the sale ofA. Bonds.B. Common stock.C. Dividends.D. A savings account.E. A proxy.

51. A distribution of money, stock, or other property that is paid to owners of a company is called aA. Bond.B. Common stock.C. Dividend.D. Savings account.E. Proxy.

52. A legal form that requests that owners transfer their voting rights to individual(s) is called aA. Bond.B. Common stock.C. Dividend.D. Savings account.E. Proxy.

53. All of the following statements are correct exceptA. Dividends are paid out of profits.B. Dividend payments must be approved by the stockholders.C. A dividend can be a distribution of money, but it can also be stock or other property.D. Dividends are not mandatory.E. Utility companies typically distribute a higher percentage of earnings than rapidly growing firms.

54. Alberta owns 100 shares of stock of ABC Company, and Bobby owns 200 shares of the same stock. If ABC Company pays a $5 dividend to all stockholders with a record date of Friday, June 15, thenA. Alberta will receive the same amount as Bobby if they owned the stock two business days before the

record date.B. Both will receive the dividend as long as they sell their stock three days before the record date.C. Alberta will receive half as much as Bobby if they owned the stock two business days before the

record date.D. Both will receive the dividend if they bought the stock on the record date.E. Alberta and Bobby will receive the same amount if they bought the shares at least one month before

the record date.

55. If you own stock, you may receive income fromA. Dividends.B. Dollar appreciation of stock value.C. Possible increases in stock price due to stock splits.D. Two of these are correct.E. All of these are correct.

56. MNOP Inc. declared a $1.00 dividend with a record date of Thursday, September 15, and a payment date of Thursday, October 20. Cheri wants to purchase stock and receive the dividend. What is the latest date that she needs to have purchased the stock in order to receive the dividend?A. September 12B. September 13C. September 15D. September 19E. October 18

57. MNOP Inc. declared a $1.00 dividend with a record date of Thursday, September 15, and a payment date of Thursday, October 20. Cheri does not want receive this current dividend. What is the earliest date that she should purchase the stock in order to avoid receiving the dividend?A. September 12B. September 13C. September 15D. October 18E. October 20

58. Why does a company split its stock?A.The stock is trading at a low price, and the company wants to increase its stock value.B. It wants fewer shares outstanding.C. The stock is trading at a high price, and the company wants to bring the price in line with a theoretical

ideal range.D. It wants the total market capitalization to be lower than the current level.E. The company wants to guarantee that the stock price will increase.

59. Which of the following statements about stock splits is correct?A. If a company has a 2-for-1 split, the price will be doubled.B. If a company has a 3-for-1 split, the price will increase by a factor of 3.C. If a company has a 4-for-1 split, the new number of shares will be four times as many as before the

split.D. If a company has a 5-for-1 split, the new number of shares will be equal to the old number of shares

divided by 5.E. None of these is correct.

60. Which of the following is not correct regarding preferred stock?A. Preferred stocks are considered to be safer investments than common stocks.B. Owners of preferred stock have first claim to a corporation's assets after creditors in a bankruptcy.C. Owners of preferred stock receive cash dividends before common stockholders receive their dividends.D. The dollar amount of the dividend on preferred stock is known before the stock is purchased.E. The yield on preferred stocks is often much higher than the yield on bonds.

61. Megan decided to start investing in stocks. Which of the following should she do first?A. Base her investing decisions on hot tips she hears at work.B. Buy stocks based solely on her stockbroker's recommendation.C. Choose stocks based on recommendations from her family members.D. Pick stocks at random.E. Research the corporations she is interested in as well as their industries.

62. Which of the following statements is correct?A. The Internet is not to be trusted as a reliable source to evaluate potential investments.B. Individual company websites usually charge for access to their own financial reports.C. The Internet provides websites that may be more up to date and thorough than printed materials.D. Websites like Yahoo! Finance are not dependable.E. None of these is correct.

63. A safe investment that generally attracts conservative investors is called a(n) stock.A. blue chipB. incomeC. micro capD. midcapE. penny

64. An investment that pays higher than average dividends is called a(n) stock.A. blue chipB. incomeC. micro capD. midcapE. penny

65. A stock that typically sells for less than $1 per share is called a(n) stock.A. blue chipB. incomeC. micro capD. midcapE. penny

66. A stock issued by a corporation that has a capitalization of between $2 billion and $10 billion is called a(n) stock.A. blue chipB. incomeC. micro capD. midcapE. penny

67. A stock issued by a company that has a capitalization of $300 million or less is called a stock.A. blue chipB. incomeC. micro capD. midcapE. penny

68. Cliff retired 10 years ago and wants to still own a few stocks. Dividends are important to him, but so is growth. He is most interested in stocks that are safe investments. He should purchase stocks.A. blue chipB. cyclicalC. micro capD. midcapE. penny

69. Patrick graduated from college five years ago. He has set up an emergency fund and has been paying off his student loans. In addition, he participates in the retirement plan offered by his employer. He wants to invest $75 per month in very small companies (capitalization of $300 million or less). He should purchase stocks.A. blue chipB. incomeC. micro capD. midcapE. penny

70. Which of the following is some of the information found on a financial website such as www.finance.yahoo.com?A. Company name, last price, target price, price change.B. 52-week price range, number of shares traded (volume).C. Market capitalization.D. Dividend paid and yield.E. All of this information is included.

71. Which of the following usually offers some free information and charges for more detailed research information you may need to evaluate a stock investment?A. Financial websites such as www.finance.yahoo.comB. Personal finance websites such as www.smartmoney.comC. Professional advisory services such as Standard & Poor's Financial Information ServicesD. Search engines such as Yahoo!E. Securities and Exchange Commission website

72. Which of the following is true?A. Mergent's Handbook of Common Stocks is a misnomer because it analyzes only industries.B. Standard & Poor's reports are available only on the Internet.C. Stock advisory services include printed detailed financial reports.D. Value Line is the only reliable stock advisory service used by investors.E. All of these are correct.

73. Financial reports from advisory services include all of the following sections exceptA. Stock prices, earnings, and dividends.B. Business summary.C. Prospects section.D. Financial data.E. All of these are included in financial reports.

74. Annual reportsA. Are available from a company for a fee.B. Are available only to current stockholders.C. Include the same information as a prospectus.D. Must be sent to all stockholders on an annual basis.E. Include estimated financial data only.

75. Which of the following is correct?A.Earnings are a minor factor in determining the value of a stock.B. Corporate earnings are reported in the proxy statement.C. Earnings per share uses the price of the stock in the calculation.D. EPS is a key factor that serious investors use to evaluate stock investments.E. The price/earnings ratio is the price of a share of stock divided by the corporation's earnings per share

of stock.

76. The earnings per share equalsA. Total number of shares of preferred stock divided by earnings.B. Total number of shares of common stock divided by earnings.C. Total earnings divided by number of shares of preferred stock.D. Total earnings divided by number of shares of common and preferred stock.E. None of these.

77. When analyzing a price-earnings ratio,A. A higher price-earnings ratio indicates pessimism because the price is too high compared to the

earnings.B. The higher the price-earnings ratio, the more investors are paying for earnings.C. A low ratio indicates that investors expect higher earnings in the future.D.Price-earnings ratios are helpful when comparing two companies in the same industry, but not to the

market in general.E.The price-earnings ratio alone provides enough information to allow an investor to decide whether to

invest in a particular stock.

78. Which of the following is based on historical numbers?A. Earnings.B. Earnings per share.C. Price-earnings ratio.D. All of these.E. None of these.

79. If you want to compare two companies, you should useA. Book value per share.B. Dividend yield.C. Price per share.D. Net income.E. Price-earnings ratio.

