Behavioral Finance (4th Semester-MBA)

Q-1. When making allocation decisions for their pensions, some people to ignore the fund
mix and instead simply allocate based on the number of funds offered. When it appears
that people are overly influenced by the menu of funds offered they may be making
decisions;

a) that seem irrational due to hyperbolic discounting

b) that are inconsistent because they have limited self-control
c) that reflect anchoring
d) using a 1/n heuristic
Q-2.A goal of scheduled deferral increases at regular intervals. true or false: research
indicates that they can be successful in increasing savings rates.

a) true
b) false

Q-3.The CBOE volatility index (VIX) is often referred to as the "investor fear gauge."

a) true
b) false
Q-4.If investors initially anchor on past earnings, they ___________ to earnings news.
Later, if they believe the observed high (or low) earnings will continue into the future,
they ____________.

a) overreact, underreact
b) underreact, overreact
c) underreact, underreact again
d) overreact, overreact again

Q-5.Which of the following is more likely to occur when a fair coin is tossed?
(i) HTHTHT
(ii) HHTHTH

a) (i) is more likely

b) (ii) is more likely
c) they are equally likely
d) i need additional information to answer this question

Q-6.When Matt started at his current job, his company did not automatically enroll him
in a retirement savings plan and he still has not enrolled. When Suzanne started her, she
was enrolled in an automatic savings plan and has stayed in the plan. Matt and Suzanne's
behavior is probably driven by
 a) hyperbolic discounting
b) limited self-control
c) status quo bias
d) loss aversion

Q-7.A rational explanation of the value premier might argue that

a) risk differences explain the premium

b) anomalies exist because of investor error
c) mean-reversion explains observed outcome
d) there is only one risk factor, the market

Q-8.When mike started with his fir ten years ago he opened a retirement savings plan
and allocated 70% of the contributions to a stock fund and 30% to a bond fund. since
then, his allocations have not changed. What is the problem with this?

a) he should really be putting more money in stocks to ensure a well-funded

retirement
b) if he really wanted to keep the same risk exposure he would need to
rebalance as the value of his savings change over time.
c) He should be increasing the allocation to stocks as he gets older
d) there is no problem with mike's choice and he could suffer if he reevaluated his
portfolio too frequently

Q-9.Many people do not save enough for retirement. This could be due to

a) hyperbolic discounting
b) limited self-control
c) status quo bias
d) all of the above

Q-10.Questionnaires are often used to assess a client's risk tolerance. A problem with
these questionnaires is that they don't always measure what we want to measure. this is
a problem with

a) client irrationality
b) client inconsistency
c) questionnaire reliability
d) questionaire validity

Q-11.Positive serial correlation in returns is reported over the medium term. This is
called ________________.

a) representitiveness
 b) anchoring
c) momentum
d) reversal
Q-12.which of the following is a benefit of a defined contribution plan?

a) avoidance of market risk

b) portability
c) avoidance of longevity risk
d) all of the above are benefits of a DC plan
Q-13.In an experimental bubbles market participants trade assets with a fixed life. We
commonly see prices rise well above fundamental value but crash near the end of trading.
which of the following is true?

a) when there is less cash in the market, more bubbles result.

b) trading experience does not moderate bubbles.
c) bubbles are larger when traders can short sell shares of the asset
d) the fundamental value can be computed because possible dividends and
their probabilities are known
Q-14.Robert Shiller of Yale University conducts surveys of institutional and individual
investors to gauge confidence in the market. true or false: these days market confidence
is at an all-time low.

a) true
b) false
Q-15.Significant changes in the pension environment in the U.S. followed the passage of
ERISA in 1974. We see pensions moving from defined ________________ to defined
_______________.

a) contribution, benefit
b) benefit, contribution
c) neither, things have pretty much stayed the same
Q-16.According to the _________________ people but assets are prices they know are too
high because they believe someone else will pay even more.

a) equity premium puzzle

b) Ponzi scheme
c) speculative bubble theory
d) greater fool theory
Q-17.In a defined __________________ retirement plan the employer commits to
payments after retirement where the payment are usually computed using a formula.

