Question

1. If an insider cannot take advantage and trade on private information to make abnormal profits​ , then a market is likely to be​ considered

A. Weak form efficient and Semi strong form efficient only B. Only Semi Strong form efficient C. Strong form efficient

2. You have placed a buy​ market-on-open order​ – a market order that would automatically be submitted at the​ market’s open tomorrow and would fill at the market price. Your​ instruction, to buy the shares at the market​ open, is​ a(n):

A. Clearing Instruction B. Validity Instruction C. Execution Instruction

3. If an investor believes a stock is undervalued they are most likely to take a​ _________ position in a​ stock? A. Long B. Neutral C. Short

4. A margin account requires an initial margin of​ 50% and a margin call will occur if the stock price depreciates to​ $13.33. If stocks were initially purchased at​ $20, the maintenance margin is: (Show the working)

Answer 1

Solution:

Question 1

Strong form of market efficiency is when even insider information is not able to generate any abnormal profit. While in semi-strong and weak market, insider information may generate abnormal profit.

Hence correct option is C. Strong form efficient

Question 2.

Execution instruction: Limit order, market order etc are the example of execution instruction. Execution instruction means the way order can be filled.

Validity Instruction: these are instruction when order can be filled and example of these instructions are

• Good-till-cancelled order (GTC):
• Good-on-open order (Market-on-open): can only be filled at the open of trading.
• Good-on-close order (Market-on-close): can only be filled at the close of trading
• Stop order (stop-loss order):

Hence correct option is Validity Instructions

Question 3.

We take long position when we think stock is undervalued and short postion when stock is overvalued.

Hence correct option is A) Long

Question 4 )

Margin Price = Purchase price * ( 1 - initial margin ) / (1- maintenance margin)

13.33 = 20 * ( 1-0.5) / ( 1- Maintenance Margin)

1- Maintenance margin = 10 / 13.33 = 0.75

Maintenance margin = 1-0.75 = 0.25 = 25%