CFA CFA Global Markets & Trading 1 — Questions and Answers
Question 1: Which type of market order guarantees execution but not the execution price?
- Market order (Correct answer)
- Limit order
- Stop-limit order
- Good-till-canceled order
Correct answer: Market order
A market order is executed immediately at the best available current price, guaranteeing execution but not a specific price.
Question 2: A limit order to buy a security is placed:
- At or below the specified limit price (Correct answer)
- At or above the specified limit price
- Exactly at the current market price
- Only at the opening price of the trading day
Correct answer: At or below the specified limit price
A buy limit order specifies the maximum price the investor is willing to pay, and execution occurs only at that price or lower.
Question 3: The bid-ask spread in financial markets represents:
- The transaction cost paid by investors and profit for market makers (Correct answer)
- The difference between a stock's 52-week high and low
- The yield difference between two bonds of different maturities
- The margin required to hold a leveraged position
Correct answer: The transaction cost paid by investors and profit for market makers
The bid-ask spread is the difference between the highest price a buyer will pay and the lowest price a seller will accept, representing the implicit cost of trading.
Question 4: Which global index is considered the primary benchmark for international developed market equities?
- MSCI EAFE Index (Correct answer)
- S&P 500 Index
- FTSE All-World Index
- Russell 2000 Index
Correct answer: MSCI EAFE Index
The MSCI EAFE (Europe, Australasia, Far East) Index is the standard benchmark for developed international equity markets outside North America.
Question 5: Short selling involves:
- Borrowing shares and selling them with the intent to repurchase at a lower price (Correct answer)
- Selling shares held in a portfolio to lock in gains
- Selling futures contracts to hedge a long position
- Liquidating a portfolio to raise cash quickly
Correct answer: Borrowing shares and selling them with the intent to repurchase at a lower price
Short selling is a strategy where an investor borrows shares, sells them, and hopes to buy them back at a lower price to profit from the decline.
Question 6: Margin trading allows investors to:
- Borrow funds from a broker to purchase more securities than their cash allows (Correct answer)
- Trade securities without paying commissions
- Access after-hours trading sessions at better prices
- Eliminate capital gains taxes on profitable trades
Correct answer: Borrow funds from a broker to purchase more securities than their cash allows
Margin trading involves borrowing from a broker to increase purchasing power, amplifying both potential gains and losses.
CFA CFA Global Markets & Trading 1
Which type of market order guarantees execution but not the execution price?