PP 2 - 10 Financial Market Phenomena & Investment Return Measurement

Question 1

how many stock exchanges are there in the US?

Answer 1

more than 13

Question 2

if you buy a stock , you can purchase in which exchanges?

Answer 2

any

Question 3

you can trade a stock in what exchanges?

Answer 3

multiple, but might have different prices

Question 4

when you purchase a stock, what price would it be executed at?

Answer 4

the lowest

Question 5

when you sell a stock, what price would it be executed at?

Answer 5

the highest

Question 6

because the price is constantly moving, a ____ is used

Answer 6

regulation system (Reg NMS)

Question 7

tick size is the…

Answer 7

minimum price variation

Question 8

what is the tick size after 2001?

Answer 8

1 cent

Question 9

lower tick size results in lower…

Answer 9

transaction costs

Question 10

why can the tick size not be decreased any further?

Answer 10

it was tested, but SEC is worried it would reduce IPO #s

Question 11

priority rules determine…

Answer 11

what’s orders are executed first

Question 12

exchanges usually use which priority?

Answer 12

price-time

Question 13

in price-time priority, what goes first?

Answer 13

best price, but if multiple have the same price, the earliest goes before

Question 14

how do brokers earn commission?

Answer 14

charging commission fees from investors

Question 15

example of a broker that uses $0 commission

Answer 15

Robinhood

Question 16

how do $0 commission brokers make money?

Answer 16

wholesalers provide $$ equity to the market

Question 17

the money market is a…

Answer 17

wholesaler

Question 18

customer sends stock trade $ to who?

Answer 18

broker

Question 19

broker sends the customer stock trade to who?

Answer 19

wholesaler

Question 20

after receiving the stock trade, the wholesaler…

Answer 20

sends a small fee and customer’s proceeds to the broker

Question 21

traditionally, we can only buy a multiple of…

Answer 21

one share of a stock

Question 22

example of busying a fraction of a share

Answer 22

purchasing 1/1000 of a share

Question 23

why do brokers allow for fractional share trading?

Answer 23

makes trading more accessible and allows for a more diverse portfolio

Question 24

order types specify…

Answer 24

how your orders get executed

Question 25

MARKET ORDER will be executed...

Answer 25

immediately with the best price in the market

Question 26

LIMIT ORDER will be executed...

Answer 26

only when the best price is better or at your specified price

Question 27

how many order types are on the market?

Answer 27

300

Question 28

when would you use a limit order?

Answer 28

if you are more patient

Question 29

what are dark pools?

Answer 29

alt trading systems (ATS) provided by brokers and investment banks that show no price or volume information

Question 30

who are dark pools mostly used by?

Answer 30

institutional investors (large company)

Question 31

in a dark pool, the only prices used are...

Answer 31

from exchanges

Question 32

in a dark pool, you do not know...

Answer 32

when and how much your orders will be executed

Question 33

why do institutional investors use dark pools rather than stock exchanges?

Answer 33

to avoid affecting the market when these large block orders are placed

Question 34

stock exchanges provide transparency about order information such as....

Answer 34

price and volume in the market

Question 35

in an efficient market, prices...

Answer 35

fully reflect available information about securities

Question 36

publicly available information cannot...

Answer 36

be used to improve investment performance

Question 37

anomalies are...

Answer 37

the pattern of returns that seem to contradict the efficient market hypothesis

Question 38

three anomaly effects

Answer 38

size effect, value effect, and momentum effect

Question 39

what effect: firms with higher book value to market value have earned abnormal returns

Answer 39

value effect

Question 40

what effect: small firms have earned abnormal returns

Answer 40

size effect

Question 41

what effect: firms with higher returns in the past 12 months continue to perform better

Answer 41

momentum effect

Question 42

if these firms are misplaced, why can't professional arbitrageurs exploit them away?

Answer 42

if markets are efficient, there would be no such opportunities to profit

Question 43

if markets are efficient, there would be no such...

Answer 43

opportunities to profit

Question 44

in an IPO, investment banks facilitate the transaction by...

Answer 44

acting as underwrites

Question 45

who are the underwriters in IPO?

Answer 45

investment banks

Question 46

in IPO, how to firms grow further?

Answer 46

raising capital

Question 47

what do IPO firms returns look like?

Answer 47

high first-day, but low long-term

Question 48

direct listing takes a form public by...

Answer 48

removing underwriters from going public process

Question 49

SPAC takes a form public by...

Answer 49

merging with them

Question 50

SPAC sponsors...

Answer 50

take the role of identify the private firm to merge with

Question 51

what types of firms go public with direct listing?

Answer 51

larger, more well-known, straight-forward companies (i.e. Spotify)

Question 52

what types of firms go public with SPAC?

Answer 52

smaller companies

Question 53

stocks have a ____ average return than bonds and bills

Answer 53

higher

Question 54

smaller stocks have a _____ average return than larger stocks

Answer 54

higher

Question 55

why do stocks have higher returns?

Answer 55

they are riskier (risk-return tradeoff)

Question 56

what type of investment has the lowest average annual return?

Answer 56

treasury bills

Question 57

highest to lowest types of investments annual returns

Answer 57

small stock, S&P 500, corporate bonds, treasury bills

Question 58

why do people still buy treasury bills and not invest in all small stocks?

Answer 58

because treasury bills are low risk, highly liquid, and predictable. if you only invest in small stocks, you are at a higher chance of risk and your portfolio will not eb as diverse

Question 59

what is the motivating question of measuring investment returns?

Answer 59

how does a security perform as an investment?

Question 60

how can you compare to securities bought in the beginning of the year with different initial prices, but the same dividends paid and increase in current price at the end of the year?

Answer 60

sale dollars earned by the initial investments using HOLDING PERIOD RETURNS (HPR)

Question 61

holding period return is the...

Answer 61

rate of return over a given investment period

Question 62

(worded equation) HPR =

Answer 62

dollars earned (price appreciation plus dividends) per dollar invested

Question 63

capital gains yield is the...

Answer 63

rise in the price of an investment

Question 64

dividend yield is...

Answer 64

a ratio that shows what return an investor would receive from an investment solely on dividend payments

Question 65

a higher HPR is ____ than a lower HPR

Answer 65

higher

Question 66

when comparing investments in different investment horizons, you would use...

Answer 66

annualizing returns

Question 67

what is the simple interest approach of annualizing returns?

Answer 67

annual percentage rate (APR)

Question 68

APR ignores...

Answer 68

compound interest

Question 69

the count interest approach when annualizing returns is...

Answer 69

effective annual rate (EAR) (aka APY)

Question 70

APR is used by..

Answer 70

loan officers and in mortgages

Question 71

APR seems ____ than it really is

Answer 71

lower

Question 72

EAR seems ___ than it really is

Answer 72

bigger

Question 73

EAR is used by..

Answer 73

banks wanting you to save with them