80. Which of the following is a profitability ratio that uses the number of outstanding shares in the calculation?A. Capital gainB. Earnings per shareC. Price per shareD. Net incomeE. Dividend yield

81. This ratio uses the market price per share of the stock and the earning per share.A. Book value per shareB. Earnings per shareC. Market price per shareD. Net incomeE. Price-earnings ratio

82. Which of the following changes would NOT cause analysts to change earnings estimates for a health care corporation?A. Interest ratesB. Unemployment ratesC. The economy in generalD. IndustryE. Weather

83. This calculation uses the annual amount of money paid to investors from the company.A. Book valueB. Dividend yieldC. Earnings per shareD. Market valueE. Price-earnings ratio

84. The formula "(Assets - Liabilities)/Shares outstanding" equalsA. Book value.B. Dividend yield.C. Earnings per share.D. Market value.E. Price-earnings ratio.

85. This calculation includes the annual dividends in dollars and the increase in the original purchase price of the investment.A. Book valueB. Capital gainC. Market valueD. Price-earnings ratioE. Total return

86. Total return equalsA. Dividend yield.B. Annual dividends in dollars plus capital gains.C. Capital gains.D. Annual dividends in dollars less capital gains.E. Capital gains less annual dividends in dollars.

87. Dividend yield equalsA. Annual dividend amount/Current price per share.B. Quarterly dividend amount/Price per share.C. Annual dividend amount/Book value per share.D. Quarterly dividend amount/Book value per share.E. Annual dividend amount/Earnings per share.

88. Book value equalsA. (Assets + Liabilities)/Number of shares outstanding.B. (Liabilities - Assets)/Number of shares outstanding.C. (Assets + Liabilities)/Earnings per share.D. (Liabilities + Assets/Price-earnings ratio.E. (Assets - Liabilities)/Number of shares outstanding.

89. Abe was contacted by XYZ's when XYZ wanted to sell new securities to the general public for the first time.A. initial public offeringB. investment bankC. primary marketD. secondary marketE. securities exchange

90. Stephen wanted to become one of the owners of GHI Corp. when it finally was available to the general public. He participated in theA. Initial public offering.B. Investment bank.C. Primary market.D. Secondary market.E. Securities exchange.

91. Kelly bought some stock using an investment bank from the issuer of those securities. She bought her shares on theA. Initial public offering.B. Investment bank.C. Primary market.D. Secondary market.E. Securities exchange.

92. Patrick sold his GE shares using his online broker. One can say that he sold them on theA. Initial public offering.B. Investment bank.C. Primary market.D. Secondary market.E. Securities exchange.

93. Jake wanted to buy and sell various stocks on the NYSE. He was using one of the largest in the world.A. initial public offeringsB. investment banksC. primary marketsD. secondary marketsE. securities exchanges

94. A marketplace where member brokers who represent investors meet to buy and sell securities is called a(n)A. Initial public offering.B. Investment bank.C. Primary market.D. Secondary market.E. Securities exchange.

95. The NYSE is an example of a(n)A. Initial public offering.B. Investment bank.C. Primary market.D. Secondary market.E. Securities exchange.

96. NYSE stands forA. New York Securities Exchange.B. New York Stock Exchange.C. New York School of Engineering.D. Never Yet So Even.E. New Year Selling Exchange.

97. Mohammad was interested in purchasing low-value securities that were not listed on the NYSE. He probably used to complete his transaction.A. an initial public offeringB. an investment bankC. the over-the-counter marketD. a primary marketE. the securities exchange commission website

98. A licensed individual who buys or sells investments for his or her clients is called a(n)A. Account executive.B. Account investor.C. Online executive.D. Market maker.E. Two of these are correct.

99. Peter is a NASDAQ dealer who matches buy and sell orders for Ford. He is known as a(n)A. Account executive.B. Account investor.C. Discount broker.D. Full-service broker.E. Market maker.

100.Excessive buying and selling of securities to generate commissions is calledA. Churning.B. Flipping.C. Marketing.D. Prospecting.E. Scamming.

101.Claudia is a licensed individual who buys or sells investment for her clients. Which of the following isnot correct?A. She is an account executive.B. She should not use her discretion without her client's approval.C. She should focus on churning for her clients.D. She should provide information and advice to be used in evaluating potential investments.E. All of these are correct.

102.Terry wants to begin investing and needs some guidance because he is uncomfortable making investment decisions. He should use a(n)A. Discount broker.B. Full-service broker.C. Market maker.D. Online broker.E. None of these is correct.

103.Tammy feels quite comfortable trading her own stocks using a computer. She should use a(n)A. Discount broker.B. Full-service broker.C. Market maker.D. Online broker.E. All of these are correct.

104.Tanya understands the "how to" of researching stocks and likes to make her own decisions. However, she is not comfortable using the Internet to trade stocks. She should use a(n)A. Discount broker.B. Full-service broker.C. Market maker.D. Online broker.E. All of these are correct.

105.Avery is thinking about using the computer to do his investing. He should ask all of the following questions exceptA. Can I manage my own investments closely?B. How long will I be on the computer?C. How large is my investment portfolio?D. None of these questions is appropriate.E. Two of these are appropriate to ask.

106.Mallory wants to purchase stock at the current market price. She should use aA. Current sale order.B. Limit order.C. Market order.D. Stop order.E. Stop-loss order.

107.Devin wants to purchase DEF stock for $40.00 or less. He should use aA. Current sale order.B. Limit order.C. Market order.D. Stop order.E. Stop-loss order.

108.Gavin has owned MNOP stock for several years and has seen the stock increase in value from $20 to $35. He wants to "lock in" his gains, so he needs to place an order that will sell his stock at the next available opportunity after its market price drops to $33. What kind of order should he use?A. Current sale order.B. Limit order.C. Market order.D. Stop-loss order.E. None of these.

109.Ethan wants to purchase some stock for the first time. Which of the following is correct?A.His account executive should be encouraged to churn Ethan's account to maximize his return.B. He should use an online broker to get specific advice about purchasing stock.C.His purchase price will exactly equal the number of shares he purchases times the price per share and is

known in advance.D. If he uses a market order, he can lock in the price at which he wants to buy the stock.E. His commission should be lower at an online broker than at a full-service broker.

110.If you bought a stock on June 15, 2010, and sold it on July 15, 2011, you would likely be classified as a(n)A. Speculator.B. Trader.C. Investor.D. Two of these are correct.E. All of these are correct.

111.If you bought a stock on July 1, 2010, and sold it on July 15, 2010, you may be a(n)A. Speculator.B. Trader.C. Investor.D. Two of these are correct.E. All of these are correct.

112.Brenda purchases stock and never plans to sell them. She could be considered to be using aA. Buy-and-hold technique.B. Direct investment plan.C. Direct reinvestment plan.D. Dollar cost averaging technique.E. Margin technique.

113.Marissa purchases $500 of stock from a corporation without having to use an account executive or a brokerage firm. She is using aA. Buy-and-hold technique.B. Direct investment plan.C. Direct reinvestment plan.D. Dollar cost averaging technique.E. Margin technique.

114.Rebecca owns stock that pays a dividend. She does not want the cash now; instead she would prefer to have more shares of stock. She should use aA. Buy-and-hold technique.B. Direct investment plan.C. Dividend reinvestment plan.D. Dollar cost averaging technique.E. Margin technique.

115.Timothy has $100 automatically invested in a stock each month. This way, he doesn't buy high and sell low. He is using aA. Buy-and-hold technique.B. Direct investment plan.C. Direct reinvestment plan.D. Dollar cost averaging technique.E. Margin technique.

116.Faye sometimes borrows money from her broker to buy her stock. She is buyingA. A call option.B. A direct investment.C. On margin.D. A put option.E. A short sale.