a) contribution
b) benefits
c) outcome
 d) payment
Q-18.One market puzzle is the finding that stock returns are higher than they should be
given the level of risk in the market. This is called

a) excess volatility
b) momentum
c) an asset price bubble
d) the equity premium puzzle
Q-19. A behavioral explanation of the equity puzzle is called myopic loss aversion. with
myopic loss aversion investors

a) are risk seeking and do not realize the risks they are taking
b) are loss averse and use mental accounting
c) focus on the long-term because they are saving for retirement
d) are risk averse and never reevaluate their portfolio allocations
Q-20.It has been argues that an investor might by an over-valued asset because he thinks
he can sell it to another who will pay even more. this is called

a) arbitrage
b) myopic loss aversion
c) the greater fool theory
d) speculation

Q-21.The market reacts with a lag to news about earnings. true or false: this post
announcement drift could result because investors and analysts anchor on recent (past)
earnings.

a) true
b) false
Q-22.We look at price/earnings rations as an initial gauge of the appropriateness of
market valuations. true or false: these days market overvaluation is at an all-time high.

a) true
b) false

Q-23.In a defined _______________ retirement plan the employee and employer both
make contributions to an account with the growth of the account subject to investment
returns and no guarantee of what will be available at retirement.

a) benefit
b) outcome
c) payment
d) contribution
Q-24.An investor's risk tolerance has two aspects that important to a wealth manager
when giving advice. They are

a) risk validity and reliability

b) risk capacity and validity
c) risk attitude and capacity
d) risk rationality and control

Q-25.There are four primary reasons why investors mat favor glamour stocks over
growth stocks. which of the following is NOT an explanation we discussed regarding the
value advantage?

a)
representativeness
b)
familiarity
c)
fiduciary obligations
d)
expectational error hypothesis or extrapolating past growth rates too far into the
future
Q-26.Which of the following is false?

a) the evidence suggests that people use heuristics when allocating retirement
funds
b) when given more choice with an increase in the number of funds offered,
employees save more
c) people are influenced be the menu of retirement funds offered
d) evidence suggests that defined contribution plans underperform defined benefit
plans
Q-27.Nobel prize winner Robert Schiller showed that stock prices are not too volatile to
be explained by the present value of dividends.

a) true
b) false

Q-28.The equity premium is called a puzzle because

a) bonds should earn higher returns because investors are loss averse
b) the level of the premium requires an extremely high degree of risk aversion
c) the level of the premium requires an extremely high degree of risk seeking
d) stocks should earn higher returns because they are riskier

Q-29.In an experimental bubbles market participants trade with fixed life. we commonly
see prices rise well above fundamental value but crash near the end of trading. which of
the following is true?
 a) when there is more cash in the market, more bubbles result
b) trading experience does not moderate bubbles
c) bubbles are not affected by the ability to short sell shares
d) all of the above

Q-30.The CBOE volatility index (VIX) is often referred to as the "investor fear gauge."

a) true
b) false
31. When making allocation decisions for their pensions, some people to ignore the fund
mix and instead simply allocate based on the number of funds offered. When it
appears that people are overly influenced by the menu of funds offered they may be
making decisions

a. that seem irrational due to hyperbolic discounting

b. that are inconsistent because they have limited self-control
c. that reflect anchoring
d. using a 1/n heuristic

32. A goal of scheduled deferral increases at regular intervals. true or false: research
indicates that they can be successful in increasing savings rates.

a. true
b. false

33. The CBOE volatility index (VIX) is often referred to as the "investor fear gauge."
a. true
b. false

34. If investors initially anchor on past earnings, they ___________ to earnings news.
Later, if they believe the observed high (or low) earnings will continue into the future,
they ____________.

a. overreact, underreact
b. underreact, overreact
c. underreact, underreact again
d. overreact, overreact again

35. Which of the following is more likely to occur when a fair coin is tossed?
(i) HTHTHT
(ii) HHTHTH

a. (i) is more likely

b. (ii) is more likely
c. they are equally likely
d. i need additional information to answer this question

