unit 1 test

Question 1

What does the Efficient Market Hypothesis (EMH) state?

Answer 1

Asset prices reflect all available information.

Question 2

What is the objective of passive management?

Answer 2

Mirror market performance rather than beat it.

Question 3

What is a common strategy used in passive management?

Answer 3

Buy and hold a diversified portfolio, often through index funds or ETFs.

Question 4

What are the advantages of passive management?

Answer 4

• Lower fees and transaction costs
• Tax efficiency from minimal capital gains distributions
• Outperforms many actively managed funds over the long term

Question 5

What is a major drawback of passive management?

Answer 5

Offers no protection against broad market downturns.

Question 6

What is the main objective of active management?

Answer 6

Outperform market benchmarks through research and strategic trading.

Question 7

What strategy do active managers use to identify mispriced securities?

Answer 7

Fundamental and technical analysis.

Question 8

What are the advantages of active management?

Answer 8

• Potential to outperform in volatile or inefficient markets
• Ability to implement defensive strategies during market downturns

Question 9

What are the drawbacks of active management?

Answer 9

• Higher management fees and transaction costs
• Inconsistent performance
• Greater tax implications from frequent trading

Question 10

What is the primary function of the primary market?

Answer 10

Facilitates the issuance of new securities directly from issuers to investors.

Question 11

What is an Initial Public Offering (IPO)?

Answer 11

When companies issue shares to the public for the first time.

Question 12

What role do investment bankers play in the primary market?

Answer 12

• Underwriting
• Price Setting
• Regulatory Compliance

Question 13

What is the primary function of the secondary market?

Answer 13

Provides a platform for investors to buy and sell existing securities.

Question 14

What are the key characteristics of the secondary market?

Answer 14

• Securities traded do not provide direct capital to the issuing entity
• Prices are driven by supply, demand, and market sentiment

Question 15

What are the two types of secondary markets?

Answer 15

• Stock Exchanges
• Over-the-Counter (OTC) Markets

Question 16

What is Venture Capital (VC)?

Answer 16

A type of equity investment that provides funding to early-stage, high-potential startups.

Question 17

What is Private Equity (PE)?

Answer 17

Investments in established, privately held companies aimed at improving operations and increasing value.

Question 18

What are subprime loans?

Answer 18

Loans given to borrowers with lower credit scores or a higher risk of default.

Question 19

What types of bonds do state and local governments issue?

Answer 19

• General Obligation Bonds
• Revenue Bonds

Question 20

What are American Depositary Receipts (ADRs)?

Answer 20

Certificates traded in the U.S. representing ownership in foreign security.

Question 21

How do you calculate Dividend Yield?

Answer 21

Dividend Yield = (Dividend per share) / (Purchase price per share)

Question 22

What is the formula for Capital Gain Yield?

Answer 22

Capital Gain Yield = (Selling price per share − Purchase price per share) / Purchase price per share

Question 23

What is a Price-Weighted Index?

Answer 23

Each stock’s weight is based on its share price.

Question 24

What defines a Market Value-Weighted Index?

Answer 24

Stocks are weighted based on their market capitalization.

Question 25

What does a Call Option allow an investor to do?

Answer 25

Buy an asset at a specified price on or before a specified expiration date.

Question 26

What is a Market Order?

Answer 26

Buy or sell a security immediately at the best available price in the market.

Question 27

What is Margin Trading?

Answer 27

Borrowing money from your brokerage company to buy stocks.

Question 28

What is a Margin Call?

Answer 28

Notification from broker that you must put up additional funds or have position liquidated.

Question 29

What are Hedge Funds?

Answer 29

Private investment pools exempt from SEC regulation.

Question 30

What is the purpose of Mutual Funds?

Answer 30

To collect investors' money to invest in stocks, bonds, and other securities.

Question 31

How is the Turnover Ratio calculated?

Answer 31

Annual total asset value bought or sold in a year / Average total asset value.

Question 32

What does the Holding Period Return measure?

Answer 32

Rate of return over a given investment period.

Question 33

What is the difference between Arithmetic Average and Geometric Average?

Answer 33

* Arithmetic Average: Best for estimating expected returns in a single period * Geometric Average: Best for measuring long-term investment performance.

Question 34

What is Value at Risk (VaR)?

Answer 34

Risk management tool that measures potential loss in the value of an investment over a specific time period.

Question 35

What does the Capital Allocation Line (CAL) represent?

Answer 35

The risk-return trade-offs available to an investor by combining a risk-free asset and a risky asset.

Question 36

What does correlation measure in finance?

Answer 36

The relationship between the returns of two assets.

Question 37

Define Systematic Risk.

Answer 37

Risk that affects the entire market or economy.

Question 38

Define Unsystematic Risk.

Answer 38

Risk specific to a company or industry.