ECON-132A INTRODUCTION TO FINANCIAL INVESTMENTS

STUDY GUIDE FOR QUIZ 1

Most of the questions below are based on Bodie, Kane and Marcus Essentials of
Investments, 9th edition, McGraw-Hill Irwin, intended for a quick review. For more
detailed study, we recommend the following questions from the textbook:
Chapter 1: questions 1, 2, 3, 5, 7, 8, 9, 13, 20, 21 and 22
Chapter 2: questions 1, 3, 4, 5, 6, 8, 14, 15, 16, 27 and 32
Chapter 3: questions 3, 6, 10, 12, 20, 22 and 24
Chapter 4: questions 2, 5 and 8

QUESTIONS
Fundamental concepts
1. What are the differences between:
a. equity and fixed-income securities?
b. asset allocation and security selection?
c. real and financial assets?
d. Real Estate and a REIT?
e. active and passive management?
f. primary and secondary market?
g. money market securities and other fixed-income securities?
h. Treasury-bill, Treasury-bond, and TIPS?
i. common and preferred stocks?
j. ETFs and mutual funds?
k. open-end funds and closed-end funds?
l. load funds and no-load funds?
m. balanced funds and asset allocation funds?
n. international funds and global funds?
2. The average rate of return on investments in large stocks has outpaced that on
investments in Treasury bills by about 7% since 1926. Why, then, does anyone
invest in Treasury bills?
3. Paying $1 for a lottery ticket is a way of possibly making $1 million with no risk.
Do you agree?
Taxation policy
4. Why are high-tax-bracket investors more inclined to invest in municipal bonds than
are low-bracket investors?
5. A short-term municipal bond currently offers yield of 4%, while comparable taxable
bonds pay 5%. What are the equivalent taxable yields for tax brackets of zero, 10%,
20%, and 30%?

Types of orders
6. What are the differences between a stop-loss order, a limit sell order, and a market
order?
7. A market order has price uncertainty but not execution uncertainty. True or false?
What about a limited order?
8. Suppose you short-sell 100 shares of Anteater Inc, now selling at $200 per share.
What is your maximum possible loss? What is your maximum possible gain? What
happens to your maximum possible loss if you simultaneously place a stop-buy
order at $210? And what happens to your maximum possible gain in this case?
9. Suppose the highest bid for Anteater Inc is $199.50 and the lowest ask is $200.50. If
you placed a stop-loss order to sell at $200, will your order be executed?
10. Suppose the highest bid for Zot Inc is $5.30 and the lowest ask is $5.50. At what
price will your trade be executed if you submit an order to but at market? What if
the order is to sell at market? What if it is a limited order to sell at $5.60? And what
if it is a limited order to buy at $5.40?