36. When Matt started at his current job, his company did not automatically enroll him in
a retirement savings plan and he still has not enrolled. When Suzanne started her, she
was enrolled in an automatic savings plan and has stayed in the plan. Matt and
Suzanne's behavior is probably driven by

a. hyperbolic discounting
 b. limited self-control
c. status quo bias
d. loss aversion

37. A rational explanation of the value premie might argue that

a. risk differences explain the premium
b. anomalies exist because of investor error
c. mean-reversion explains observed outcome
d. there is only one risk factor, the market

38. When mike started with his fir ten years ago he opened a retirement savings plan and
allocated 70% of the contributions to a stock fund and 30% to a bond fund. since then,
his allocations have not changed. What is the problem with this?

a. he should really be putting more money in stocks to ensure a well-funded

retirement
b. if he really wanted to keep the same risk exposure he would need to rebalance as
the value of his savings change over time.
c. He should be increasing the allocation to stocks as he gets older
d. there is no problem with mike's choice and he could suffer if he reevaluated
his portfolio too frequently

39. Many people do not save enough for retirement. This could be due to
a. hyperbolic discounting
b. limited self-control
c. status quo bias
d. all of the above

40. Questionnaires are often used to assess a client's risk tolerance. A problem with these
questio nares is that they don't always measure what we want to measure. this is a
problem with

a. client irrationality
b. client inconsistency
c. questionnaire reliability
d. questionaire validity

41. Positive serial correlation in returns is reported over the medium term. This is called
________________.
a. representitiveness
b. anchoring
c. momentum
d. reversal
42. which of the following is a benefit of a defined contribution plan?
a. avoidance of market risk
b. portability
c. avoidance of longevity risk
d. all of the above are benefits of a DC plan

43. In an experimental bubbles market participants trade assets with a fixed life. We
commonly see prices rise well above fundamental value but crash near the end of
trading. which of the following is true?

a. when there is less cash in the market, more bubbles result.

b. trading experience does not moderate bubbles.
c. bubbles are larger when traders can short sell shares of the asset
d. the fundamental value can be computed because possible dividends and their
probabilities are known

44. Robert Shiller of Yale University conducts surveys of institutional and individual
investors to gauge confidence in the market. true or false: these days market
confidence is at an all-time low.
a. true
b. false

45. Significant changes in the pension environment in the U.S. followed the passage of
ERISA in 1974. We see pensions moving from defined ________________ to defined
_______________.

a. contribution, benefit
b. benefit, contribution
c. neither, things have pretty much stayed the same

46. According to the _________________ people but assets are prices they know are too
high because they believe someone else will pay even more.

a. equity premium puzzle

b. Ponzi scheme
c. speculative bubble theory
d. greater fool theory

47. In a defined __________________ retirement plan the employer commits to

payments after retirement where the payment are usually computed using a formula.

a. contribution
b. benefits
 c. outcome
d. payment

48. One market puzzle is the finding that stock returns are higher than they should be
given the level of risk in the market. This is called

a. excess volatility
b. momentum
c. an asset price bubble
d. the equity premium puzzle

49. A behavioral explanation of the equity puzzle is called myopic loss aversion. with
myopic loss aversion investors

a. are risk seeking and do not realize the risks they are taking
b. are loss averse and use mental accounting
c. focus on the long-term because they are saving for retirement
d. are risk averse and never reevaluate their portfolio allocations

50. It has been argues that an investor might by an over-valued asset because he thinks he
can sell it to another who will pay even more. this is called

a. arbitrage
b. myopic loss aversion
c. the greater fool theory
d. speculation

51. The market reacts with a lag to news about earnings. true or false: this post
announcement drift could result because investors and analysts anchor on recent
(past) earnings.

a. true
b. false

52. We look at price/earnings rations as an initial gauge of the appropriateness of market

valuations. true or false: these days market overvaluation is at an ll-time high.

a. true
b. false

53. In a defined _______________ retirement plan the employee and employer both
make contributions to an account with the growth of the account subject to investment
returns and no guarantee of what will be available at retirement.
 a. benefit
b. outcome
c. payment
d. contribution