117.Investors who earn larger returns because they borrow part of the money needed to by a particular stock are using which of the following techniques?A. A call optionB. Direct investingC. Buying on marginD. A put optionE. Selling short

118.If you buy or sell with this technique, you may be required to pledge additional collateral or cash for a loan.A. A call optionB. Direct investingC. Buying on marginD. A put optionE. Selling short

119.Ben borrowed some securities from his broker and planned to replace them at a later date. Which of the following strategies did he use?A. A call optionB. Direct investingC. Buying on marginD. A put optionE. Selling short

120.Which of the following is correct?A. The broker pays you interest on money borrowed to purchase stock on margin.B. Selling short is selling stock borrowed from a brokerage firm.C. A put option is the right, but not the obligation, to purchase a stock at a specified price by a given date.D. A brokerage firm receives double its commission when stock is bought and sold when the investor is

selling short.E. If the stock price increases and you purchased stock on margin, you may receive a margin call.

121.Which of the following is not correct?A. You pay interest on money borrowed to purchase stock on margin.B. Selling short is selling stock borrowed from a brokerage firm.C. A call option is the right, but not the obligation, to purchase a stock at a specified price by a given

date.D. A brokerage firm receives double its commission when stock is bought and sold when the investor is

selling short.E. If the stock price decreases and you purchased that stock on margin, you may receive a margin call.

122.The opportunity, but not the obligation, to buy a security within a specified period of time at a guaranteed price isA. A call option.B. Direct investing.C. Buying on margin.D. A put option.E. A short sale.

123.The opportunity, but not the obligation, to sell a security within a specified period of time isA. A call option.B. Direct investing.C. Buying on margin.D. A put option.E. A short sale.

124.Mary Sue owns 1,000 shares of QRS Moving Company. QRS pays a quarterly dividend of $.25 per share.What is the total annual dividend that Mary Sue will receive? A. $.50.B. $2.00. C. $250.00. D. $500.00.E. $1,000.00.

125.Mary Jane owns 1,000 shares of TUV Trucking Company. TUV pays a quarterly dividend of $.50 per share. What is the total annual dividend that Mary Jane will receive?A. $.25.B. $1.00. C. $500. D. $1,000.E. $2,000.

126.Gregory bought 500 shares of stock at a price of $60 per share. He later sold his stock at a price of $56.What was his total return on his investment?A. $2,000 lossB. $60 lossC. $4 gainD. $2,000 gain E. $26,500 gain

127.On July 3, 2009, Devin purchased 100 shares of CDEF stock at a cost of $30 per share. His commission was $29. He sold his shares on July 6, 2011, at a price of $45 per share less another $29 commission.During the time he held the stock, he earned dividends of $2.50 per share. What was his total return on his investment?A. $250 B. $1,492 C. $1,692 D. $1,721 E. $1,750

128.Using the information given here, what are the earnings per share for DEF Company?

• Income = $180,000• Number of shares outstanding = 60,000• Price per share = $30• Book value per share = $10 A. $1.00B. $2.00 C. $3.00 D. $5.00 E. $6.00

129.Using the information given here, what are the earnings per share for GHI Company?

• Income = $375,000• Number of shares outstanding = 150,000• Price per share = $60• Book value per share = $20 A. $0.33B. $1.33 C. $2.50 D. $3.00 E. $7.50

130.Using the information given here, what is the price-earnings ratio for DEF Company?

• After-tax income = $180,000• Number of shares outstanding = 60,000• Price per share = $30• Book value per share = $10• Earnings per share = $3.00 A. $3.00B. $4.00 C. $7.50 D. $10.00 E. $20.00

131.• Income = $180,000• Number of shares outstanding = 60,000• Price per share = $30• Book value per share = $10Using the information given here, what is the price-earnings ratio for DEF Company? (Hint: This is a two-step calculation.)

A. $3.00 B. $4.00 C. $7.50 D. $10.00 E. $20.00

132.Given the information shown here for NMOP Inc., calculate the dividend yield.

• Annual dividend = $4.00• Current market value per share = $60.00 A. 6.7%.B. $0.67. C. 15%. D. $1.50.E. Need more information to calculate.

133.Given the information shown here for NMOP Inc., calculate the dividend yield.

• Annual dividend = $4.00• Number of shares outstanding = 40,000• Current market value per share = $40.00• Book value per share = $8.00 A. 10%B. 15%C. 20%D. 25%E. 40%

134.Given the information shown here for QRS Inc., calculate the book value.

• Assets = $18,000,000• Liabilities = $10,000,000• Number of shares outstanding = 2,000,000 A. $1.33B. $2.50 C. $3.50 D. $4.00 E. $7.50

135.Given the information shown here for TUV, Inc., calculate the total return.

• Dividends per share = $1.50• Purchase price (July 15, 2010) = $50.00• Sell price (July 15, 2011) = $56.00 A. ($6.00)B. ($4.50) C. $1.50 D. $6.00 E. $7.50

136.Gregory purchased 600 shares of QRS stock at a price of $25 per share. In addition, he paid a commission of $30 for the transaction. How much did he need to pay his broker?A. $7,500. B. $15,470. C. $15,000. D. $15,030. E. $15,050.

137.If you bought stock using dollar cost averaging as listed here, what was your average cost?

A. $27.50 B. $27.78 C. $27.96 D. $28.57 E. $30.00

138.Mike bought 200 shares of PDQ stock on margin at $15/share. The stock increased to $21/share. What was Mike's profit?A. $600 B. $1,200 C. $3,000 D. $4,200 E. $5,200

139.Stocks have been tracked for years. What has been the average annual return for stocks since 1926?

140.What are two characteristics of common stock?

141.Why might you want to invest in common stocks?

142.What is a difference between common stock and preferred stock?

143.In reality, what is one of the most important things an investor should do before investing in any stocks?

144.Is the Internet a valid tool to use for evaluating stocks? Why or why not?

145.List five things that can be found at a website such as http://finance.yahoo.com to evaluate stock investments.

146.Stock advisory services provide detailed information about corporations. Describe three sections that appear in a report.

147.Whose responsibility is it to determine whether a company's stock is a good investment?

148.What are three calculations that can be used to evaluate the profitability of a corporation?

149.What is the relationship between the price-earnings ratio and confidence by investors in the company?

150.What is the difference between a primary market and a secondary market?

151.Discuss full-service, discount, and online brokers.

152.When choosing a broker for your securities transactions, you should ask yourself some questions. What are three questions you should ask?

153.You bought Harley-Davidson stock at $9 in March 2009 and saw the value increase to $22, then drop to$17 by early June 2009. Looking back, you realized that you missed a chance to "lock in" your profits and sell the stock at a price of $21 or higher. If you did not want to use a market order, what should you have used to lock in your profit?

154.List two long-term investing techniques.

155.List two short-term investing techniques.

156.Why is short-term investing riskier than long-term investing? Explain your answer.

