50 Multiple Choice Questions on Finance

Question 1 of 50

Director of Studies or Student Adviser on behalf of the student, no later than five working days after the published (or extended) submission deadline for the assessment task or the date on which an examination was held.

The cost of information explains why:

a)Markets are not completely efficient.

b)There tends to be an upward bias to prices.

c)Arbitrageurs cannot exploit pricing anomalies.

Which of the following is least likely a reason why real assets are attractive to investors?

a)They provide diversification benefits.

b)The market for real assets is liquid.

c)They provide income and tax benefits.

A company's stock changes its price in an efficient market because of all of the following except:

a)New information about the market today

b)The reactions of investors toward an announcement made by the company today

c)Private information

In an efficient market, an asset's intrinsic value is expected to be:

a)Greater than its market value.

b)Equal to its market value.

c)Less than its market value.

A financial market characterized by low costs to trade is a financial system that is:

a)Complete markets.

b)Operationally efficient.

c)Informationally efficient.

Which of the following is least likely a fixed income security?

a)Warrants

b)Repurchase agreements

c)Bonds

A market where both private and public information are fully reflected in prices is:

a)Strong form efficient.

b)Semi-strong efficient.

c)Weak-form efficient.

Which of the following is not a use of market indices?

a)Measure of systematic risk

b)Provide information regarding market sentiment

c)Proxy for asset classes in asset allocation models

A corporation looking to raise funds may decide to do a private placement because:

a)It will reduce issuing costs.

b)It will avoid using an investment bank.

c)The issue can be sold at a higher price than if it were sold in a public offering.

Consider the following statements:

Statement 1: A fixed income security with a maturity of 8 years is classified as a bond.

Statement 2: Commercial paper usually matures within a year.

Which of the following is most likely?

a)Only Statement 1 is incorrect.

b)Only Statement 2 is incorrect.

c)Both statements are correct.

What does a security market index represent?

a)The risk inherent in a security market.

b)Every stock for sale in the market.

c)The market for securities, a segment, or an asset class.

Which of the following least likely contributes to market efficiency?

a)Low transaction costs

b)Large number of active market participants

c)Limits to trading

Compared to a forward contract, a futures contract has:

a)Less counterparty risk.

b)The ability to be customised.

c)More flexibility in terms of maturity date.

One of the ways that an arbitrageur differs from a dealer is that the arbitrageur is matching buyers and sellers in:

a)The same market at the same time.

b)Different markets at the same time.

c)The same market at different times.

An exchange traded fund (ETF) most likely invests in:

a)Real assets.

b)Fixed-income instruments.

c)Shares of other companies.

A company that already has common shares outstanding has engaged an investment bank to help it issue additional common shares in a secondary offering. The issuance of these new shares will occur in the:

a)Primary market.

b)Seasoned market.

c)Secondary market.

An investor increasing his risk tolerance because he knows that he is already insured is an inherent risk in the insurance field called:

a)Moral hazard

b)Adverse selection

c)Arbitrage opportunities

Financial intermediaries that execute trades for customers, as well as their own accounts, are best described as being:

a)Brokers.

b)Arbitrageurs.

c)Broker-dealers.

A security market index is defined as a single measure that consolidates information and reflects the performance of an entire:

a)Industry.

b)Economy.

c)Security market.

Overreaction on the part of stock market investors can be explained by investors':

a)Loss aversion.

b)Market short-run irrationality.

c)Risk aversion.

A properly functioning financial system is least likely to:

a)Eliminate risk for investors.

b)Facilitate the allocation of capital efficiently.

c)Help individuals achieve their financial goals.

The founders of Terra Corporation are selling their shares along with newly issued shares from the corporation to the public. This will be done in the:

a)Primary market.

b)Forward market.

c)Secondary market.

Which capital budgeting criterion is most directly related to the goal of shareholder wealth maximization?

a)Internal rate of return.

b)Net present value.

c)Discounted payback period.