54. An investor's risk tolerance has two aspects that important to a wealth manager when
giving advice. They are

a. risk validity and reliability

b. risk capacity and validity
c. risk attitude and capacity
d. risk rationality and control

55. There are four primary reasons why investors mat favor glamour stocks over growth
stocks. which of the following is NOT an explanation we discussed regarding the
value advantage?

a. representativeness
b. familiarity
c.fiduciary obligations
d. expectational error hypothesis or extrapolating past growth rates too far into the
future

56. Which of the following is false?

a. the evidence suggests that people use heuristics when allocating retirement funds
b. when given more choice with an increase in the number of funds offered,
employees save more
c. people are influenced be the menu of retirement funds offered
d. evidence suggests that defined contribution plans underperform defined benefit
plans

57. Nobel prize winner Robert Schiller showed that stock prices are not too volatile to be
explained by the present value of dividends.

a. true
b. false

58. The equity premium is called a puzzle because

a. bonds should earn higher returns because investors are loss averse
b. the level of the premium requires an extremely high degree of risk aversion
c. the level of the premium requires an extremely high degree of risk seeking
d. stocks should earn higher returns because they are riskier
59. In an experimental bubbles market participants trade with fixed life. we commonly
see prices rise well above fundamental value but crash near the end of trading. which
of the following is true?

a. when there is more cash in the market, more bubbles result

b. trading experience does not moderate bubbles
c. bubbles are not affected by the ability to short sell shares
d. all of the above

60. The CBOE volatility index (VIX) is often referred to as the "investor fear gauge."
a. true
b. false

61. Adam Smith in The Theory of Moral Sentiments from 1776 emphasizes that people’s
actions are not completely driven by selfishness, but by another important motive.
What is this motive?
(a) The Antisocial Personality Disorder.
(b) A desire for praiseworthiness.
(c) Social contagion.
(d) Cognitive dissonance.

62. Which of the following components are not part of Daniel Kahneman’s and Amos
Tversky’s Prospect Theory?

(a) A value function that evaluates the outcome of the different prospects.
(b) A value function that is concave in gains and convex in losses, with a kink at the
reference point that separates the gains- from the loss-region.
(c) An overconfidence-factor that is directly applied to the value function in the
loss-region.
(d) A probability weighting function that overvalues small probabilities and
undervalues probabilities close to one.

63. Which of the following phenomena are attributable to overconfidence?

(a) The tendency for people to think that they have very smart friends.
(b) The tendency to think that CEOs are geniuses.
(c) The fact that only between 5 and 10% of the students in the class had the correct
weight of the earth within their 90% confidence interval.
(d) The tendency to avoid anything that you might regret later.

64. Sendhil Mullainathan and his co-authors conducted an experiment, in which they sent
actors to financial advisors. They found that the financial advisors did not challenge the
assumptions that supposedly made these ”clients” put all their money in one kind of
investment. Which psychological phenomenon has been cited to be responsible for this
behavior?
 (a) The financial advisors did not want to stir up cognitive dissonance feelings in
their “clients”.
(b) The financial advisors were overconfident about their own ability as financial
advisors.
(c) The financial advisors were influenced by Kahneman’s and Tversky’s probability
weighting function, which lead them to overweight very small probabilities.
(d) The financial advisors suffered from Antisocial Personality Disorder.

65. What is the main point of Anna Bernasek’s Economics of Intergrity?

(a) She outlines that a sense of personal integrity has dominated what people do in
the business world much more than we thought recently.
(b) She points out that that the manager of a company shouldn't be underestimating the
importance of shared value creation with society.
(c) She states that most of the things that happen in life are just chance.
(d) She claims that there's a tendency for people to think that CEOs are geniuses.

66. Which of these activities does not exclusively come within the scope of corporate
financial decision-making
a) How much should be invested?
b) How much is to be allocated to the marketing budget?
c) Which type of finance should be chosen?
d) How much finance should be raised?

67. A great deal of financial theory is based on the concept of free markets and in
particular the theory of:

a) perfect competition.
b) monopolistic competition.
c) monopoly.
d) oligopoly.

