Equity Investments

Question 1

weak-form efficient market hypothesis

Answer 1

defined as a market where security prices fully reflect all market data, which refers to all past price and trading volume information.

Active strategies can yield long-term economic profits

Question 2

Three main functions of the financial system are to:

Answer 2

• Allow entities to save and borrow money, raise equity capital, manage risks, trade assets currently or in the future, and trade based on their estimates of asset values.
• Determine the returns (i.e., interest rates) that equate the total supply of savings with the total demand for borrowing.
• Allocate capital to its most efficient uses.

Question 3

payments-in-lieu

Answer 3

In a short sale, the short seller must pay all dividends or interest that the lender would have received from the security

Question 4

margin call price

Answer 4

Price (1 - initial margin) / (1 - Maintenace margin)

Question 5

Execution Instructions

Answer 5

• Market order – as fast as possible
• Limit order – executes at a specific price
• standing limit orders – waiting to be executed
• All or nothing orders - execute only if the whole order can be filled
• Hidden orders are those for which only the broker or exchange knows the trade size
• Display size / iceberg orders – trader chooses how much of the order that can be seen by the market

Question 6

Validity Instructions

Answer 6

• day orders - expire if unfilled by the end of the trading day
• Good-til-canceled - orders last until they are filled
• Immediate-or-cancel orders (fill or kill) - cancelled unless they can be filled immediately
• Good-on-close orders - only filled at the end of the trading day. market-on-close if they are market orders
• Stop orders – stop loss orders – stop sell orders – stop buy orders

Question 7

Clearing instructions

Answer 7

tell the trader to clear and settle a trade