1. (p. 390) TRUE

2. (p. 390) FALSE

3. (p. 390) FALSE

4. (p. 392) TRUE

5. (p. 392) FALSE

6. (p. 392) FALSE

7. (p. 392) TRUE

8. (p. 393) FALSE

9. (p. 393) FALSE

10. (p. 393) FALSE

11. (p. 394) FALSE

12. (p. 397) TRUE

13. (p. 397) TRUE

14. (p. 398) FALSE

15. (p. 398) FALSE

16. (p. 398) TRUE

17. (p. 398) TRUE

18. (p. 399) FALSE

19. (p. 399) FALSE

20. (p. 402) FALSE

21. (p. 402) FALSE

22. (p. 402) TRUE

23. (p. 402) TRUE

24. (p. 404) FALSE

25. (p. 407) FALSE

26. (p. 407) TRUE

27. (p. 407) FALSE

28. (p. 408) FALSE

29. (p. 407) TRUE

30. (p. 409) FALSE

31. (p. 409) FALSE

32. (p. 410) TRUE

33. (p. 412) TRUE

34. (p. 412) FALSE

35. (p. 412) FALSE

36. (p. 412) TRUE

12 Key

37. (p. 412) FALSE

38. (p. 414) FALSE

39. (p. 414) TRUE

40. (p. 414) FALSE

41. (p. 414) TRUE

42. (p. 414) FALSE

43. (p. 414) FALSE

44. (p. 414) FALSE

45. (p. 416) FALSE

46. (p. 418) FALSE

47. (p. 392) D

48. (p. 395) B

49. (p. 392) B

50. (p. 392) B

51. (p. 392) C

52. (p. 393) E

53. (p. 393) B

54. (p. 393) C

55. (p. 393) E

56. (p. 393) A

57. (p. 393) B

58. (p. 394) C

59. (p. 394) C

60. (p. 396) E

61. (p. 397) E

62. (p. 398) C

63. (p. 398) A

64. (p. 398) B

65. (p. 398) E

66. (p. 398) D

67. (p. 398) C

68. (p. 398) A

69. (p. 398) C

70. (p. 400) E

71. (p. 400) C

72. (p. 400) C

73. (p. 401) E

74. (p. 402) D

75. (p. 404) E

76. (p. 406) E

77. (p. 404) B

78. (p. 405) D

79. (p. 404) E

80. (p. 404) B

81. (p. 404) E

82. (p. 405) E

83. (p. 406) B

84. (p. 407) A

85. (p. 407) E

86. (p. 407) B

87. (p. 406) A

88. (p. 407) E

89. (p. 408) B

90. (p. 408) A

91. (p. 408) C

92. (p. 408) D

93. (p. 408) E

94. (p. 408) E

95. (p. 409) E

96. (p. 409) B

97. (p. 409) C

98. (p. 410) A

99. (p. 410) E

100. (p. 410) A

101. (p. 410) C

102. (p. 411) B

103. (p. 411) D

104. (p. 411) A

105. (p. 411) E

106. (p. 412) C

107. (p. 412) B

108. (p. 412) D

109. (p. 412) E

110. (p. 414) C

111. (p. 414) D

112. (p. 414) A

113. (p. 414) B

114. (p. 416) C

115. (p. 414) D

116. (p. 416) C

117. (p. 416) C

118. (p. 416) C

119. (p. 417) E

120. (p. 417) B

121. (p. 417) D

122. (p. 418) A

123. (p. 418) D

124. (p. 396) E

125. (p. 396) E

126. (p. 397) A

127. (p. 397) C

128. (p. 404) C

129. (p. 404) C

130. (p. 405) D

131. (p. 405) D

132. (p. 406) A

133. (p. 406) A

134. (p. 407) D

135. (p. 407) E

136. (p. 408) D

137. (p. 414) B

138. (p. 416) B

139. (p. 390) The average annual return is just below 10%.

• Stockholders elect the board of directors.• Stockholders may vote in person or by proxy at the annual meeting.• Common stocks may pay dividends.• Common stocks are equity financing.140. (p. 392) • Common stocks are the most basic form of ownership for a corporation.

141. (p. 392) You might want to invest in common stocks because of the potential profitability due to dollar appreciation of stock value, income from dividends, and potential increases in stock value after stock splits.

Common stockholders can vote, whereas preferred stockholders normally do not vote.142. (p. 392) Preferred stockholders receive a constant, known dividend before any common dividends are paid. Therefore, common stockholders receive variable dividends.

143. (p. 392) An investor should research and evaluate the company as well as the industry in which it operates.

144. (p. 398) The Internet is a valid tool because it is easily accessible and may be more up-to-date and thorough than printed material. Company websites, personal finance websites, and professional advisory services all provide financial information about companies.

• Stock price changes and ranges.• Volume.• Dividends.• Financials.• Ownership.• Analyst coverage.• Information.• News.• Charts.• Stock quotes.• Company name and ticker symbol.145. (p. 400) http://finance.yahoo.com includes the following and more:

• Final section—auditors, where principal office is located, transfer agent, corporate officers.• Financial data—data for the past five years plus the last three-month reporting period. Includes total revenues, earnings per share, dividends per share, return on equity, and net income.• Prospects—company's outlook.• Recent developments—current information about the company's net income and sales revenue.• Business summary—company's major operations in detail.• Top section—stock prices, earnings, dividends.146. (p. 400) The text provides an example from Mergent's that includes six sections:

147. (p. 402) It is the investor's job to interpret information and decide whether a company's stock is a good investment.

• Return on equity (not discussed in this section of the text; nevertheless, some students may be aware of this ratio).• Return on assets (not discussed in this section of the text; nevertheless, some students may be aware of this ratio).• Capital gain.• Total return.• Dividend yield.• Price-earnings ratio.• Earnings per share.148. (p. 404) Possible answers include these:

149. (p. 404) A direct relationship exists in that a high price-earnings ratio often indicates investor optimism because of the expectation of higher earnings in the future.

150. (p. 408) In a primary market, investors purchase stock from the issuer of the securities (e.g., initial public offering). A secondary market deals with existing securities (e.g., you sell your shares to another investor).

An online broker is also appropriate for people who understand how to research stocks and prefer to make their own decisions. This is for individuals who are comfortable trading stocks online. Online brokers generally have the lowest commissions.A discount broker is for individuals who are uncomfortable trading stocks online and for people who understand how to research stocks and prefer to make their own decisions.151. (p. 411) A full-service broker is appropriate for beginning investors with little or no experience and for those who are uncomfortable making investment decisions. Commissions generally are highest with full-service brokers.

• Are there any fees in addition to the commissions I pay when I buy or sell stocks?• Is there a charge for statements, research reports, and other financial reports?• How often do I get statements?• Do you have a toll-free telephone number for customer use?• What is the typical commission for a stock transaction?• Can I trade stocks online?• Can I buy or sell stocks over the phone?152. (p. 411) Possible questions include these:

153. (p. 412) You should have used a stop-loss order to sell the Harley stock at the next available opportunity after its market price reached $21.

• Dividend reinvestment plan.• Direct investment plan.• Dollar cost averaging.• Buy and hold.154. (p. 414) Long-term techniques include

• Put options.• Call options.• Selling short.• Buying stock on margin.155. (p. 416) Short-term techniques include

156. (p. 416) Short-term investing (speculating or trading) is more risky because of the strategies used. Buying on margin uses financial leverage, which can provide larger returns when the stock value increases as well as lower returns when the stock value decreases. Selling short is risky because the stock is sold before it is purchased. If the stock price decreases, it can be purchased at a lower price; however, if the price increases, the investment will provide a loss (buy high and sell low). Options are risky because changes in price need to occur before the expiration date or the investor can lose the money invested in the option.