68. Which of the following is not a fundamental concept in Corporate Finance?

a) Net present value.
b) The relationship between risk and return.
c) The business cycle.
d) Double-entry book-keeping.

69. Which of the following is a legitimate reason why firm value maximization is
preferred to profit maximization as the ideal goal for the firm?

a) Value takes account of both profit and cash flow.

b) Value or discounted cash flow is less ambiguous than profit.
c) Value takes account of depreciation.
d) Profit is too concerned with the longer term.
70. What does the general principle of disclosure and transparency mean?

a) The company is obliged to reveal all holding companies, strategic alliances, and
joint ventures to the government.
b) The company is obliged to reveal all investment plans to employees.
c) The company is obliged to reveal all information in a timely manner which
could have a significant effect on shareholder welfare.
d) The company is obliged to lodge audited accounts with Companies House.

71, Which of the following people or institutions is not the author of a corporate
governance code?
a) International Corporate Governance Network.
b) Cadbury.
c) OECD.
d) Harvard-Yale.

72. What is the stakeholder view of the firm?

a) Shareholders should eventually be returned their stake in the firm.

b) The firm must honour its wider social obligations as well as making money.
c) The only obligation on the firm is to maximize profit.
d) The firm exists to maximize return.

73. Why did the credit crunch occur?

a) Because of low levels of credit and interest.

b) Because of an unwillingness to securitize the cash flows from financial assets.
c) Because of lower-than-expected default rates on US mortgages.
d) Because of bank overexposure to CDOs and CDS.

74. What is the Grameen bank?

a) A US investment bank dealing in CDOs.

b) A Bangladeshi bank specializing in microfinance.
c) A Japanese bank specializing in Forex trading.
d) A British hedge fund.
75. Employment of funds with the aim of achieving additional income is known as

a) Investment b) Speculation c) Gambling d) Biting

76. ______ is based on tips, rumours and hunches, unplanned and without knowledge
of the exact nature of risk.

a) Investment b) Speculation c) Gambling d) Arbitrage

77. A National Commodity and Derivatives Exchange Ltd (NCDEX) has been set up in
India in

a) 2000 b) 2003 c) 2005 d) 2010

78. Buying low and selling high, making a large capital gain is associated with

a) Investment b) Speculation c) Gambling d) Arbitrage

79. Horse racing, game of cards, lottery are the typical examples of

a) Investment b) Speculation c) Gambling d) Arbitrage

80. Investment in which principal amount and the terminal value are known with
certainty is

a) Fixed principal investment b) Variable principal investment

c) Non – security investment d) indirect investment

81. Which one of the following is known as indirect investment alternatives?

.
a) Cash b) Equity shares c) Pension Fund d) Antiques

82. Investment in which the terminal value are not known with certainty is

a) Fixed principal investment b) Variable principal securities c)

Non – security investment d) Indirect investment

83. _________ refers to direct ownership investments in new or growing business

before firms sell securities on a public basis.

a) Business ventures b) Private companies c) Limited companies d) Partnership

84. Rising of prices and falling of standard of living is arises at the time of
 a) Inflation b) Boom period c) Normal period d) Deflation

85. risks cover the risk of market, interest rate risk and purchasing power risk.

a) Systematic b) Unsystematic risk c) Financial d) Business

86. Risk due to internal environment of a firm or those affecting particular industry are
referred to as

a) Unsystematic risk b) Systematic risk c) Normal risk d)Abnormal risk

87. is a non – diversifiable risk.

a) Unsystematic risk b) Systematic risk c) Normal risk d)Abnormal risk

88. risk is associated with the security market, as well as the economic,
sociological, political and legal consideration of the prices of all securities in the
economy.

a) Unsystematic risk b) Systematic risk c) Normal risk d)Abnormal risk

89. Labour strike, consumer preferences and management policies are making to arises
out of uncertainty is known as

a) Systematic b) Unsystematic risk c) Financial d) Business

90. Purchasing power risk is also known as

a) Inflation risk b) Business risk c) Financial risk d) Market risk

91. risk can be identified through rise and decline of total revenues as indicated in the
firm’s earnings before interest and taxes.