12 SummaryCategory # of Questions

Blooms: Analyze 9Blooms: Apply 17Blooms: Remember 48Blooms: Understand 82Difficulty: 1 Easy 26Difficulty: 2 Medium 107Difficulty: 3 Hard 23Kapoor - Chapter 12 156Learning Objective: 12-01 Identify the most important features of common and preferred stock. 33Learning Objective: 12-02 Explain how you can evaluate stock investments. 28Learning Objective: 12-03 Analyze the numerical measures that cause a stock to increase or decrease in value. 32Learning Objective: 12-04 Describe how stocks are bought and sold. 35Learning Objective: 12-05 Explain the trading techniques used by long-term investors and short-term speculators. 28Topic: Buying and Selling Stocks 35Topic: Common and Preferred Stock 33Topic: Evaluating a Stock Issue 28Topic: Long-Term and Short-Term Investment Strategies 28Topic: Numerical Measures That Influence Investment Decisions 32

13Student:

1. For individuals, stocks and bonds are safer choices than mutual funds because money is pooled from many investors for mutual funds.True False

2. Many people invest in mutual funds through their retirement accounts. True False

3. In 2011, investors in the United States could choose from more than 25,000 mutual funds. True False

4. Mutual funds carry a "real risk" that they can decrease in value. True False

5. Mutual funds provide amateur management. True False

6. Most mutual funds are closed-end funds. True False

7. An exchange-traded fund has portfolio managers who actively research and select the stocks and other securities.True False

8. An "A fund" mutual fund may have a commission as high as 9.5%. True False

9. Fred wants to invest in a "no-load" fund. This means that the fund has no 12b-1 fees. True False

10. An aggressive growth fund invests in companies with a long history of paying dividends. True False

11. The difference between a global stock fund and an international fund is that the global stock fund invests in companies throughout the world, including the United States, whereas the international fund invests outside the United States.True False

12. Stephanie wants to invest in a mutual fund that invests in companies within the same industry. She should put her money into a regional fund.True False

13. A socially responsible fund invests in companies that produce tobacco, nuclear energy, and weapons in order to influence the boards to change the companies' mission statements.True False

14. The return for an intermediate U.S. government bond fund should be higher than for a junk bond fund.True False

15. A family of funds is a grouping of funds that all invest in bonds or all invest in stocks. True False

16. Open-end mutual funds have managers and closed-end funds do not. True False

17. Most managed mutual funds outperform the Standard & Poor's 500 stock index. True False

18. A "good" fund manager has the ability to increase the share value when the economy is good and retain that value when the economy is bad.True False

19. If Ryan wants to invest in an index mutual fund, he should not expect his fund to behave differently than the underlying index.True False

20. Brenda wants to invest in a fund that will outperform most others. On average, she would be better off to invest in an index fund instead of a managed closed-end fund.True False

21. The only way to get reliable information about mutual funds is to pay a fee for it. True False

22. An investment company sponsoring a mutual fund must give potential investors an annual report. True False

23. A newspaper will provide more complete coverage of mutual funds compared to other sources. True False

24. Many people own mutual funds as part of a 401(k) plan. True False

25. A capital gain distribution is the profit that usually results when the investors sell their shares that have increased in value.True False

26. Cynthia received an IRS Form 1099DIV. This form is sent at the end of each quarter to specify how much she received in dividends and capital gain distributions.True False

27. A higher turnover ratio for a mutual fund can result in higher tax bills. True False

28. All of the following are advantages of a mutual fund exceptA. Diversification.B. Professional management.C. Loads of up to 8.5%.D. Ease of buying and selling shares.E. All of these are advantages.

29. What percentage of all mutual funds are closed-end funds?A. 6% B. 13% C. 36% D. 85% E. 93%

30. Which type of fund has the prices determined by factors of supply and demand like a stock?A. Closed-end fundB. SEC government fundC. Net asset value fundD. No-load fundE. Open-end fund

31. Which of the following is a fund that invests in stocks or securities contained in a specific stock or securities index?A. Closed-end fundB. Exchange-traded fundC. Net asset value fundD. No-load fundE. Open-end fund

32. Whose shares are issued and redeemed by the investment company at the request of investors?A. Closed-end fundB. Exchange-traded fundC. Net asset value fundD. No-load fundE. Open-end fund

33. How is an ETF similar to a closed-end fund?A.Shares are traded on a securities exchange or in the over-the-counter market.B. An investor can purchase as little as one share of a fund.C. Prices are determined by supply and demand and the value of stocks and other investments contained

in the portfolio.D. Prices are determined by investor expectations.E. All of these are correct.

34. Which of the following is correct for a closed-end fund?A. It is not traded on a securities exchange.B.The price of its shares is determined by supply and demand, by the value of stocks in the portfolio, and

by investor expectations.C. It is not actively managed by professional fund managers.D. Its price is equal to the net asset value.E. Its load cannot exceed 2%.

35. The net asset value is calculated asA. (Liabilities - Value of portfolio) + Number of shares outstanding.B. Number of shares outstanding/(Liabilities - Value of portfolio).C. (Liabilities - Value of portfolio)/Number of shares outstanding.D. (Current market value of portfolio - Liabilities)/Number of shares outstanding.E. Number of shares outstanding/(Value of portfolio - Liabilities).

36. Many mutual funds charge a commission every time they are purchased by investors. These are calledA. Load funds.B. Closed-end funds.C. Exchange-traded funds.D. Net asset value funds.E. Open-end funds.

37. A load fund is allowed to collect a sales charge (commission) as high as A. 0%.B. 2%.C. 3-5%.D. 8.5%.E. 11.5%.

38. The average load charge for mutual funds is A. 0%.B. 2%.C. 3-5%.D. 8.5%.E. 11.5-14.5%.

39. The average upfront sales charge for a no-load mutual fund is A. 0%.B. 2%.C. 3-5%.D. 8.5%.E. 11.5-14.5%.

40. A no-load mutual fundA. May allow investors to pay a sales charge.B. Charges commission when you buy shares.C. Uses salespeople to sell the funds.D. Is available only via the Internet.E. Can charge a 12b-1 fee of up to 0.25% of its assets.

41. A contingent deferred sales load is known as all of the following exceptA. Back-end load.B. B fund.C. Redemption fee.D. Only two of these are correct.E. All of these are correct.

42. A fee charged to defray the costs of advertising and marketing for a mutual fund is called a fee.A. 3cB. 12b-1 C. 14c-2 D. 401(k)E. 403(b)

43. Which of the following is not correct about the 12b-1 fee?A. It is also known as a distribution fee.B. A no-load fund can charge a 12b-1 fee of up to 0.25% of its assets.C. It is often an ongoing fee that is charged on an annual basis.D. It needs to be disclosed in the annual report but not in the prospectus.E It is used to defray the costs of advertising and marketing a mutual fund and commissions paid to a. broker who sold shares in the mutual fund.

44. Which class of shares charges a commission when shares are purchased?A. AB. BC. CD. KE. Q

45. Which class of shares charges a commission when withdrawals are made during the first five years?A. AB. BC. CD. KE. Q

46. Which class of shares does not impose a sales load or contingent deferred sales fee but charges a higher 12b-1 fee than the other classes?A. AB. BC. CD. KE. Q

47. Which of the following types of stock funds invests in stock issued by companies with a long history of paying dividends?A. Equity income fundsB. Growth fundsC. Index fundsD. International fundsE. Regional funds

48. Which of the following types of stock funds invests in stock issued by companies expecting higher-than- average revenue and earnings growth?A. Equity income fundsB. Growth fundsC. Index fundsD. International fundsE. Regional funds

49. Which of the following types of stock funds invests in the same companies included in the Standard & Poor's 500 stock index?A. Equity income fundsB. Growth fundsC. Index fundsD. International fundsE. Regional funds

50. Which of the following types of stock funds invests in stock issued by companies throughout the world outside the United States?A. Equity income fundsB. Growth fundsC. Index fundsD. International fundsE. Regional funds

51. Which of the following types of stock funds invests in stock traded within one specific region of the world?A. Equity income fundsB. Growth fundsC. Index fundsD. International fundsE. Regional funds

52. Sally wants to invest in a fund that invests only in stock. Which of the following will meet her needs?A. Asset allocation fundsB. Balance fundsC. Junk bond fundsD. Midcap fundsE. Short-term corporate bond funds

53. Thomas wants to invest in a fund that invests in stock, bonds, and money market instruments. Which of the following will meet his needs?A. Asset allocation fundsB. Aggressive growth fundsC. Junk bond fundsD. Midcap fundsE. Short-term corporate bond funds

54. Val wants to invest in a fund whose primary objective is to conserve principal, provide income, and provide long-term growth. Which of the following will best meet her needs?A. Cyclical fundsB. Balanced fundsC. Junk bond fundsD. Midcap fundsE. Short-term corporate bond funds

55. An example of a lifecycle fund is a fund thatA.Assists investors with planning for retirement by a specific date.B. Initially invests in conservative securities, then changes to invest in more risk-oriented securities as

time goes by.C. Invests in shares of other mutual funds in order to increase diversification and asset allocation.D. Has principal protection as its main objective.E. None of these is an example of a lifecycle fund.

56. If you start a new job and are offered the opportunity to participate in the company's 401(k) or 403(b) retirement plan, which of the following decisions can affect your financial future?A. Participating in the retirement account as a way to reduce income taxes.B. Participating in the retirement account to take advantage of the employer's matching contributions.C. Choosing mutual funds from a number of different fund options for your retirement account.D. Basing your actual choice of investments on your age, how long before you retire, and your tolerance

for risk.E. All of these decisions would have a financial impact.

57. Time is an important factor when evaluating a mutual fund for which of the following?A. The existence of the underlying index.B. The life of the companies in the fund.C. The length of time that the fund manager has been managing the fund.D. The status of the economy.E. None of these.

58. Which of the following is not correct?A When evaluating a mutual fund, an important question to ask is this: How long has the present fund. manager been managing the fund?B. Over the years, the majority of managed mutual funds have failed to outperform the Standard &

Poor's 500 stock index.C. Managed funds may be open-end funds or closed-end funds.D A benchmark of a good fund manager is the ability to increase share value when the economy is good. and retain that value when the economy is bad.E. A managed fund will outperform an index fund only 60% of the time.

59. Which of the following is not a way one can access reliable information about mutual funds on the internet?A. Find statistical information from the investment company's web page.B. Obtain current market values for mutual funds by using a search engine such as http://

finance.yahoo.com.C. Review blogs from amateur investors about their favorite mutual funds.D. Research reports for mutual funds using professional advisory services.E. All of these are reliable sources of information about mutual funds.

60. Professional advisory services provide detailed information about mutual funds. Which of the following is not a professional advisory service?A. Dun and Moody's.B. Lipper Analytical Services.C. Morningstar, Inc.D. Value Line.E. All of these are professional advisory services that provide information about mutual funds.

61. Professional advisory services provide research on mutual funds in all of the following areas exceptA. A historical profile.B. Statistical information.C. Performance, risk analysis, and portfolio analysis.D. Summary of the analyst's research.E. All of these are included by professional advisory services.

62. Sally wants to invest in a mutual fund. The mutual fund must provide a(n) to her.A. analysis from a financial publicationB. annual reportC. prospectusD. quarterly reportE. summary report

63. Which of the following provides some information about mutual funds for free and more detailed information at a cost?A. Financial publicationsB. InternetC. Mutual fund annual reportD. NewspapersE. Professional advisory services

64. Which of the following provides a good means of monitoring the value of your mutual fund investments, but not as much information as other sources of information that conduct a more complete evaluation?

A. Financial publicationsB. Internet resourcesC. Mutual fund annual reportD. NewspapersE. Professional advisory services

65. Which of the following contains a letter from the president of the investment company, detailed financial information, a schedule of investments, and a letter from the fund's independent auditors?A. Financial publicationsB. InternetC. Mutual fund annual reportD. NewspapersE. Professional advisory services

66. How do mutual funds provide returns to their shareholders?A. Income dividends.B. Capital gain distributions.C. Capital gains.D. All of these.E. None of these.

67. Earnings paid to shareholders that are not related to the sale of securities in the fund's portfolio are calledA. Capital gain distribution.B. Income dividend.C. Capital gain.D. Mutual fund money.E. Fund taxes.

68. Payments to investors related to the sale of securities in the fund's portfolio areA. Capital gain distributions.B. Income dividends.C. Capital gains.D. Mutual fund money.E. Fund taxes.

69. When you sell your shares in a mutual fund, you may receive a profit calledA. Capital gain distribution.B. Income dividend.C. Capital gain.D. Mutual fund money.E. Fund taxes.

70. Which of the following is true about mutual funds and taxes?A. Capital gain distributions are taxed when you sell your shares.B. Income dividends are taxed quarterly.CInvestment companies are required to send each shareholder a year-end statement that specifies how. much each received in dividends and capital gain distributions.D. Capital gains distributions are not taxed.E. Taxes can be eliminated if you hold your mutual fund shares in your 401(k) retirement account.

71. If you hold mutual fund shares in your Roth individual retirement account, the taxes will beA. Deferred.B. Eliminated.C. Evaluated.D. Payable immediately.E. None of these.

72. A problem with mutual funds isA. Professional management.B. The possibility to eliminate taxes if held in a Roth individual retirement account.C. Being required to report reinvested income dividends and capital gain distributions on your federal tax

return.D. Tax deferral if the fund is held in a retirement account like a 401(k) account.E. The diversification offered to investors.

73. All of the following are valid ways to purchase mutual funds exceptA. A regular account transaction.B. A voluntary savings plan.C. A contractual savings plan.D. A reinvestment plan.E. All of the ways listed are valid purchase options.

74. Melinda wants to withdraw some money from her mutual fund. Which of the following is not an option available?A. Write a checkB. Sell a certain number of shares each investment periodC. Withdraw a fixed percentage of asset growthD. Withdraw all income dividends and capital gain distributions earned each investment periodE. Withdraw all principal and leave interest dividends and capital gain distributions in the account

75. The investments in the Alamo Basics Contingency Fund have a current market value of $800 million. The fund also has liabilities that total $60 million. If this mutual fund has 20 million shares, what is the net asset value per share?A. $3.00 B. $37.00 C. $40.00 D. $43.00 E. $60.00

76. The investments in the Already Been Counted Fund have a current market value of $600 million. The fund also has liabilities that total $40 million. If this mutual fund has 25 million shares, what is the net asset value per share?A. $1.60.B. $22.40.C. $24.00.D. $25.60.E. None of these.

77. The Anderson Balanced mutual fund charges a sales load of 4.85%. If you invest $15,000, how much must you pay in commissions?A. $4.85 B. $485.00 C. $600.00 D. $727.50 E. $750.00

78. The Anderson Balanced mutual fund charges a sales load of 4.85%. If you invest $15,000, how much of your investment will actually be used to purchase shares in the fund?A. $14,250.00 B. $14,272.50 C. $14,400.00 D. $14,485.00 E. $15,000.00

79. Francesca withdrew $7,000 from B shares that she owned in the Already Been Counted mutual fund within one year of her purchase. If she must pay a 5% contingent deferred sales fee, what will her total fee be?A. $0B. $3.50 C. $35.00 D. $350.00E. $3,500.00

80. Francesca withdrew $7,000 from B shares that she owned in the Already Been Counted mutual fund within one year of her purchase. If she must pay a 5% contingent deferred sales fee, what amount will she actually receive?A. $350 B. $6,650 C. $7,000 D. $7,350 E. $7,500

81. Nicholas purchased 150 shares of ABC Mutual Fund at $10.50 and sold them one year later at a price of$14.50. His total earnings were A. $400B. $600 C. $2,025 D. $2,625 E. $4,650

82. What is a mutual fund?

83. What are the two primary reasons that investors purchase mutual funds?

84. How is the price per share for closed-end mutual funds determined?

85. What is an ETF?

86. How is the price per share for open-end mutual funds determined?

87. Contrast a load fund and a no-load fund.

88. List and explain five types of stock funds.

89. Describe the investment strategy of a socially responsible fund.

90. What is a balanced fund?

91. What is a family of funds, and what are its advantages?

92. Why have lifestyle funds become so popular with investors?

93. Knowing what we know now, if you were an investor in 2007, what changes would you have made to your mutual fund investments to minimize your losses in the economic crisis that followed?