a) Internal business risk b) External business risk c) Market

risk d) Interest rate risk

92. ROI denotes _

a) Return on Investment
b) Return on Interest
c) Return on Income
d) Risk on Investment
93. Variance calculation and measuring the Standard deviation is one way of measuring
the

a) Risk b) Return c) Speculation d) Gambling

94. ______describes the occurrence of all possible outcomes of an event and the
probability of occurrence of each outcome.

a) Probability distribution b) Index numbers c) Correlation d) Regression

95. Who is called a father of fundamental analysis

a) Benjamin Graham b) Timbergen c) William d) Elliot Wave

96. The diffusion index is also called as _

a) Census b) Barometer c) Opportunistic model building d)

Economic model building

97. The indicators are identified with consumer price index, capital expenses and
commercial paper rates are known as

a) Leading indicators b) coincidental indicators

c) Lagging indicators d) None of these

98. _________is the mathematical and statistical application to forecast the future trend
of the economy.

a) Economic model building b) Opportunistic model building c) Diffusion

indexes d) Indicators

99. ________ results are approximate because it is based on beliefs, intentions and
future budgeting of the government.

a) Surveys b) Opportunistic model building c) Diffusion

indexes d) Indicators

100. ________ analysis is a study of the variables that influence the future of a firm both
qualitatively and quantitatively for

101. The fundamental analysis approach has been associated with .

a) Uncertainties b) Certainties c) Ratios d) Balance sheet

102. ___________is a method which combines the different indicators into one total
measure and it gives weaknesses and strengths of a particular time series of data.

a) Surveys b) Opportunistic model building c) Diffusion indexes d) Indicators

103. During the stage many new firms enter into

market, the firms earns high profit, all firms compete with each other and only a few
efficient firms are left to run the business and most of the other firms are wiped out.
 a) Pioneering stage b) Expansion stage c) Stagnation stage d) Declining stage

104. __________analysis refers the study of the variables that influence the future of a
firm both qualitatively and quantitatively.

a) Company analysis b) Industry analysis

c) Technical analysis d) Economic analysis

105. Technical analysis is useful

a) To make an estimate of growth in a stock market

b) To find out the market forces influencing stock market
c) To indicate the direction of the overall market
d) To analyze the economic activity of government.
106. The Dow theory was developed by

a) Stock broker by the name of Dow

b) An editor of Wall Street Journal by the name of Dow
c) It was developed by Markowitz and Dow
d) It was developed by Sharpe.
107. In Dow theory, secondary movements are those which last only for a short while
are also known as

a) Corrections b) Random wiggles c) Narrow movements d) Fluctuations.

108. The narrow movement is called fluctuations are _

a) Random Wiggless b) Corrections

c) Primary trends d) None of these

109. The peak price of the stock is called the

a) Resistance area b) Support area c) Head d) Shoulder

110. According to technical analysts the support area denotes the signal

a) Sell signal b) Buy signal c) Exchange signal d) None of these

111. Elliott wave explains long-term pattern of price behaviour of share prices in the
major patterns in .

a) Five successive waves b) Three successive waves c) Two successive wave

d) Four successive waves

112. Markowitz efficient hypothesis initiated in a) 1958 b) 1959 c)
1961 d) 1960

113. Markowitz model presumed generally investors are

a) Risk averse b) Risk natural c) Risk seekers d) Risk moderate

114. A chart that has open, high, low and close data sets in a vertical line is known as

a) Bar or OHLC chart b) Line chart c) Candle stick chart d) Point and figure chart