94. How is an index fund different from other mutual funds?

95. When you think about good and bad economic times, what are the responsibilities of a "good" fund manager?

96. Compare the returns of managed funds and index funds.

97. Identify three items that should be found in a mutual fund prospectus.

98. What are three ways that a shareholder can receive a return from a mutual fund?

99. If you want to eliminate all taxes from the sale of shares from your mutual funds, what should you do?

100.Explain the taxability of reinvested income dividends in a mutual fund.

101.What is the turnover ratio?

1. (p. 429) FALSE

2. (p. 429) TRUE

3. (p. 429) FALSE

4. (p. 429) TRUE

5. (p. 430) FALSE

6. (p. 408) FALSE

7. (p. 431) FALSE

8. (p. 433) FALSE

9. (p. 433) FALSE

10. (p. 438) FALSE

11. (p. 438) TRUE

12. (p. 439) FALSE

13. (p. 439) FALSE

14. (p. 439) FALSE

15. (p. 440) FALSE

16. (p. 442) FALSE

17. (p. 442) FALSE

18. (p. 442) TRUE

19. (p. 443) TRUE

20. (p. 443) TRUE

21. (p. 443) FALSE

22. (p. 446) FALSE

23. (p. 446) FALSE

24. (p. 450) TRUE

25. (p. 450) FALSE

26. (p. 450) FALSE

27. (p. 450) TRUE

28. (p. 431) C

29. (p. 431) A

30. (p. 431) A

31. (p. 431) B

32. (p. 433) E

33. (p. 433) E

34. (p. 431) B

35. (p. 433) D

36. (p. 433) A

13 Key

37. (p. 433) D

38. (p. 433) C

39. (p. 433) A

40. (p. 433) E

41. (p. 434) E

42. (p. 434) B

43. (p. 435) D

44. (p. 435) A

45. (p. 435) B

46. (p. 435) C

47. (p. 439) A

48. (p. 439) B

49. (p. 439) C

50. (p. 439) D

51. (p. 439) E

52. (p. 439) D

53. (p. 439) A

54. (p. 439) B

55. (p. 440) A

56. (p. 435) E

57. (p. 441) C

58. (p. 441) E

59. (p. 443) C

60. (p. 443) A

61. (p. 446) E

62. (p. 446) C

63. (p. 443) E

64. (p. 448) D

65. (p. 446) C

66. (p. 450) D

67. (p. 450) B

68. (p. 450) A

69. (p. 450) C

70. (p. 452) C

71. (p. 452) B

72. (p. 452) C

73. (p. 453) E

74. (p. 454) E

75. (p. 433) B

76. (p. 433) B

77. (p. 433) D

78. (p. 433) B

79. (p. 434) D

80. (p. 434) B

81. (p. 451) B

82. (p. 428) A mutual fund is an investment company that pools the money of many investors, its shareholders, to invest in a variety of securities.

83. (p. 430) The two main reasons are professional management and diversification.

84. (p. 431) The prices of shares are determined by the factors of supply and demand, by the value of stocks and other investments contained in the fund's portfolio, and by investor expectations.

85. (p. 431) An ETF (exchange-traded fund) is a fund that invests in the stocks or other securities contained in a specific stock or securities index, and whose shares are traded on a securities exchange or over the counter.

86. (p. 433) The price per share is the net asset value (NAV). The NAV is equal to the current market value of securities contained in the portfolio less the liabilities divided by the number of shares outstanding.

87. (p. 433) A load fund is a mutual fund in which investors pay a commission every time they purchase shares. A no-load fund is a mutual fund in which the individual investor pays no sales charge when shares are purchased; however, it may charge a 12b-1 fee up to .25% of its assets.

For a description of each type of fund, see the section "Classification of Mutual Funds."• Socially responsible funds avoid investing in companies that may cause harm to people, animals, or the environment.

• Small-cap funds invest in smaller, less well-known companies with total capitalization of less than $2 billion.• Sector funds invest in companies within the same industry.• Regional funds seek to invest in stock traded within one specific region of the world.• Midcap funds invest in the stocks of companies with total capitalization of $2 billion to $10 billion.• Large-cap funds invest in the stocks of companies with total capitalization of $10 billion or more.• International funds invest in foreign stocks sold in securities markets throughout the world outside the United States.• Index funds invest in the same companies included in an index like Standard & Poor's 500 stock index, the Dow Jones Industrial Average, or the NASDAQ 100 Index.• Growth funds invest in well-established companies expecting higher-than-average revenue and earnings growth.• Global stock funds invest in stocks of companies throughout the world, including the United States.• Equity income funds invest in stocks issued by companies with a long history of paying dividends.• Aggressive growth funds seek rapid growth by purchasing stocks of small, growth companies whose prices are expected to increase dramatically in a short period of time.88. (p. 438) All of the following are stock funds:

89. (p. 439) A socially responsible fund avoids investing in companies that may cause harm to people, animals, and the environment. Typically these funds do not invest in companies that produce tobacco, nuclear energy, or weapons, nor do they invest in companies that have a history of discrimination. Instead they invest in companies that have a history of making ethical decisions, establishing efforts to reduce pollution, and other socially responsible activities.

90. (p. 439) A balanced fund invests in both stocks and bonds. Its primary objective is conserving principal, providing income, and providing long- term growth.

91. (p. 440) A family of funds exists when one investment company manages a group of mutual funds where each fund within the family has a different financial objective. The investment may offer exchange privileges within the family and the convenience of switching investments within the family.

92. (p. 440) Lifestyle, or lifecycle, funds have an asset allocation that changes through time. Initially these funds invest in more risk-oriented securities (stocks) and then become increasingly conservative and income-oriented (bonds and CDs). They are popular when an investor is planning for retirement by a specific date.

93. (p. 441) If you would have known that an economic crisis was coming, you would have changed your investments to be more conservative in order to conserve your investment dollars and minimize your losses.

94. (p. 441) An index fund has a manager; however, his or her responsibility is to "mirror" the underlying index. Therefore, the index fund is passively managed. Other mutual funds have professional managers whose responsibility is to actively manage the fund to earn returns. Also, the expense ratio for an index fund is smaller when compared to the expense ratio for managed funds.

95. (p. 441) A good fund manager has the ability to increase share value when the economy is good and retain that value when the economy is bad.

96. (p. 441) Index funds outperform managed funds as often as 50-80% of the time. Two factors account for an index fund's performance. First, index funds are a mirror image of an index. Historically, an index like the Standard and Poor's 500 stock index outperforms most managed funds. Second, index funds have lower expense ratios than managed mutual funds, which can make a significant difference in the value of the investment over a long period.

• A description of services provided to investors and fees for services, if any.• The process an investor can use to buy or sell shares in the fund.• How often the fund's investment portfolio changes.• Limitations or requirements, if any, the fund must honor when choosing investments.• The fund's management.• Dividends, distribution, and taxes.• Information about• A statement describing the type of investments contained in the fund's portfolio.• A description of the fund's past performance.• A statement describing the risk factor associated with the fund.• A fee table summarizing the fees a fund charges.• The fund's objective.97. (p. 446) A prospectus includes

98. (p. 450) Income dividends, capital gain distributions, and capital gains.

99. (p. 452) You should hold your mutual fund in a Roth individual retirement account.

100. (p. 452) Reinvested income dividends are taxable and must be reported on a federal tax return as current income in the year they are earned.

101. (p. 452) The turnover ratio measures the percentage of a fund's holdings that have changed or "been replaced" during a 12-month period. It is a measure of a fund's trading activity. Unless you are using the fund in a 401(k) or 403(b) retirement account or some type of individual retirement account, a mutual fund with a high turnover ratio can result in higher income tax bills.

13 SummaryCategory # of Questions

Blooms: Analyze 8Blooms: Apply 7Blooms: Evaluate 1Blooms: Remember 49Blooms: Understand 36Difficulty: 1 Easy 12Difficulty: 2 Medium 71Difficulty: 3 Hard 18Kapoor - Chapter 13 101Learning Objective: 13-01 Explain the characteristics of mutual fund investments. 40Learning Objective: 13-02 Classify mutual funds by investment objective. 21Learning Objective: 13-03 Evaluate mutual funds. 22Learning Objective: 13-04 Describe how and why mutual funds are bought and sold. 18Topic: Classifications of Mutual Funds 21Topic: How to Make a Decision to Buy or Sell Mutual Funds 22Topic: The Mechanics of a Mutual Fund Transaction 18Topic: Why Investors Purchase Mutual Funds 40

14Student:

1. The best time to begin planning for retirement is at age 27. True False

2. Annabelle works at Acme Cleaning Company. When she retires, her employer's health insurance plan and Medicare should cover all of her medical expenses.True False

3. Bruce and Christopher are both retiring from Best Conditioning Company. They both should have the same amount of money in their retirement funds regardless of the lifestyle they expect during retirement.True False

4. Cindy's net worth should increase each year as she moves closer to her retirement. True False

5. Housing and life insurance are so important to your retirement income that other investments can be ignored as you review your assets.True False

6. When Don retires, his transportation expenses will likely increase. True False

7. Because of the potential effect of inflation, individuals should underestimate the amount of money needed for retirement.True False

8. The four primary sources of retirement income are employer pension plans, personal retirement plans, annuities, and public pension plans.True False

9. A benefit of an employer pension plan is that taxes are eliminated. True False

10. An example of a defined contribution plan is a stock bonus plan. True False

11. A salary reduction plan for a nonprofit organization is called a 401(k) plan. True False

12. Lora is a full-time employee at Harley-Davidson Inc. She should be eligible to participate in the company's 401(k) plan to save for retirement.True False

13. A defined benefit plan specifies the benefits that you will receive at retirement age. True False

14. When Social Security was established, it was intended to provide less than 100% of one's retirement income.True False

15. Social Security covers 97% of all workers in America. True False

16. About one out of every three Americans currently collects some form of Social Security benefit. True False

17. Only people who are retired can receive a benefit from Social Security. True False

18. If you were born in 1960 or later, you will first become eligible to receive Social Security benefits at age 67.True False

19. Eight years ago, Thomas began investing in his Roth IRA. He is now purchasing his first home. He may withdraw some money from his Roth IRA tax-free and penalty-free for this purchase.True False

20. The SEP IRA is the simplest type of retirement plan if a person is self-employed. True False

21. When Paul leaves his job at Acme Bending Company, he may choose to move his 401(k) balance to a plan called a rollover IRA.True False

22. The longer money accumulates tax-deferred, the bigger the benefit. True False

23. Retirement means that you will never work again. True False

24. People should never dip into their savings in retirement. True False

25. Your estate consists of everything you own. True False

26. Estate planning is important for financial planning but not for retirement planning. True False

27. If you are single, you should not have beneficiaries. True False

28. Every adult should have a written will. True False

29. If you die intestate, your beneficiaries will receive your estate. True False

30. A traditional marital share will leaves everything to your spouse. True False

31. A traditional marital share will has some assets going into a trust to provide your spouse lifelong income that will not be taxed.True False

32. A stated amount will identifies the amount that will not go to your spouse. True False

33. If a will is found to be invalid, the result is called in-probate. True False

34. Probate is a short, quick process. True False

35. A holographic will has a holographic seal to prove its authenticity. True False

36. A holographic will is legal in all states. True False

37. A statutory will is one that is prepared with the help of an attorney. True False

38. If you are married, your estate will automatically pass to your spouse. True False

39. Only one will may legally be written during a person's lifetime. True False

40. Changes to a will should be written in ink on the will and initialed. True False

41. A power of attorney should handle the estate of a deceased person. True False

42. A copy of your living will should be distributed to your family doctor. True False

43. Another name for a will is a letter of last instruction. True False

44. A revocable trust cannot be changed or ended. True False

45. A disclaimer trust is appropriate for couples who do not yet have enough assets to need a credit shelter trust.True False

46. An inter vivos trust takes effect while you're alive. True False

47. A testamentary trust takes effect while you're alive. True False

48. An individual can give away up to $13,000 per year before paying an inheritance tax to the IRS. True False

49. When thinking about retirement, which of the following is correct?A. You'll spend less money when you retire.B. Saving just a little bit won't help.C. You can depend on Social Security and a company pension plan to pay your basic living expenses.D. The earlier you start saving, the better.E. Your pension benefits will increase to keep pace with inflation.

50. When planning for retirement, you should reviewA. Housing.B. Life insurance.C. Investments.D. Assets.E. All of these.

51. When planning for retirement,A. A mortgage should not affect your financial planning.B. Investments should be evaluated to determine whether their income can help cover living expenses.C. Keeping your current, large house will be cheaper to maintain than a move to a smaller house.D. Life insurance should be avoided.E. All of these are true.

52. According to the text, which of the following will probably be your most valuable asset at retirement?A. Automobile.B. House.C. Investments.D. Life insurance.E. All of these.

53. What steps should be taken in retirement planning?A. Conduct a financial analysis.B. Estimate retirement living expenses.C. Exceed budget amounts for spending.D. Conduct a financial analysis and estimate retirement living expenses.E. All of these are correct.

54. An "average" older household spends most of its money onA. Entertainment.B. Food.C. Housing.D. Medical care.E. Transportation.

55. An "average" older household spends more money onA. Clothing than on housing.B. Contributions than on medical care.C. Entertainment than on transportation.D. Housing than on contributions, entertainment, and clothing combined.E. Personal insurance than on food.

56. When you retire, you will probably spend less money onA. Clothing.B. Health insurance.C. Medical care.D. Recreation.E. All of these.

57. When you retire, you will probably spend more money onA. Clothing.B. Transportation.C. Taxes.D. Health insurance.E. All of these.

58. When planning for retirement, inflationA. Decreases through retirement.B. Should be ignored since it will have no effect on retirement funding.C.Should be considered since income received earlier in retirement will buy more than the same amount

received later in retirement.D. Is unimportant since pension income does not change in retirement.E. Should be recognized since it will increase the value of income received in retirement.

59. Which of the following is not a source of retirement income?A. Annuity.B. Employer pension plan.C. Personal retirement plan.D. Public pension plan.E. All of these are sources of retirement income.

60. All of the following are examples of defined contribution plans exceptA. Defined benefit plan.B. Money-purchase plan.C. Profit-sharing plan.D. Salary reduction plan.E. Stock bonus plan.

61. When an employer promises to set aside a certain amount of money for each employee each year, it has set up aA. Defined benefit plan.B. Money-purchase plan.C. Profit-sharing plan.D. Salary reduction plan.E. Stock bonus plan.

62. A salary reduction plan is also known as aA. 401(k) plan.B. Money-purchase plan.C. Profit-sharing plan.D. Salary reduction plan.E. Stock bonus plan.

63. When an employer's contribution is used to buy stock in the company for its employees, it has aA. 401(k) plan.B. Money-purchase plan.C. Profit-sharing plan.D. Salary reduction plan.E. Stock bonus plan.

64. An employer's contribution will vary according to the company's profits in aA. 401(k) plan.B. Money-purchase plan.C. Stock bonus plan.D. Profit-sharing plan.E. Salary reduction plan.

65. An employer may choose to match money employees invest in aA. 401(k) plan or a salary reduction plan.B. Money-purchase plan.C. Stock bonus plan.D. Profit-sharing plan.E. Individual retirement account.

66. Vesting is the right to receive theA. Employer's contributions to a pension plan.B. 401(k) contributions made by the employee.C. Employee's contributions each pay period.D. Portable employee benefits from a defined benefit plan.E. Employee of the month award at a company that makes life jackets.