115. A combination of various investment products like bonds, shares, securities, mutual
funds and so on is called as

a) Portfolio b) Investment c) Speculation d) Gambling

116. The process by which one choose the securities, derivatives and other assets include
in a portfolio is known as

a) Portfolio selection b) Portfolio Revision c) Portfolio diversification d) None

of these

117. The process of addition of more assets in an existing portfolio or changing the ratio
of funds invested is called as -

a) Portfolio selection b) Portfolio Revision

c) Portfolio diversification d) None of these

118. Investing in different asset and securities of many companies in an attempt to

reduce the overall investment risk is known as

a) Portfolio selection b) Portfolio Revision

c) Portfolio diversification d) None of these

119. Investing in similar types companies of investments in a portfolio is known as

.
 a) Horizontal diversification b) Vertical diversification

c) Circle diversification d) None of these

120. Which type of market efficiency declares that current security prices totally reflect all
information, equally public and private

a) Weak b) Semi-strong c) Strong d) None of these

121. The main objective of portfolio is to reduce by diversification.

a) Return b) Risk c) Uncertainty d) Percentage

122. Who concern with relations between security returns

a) Markowitz diversification b) Random diversification

c) Friedman diversification d) Correlating diversification

123. Asset allocation is procedure of scattering your assets between numerous different
kinds of investments to

a) Highest risk b) Moderate risk c) Lessen risk d) No risk

124. __________describes the relationship between systematic risk and expected return
for assets, particularly stocks

a) CAPM b) PERT c) Sharp ratio d) Treynor ratio

125. For a profitable firm, total sources of funds will always total uses of
funds.
a. be equal to

b. be greater than

c. be less than

d. have no consistent relationship to

126. Which of the following would be consistent with a more aggressive

approach to financing working capital?
a. Financing short-term needs with short-term funds.

b. Financing permanent inventory buildup with long-term debt.

 c. Financing seasonal needs with short-term funds.

d. Financing some long-term needs with short-term funds.

127. Which asset-liability combination would most likely result in the firm's
having the greatest risk of technical insolvency?
a. Increasing current assets while lowering current liabilities.

b. Increasing current assets while incurring more current liabilities.

c. Reducing current assets, increasing current liabilities, and

reducing long-term debt.

d. Replacing short-term debt with equity.

128. Which of the following illustrates the use of a hedging (or matching)
approach to financing?
a. Short-term assets financed with long-term liabilities.

b. Permanent working capital financed with long-term liabilities.

c. Short-term assets financed with equity.

d. All assets financed with a 50 percent equity, 50 percent long-term

debt mixture.

129. In deciding the appropriate level of current assets for the firm, management
is confronted with
a. a trade-off between profitability and risk.

b. a trade-off between liquidity and marketability.

c. a trade-off between equity and debt.

d. a trade-off between short-term versus long-term borrowing.

130. varies inversely with profitability.

a. Liquidity.

b. Risk.

c. Blue.
 d. False.

131. Spontaneous financing includes

a. accounts receivable.

b. accounts payable.

c. short-term loans.

d. a line of credit.

132. Permanent working capital

a. varies with seasonal needs.

b. includes fixed assets.

c. is the amount of current assets required to meet a firm's long-

term minimum needs.

d. includes accounts payable.

133. Financing a long-lived asset with short-term financing would be

a. an example of "moderate risk -- moderate (potential) profitability"

asset financing.

b. an example of "low risk -- low (potential) profitability" asset

financing.

c. an example of "high risk -- high (potential) profitability" asset

financing.

d. an example of the "hedging approach" to financing.

134. Net working capital refers to

a. total assets minus fixed assets.

b. current assets minus current liabilities.

c. current assets minus inventories.

d. current assets.
135. Marketable securities are primarily
a. short-term debt instruments.

b. short-term equity securities.

c. long-term debt instruments.

d. long-term equity securities.

136. Time consumed in clearing a check through the banking system.

a. Processing float

b. Deposit float

c. Collection float

d. Availability float

137. Commercial paper is essentially

a. another term for a junk bond.

b. a short-term unsecured corporate IOU.

c. an intermediate-term corporate bond.

d. a certificate that may be exchanged for a share of common stock at a

specified future date.

138. Concentration banking

a. increases idle balances.

b. moves excess funds from a concentration bank to regional banks.

c. is less important during periods of rising interest rates.

d. improves control over corporate cash.

139. Which would be an appropriate investment for temporarily idle corporate

cash that will be used to pay quarterly dividends three months from now?
a. A long-term Aaa-rated corporate bond with a current annual yield of
9.4 percent.

b. A 30-year Treasury bond with a current annual yield of 8.7 percent.

 c. Ninety-day commercial paper with a current annual yield of 6.2
percent.

d. Common stock that has been appreciating in price 8 percent annually,

on average, and paying a quarterly dividend that is the equivalent of a
5 percent annual yield.

140. Which of the following marketable securities is the obligation of a

commercial bank?
a. Commercial paper

b. Negotiable certificate of deposit

c. Repurchase agreement

d. T-bills

141. The movement of business data electronically in a structured, computer-

readable format.
a. EFT

b. EDI

c. SWIFT

d. CHIPS

142. That portion of a firm's total marketable securities portfolio held to take care
of probable deficiencies in the firm's cash account.
a. Free cash segment

b. Controllable cash segment

c. Ready cash segment

d. None of the above

143. The most basic requirement for a firm's marketable securities.

a. Safety

b. Yield

c. Marketability
 d. New York.

144. A non-negotiable check payable to a company account at a concentration

bank
a. Payable through draft (PTD)

b. Depository transfer check (DTC)

c. ACH transfer

d. Repo

145. According to the Bond Equivalent Yield (BEY) method, the yield on a
$1,000, 13-week US Treasury bill purchased for $960 would be closest
to .
a. 16.0 percent

b. 16.7 percent

c. 17.0 percent

d. 17.8 percent

146. US Treasury bills are now sold in minimum amounts of and multiples
of above the minimum.
a. $10,000; $10,000

b. $10,000; $1,000

c. $1,000; $1,000

d. $1,000; $100

e. $100; $100

147. Accounts receivable conversion (a.k.a., check conversion) is the conversion

of a paper check to .
a. an electronic check image

b. a "substitute check"

c. an ACH debit transaction

 d. a foreign currency
148. The US Federal National Mortgage Association (FNMA, "Fannie Mae") and
the US Federal Home Loan Mortgage Corporation (FHLMC, "Freddie
Mac") are . Interest and principal on debt securities that they
issue explicity guaranteed by the US government.
a. federal agencies; are

b. federal agencies; are not

c. government sponsored entities (GSEs); are

d. government sponsored enterprises (GSEs); are not

149. "Shareholder wealth" in a firm is represented by:

a. the number of people employed in the firm.

b. the book value of the firm's assets less the book value of its liabilities.

c. the amount of salary paid to its employees.

d. the market price per share of the firm's common stock.

150. The long-run objective of financial management is to:

a. maximize earnings per share.

b. Maximize the value of the firm's common stock.

c. maximize return on investment.

d. maximize market share.

 ANSWERS
1 d 11 c 21 a
2 a 12 b 22 b
3 a 13 d 23 d
4 b 14 b 24 c
5 c 15 b 25 b
6 a 16 d 26 b
7 a 17 b 27 b
8 b 18 d 28 b
9 d 19 b 29 a
10 d 20 c 30 a

ANSWER KEY
31 D 36 C 41 C 46 D 51 A 56 B 61 B 66 B 71 D
32 A 37 A 42 B 47 B 52 B 57 B 62 C 67 A 72 B
33 A 38 D 43 D 48 D 53 D 58 B 63 A 68 D 73 D
34 B 39 D 44 B 49 B 54 C 59 A 64 A 69 B 74 B
35 C 40 D 45 B 50 C 55 B 60 A 65 A 70 C

ANSWER KEY

75 A 85 A 95 A 105 C 115 A
76 C 86 A 96 A 106 B 116 A
77 B 87 B 97 C 107 A 117 B
78 B 88 B 98 A 108 A 118 C
79 C 89 B 99 A 109 A 119 A
80 A 90 A 100 110 A 120 C
81 C 91 A 101 A 111 A 121 B
82 B 92 A 102 C 112 D 122 A
83 A 93 A 103 A 113 A 123 C
84 A 94 A 104 A 114 A 124 A

ANSWER KEY

125 A 130 A 135 A 140 B 145 B 150 B

126 D 131 B 136 D 141 B 146 E
127 C 132 C 137 B 142 C 147 C
128 B 133 C 138 D 143 A 148 D
129 A 134 B 139 C 144 B 149 D