441- Chapter 1

In a market economy, capital resources are primarily allocated by ____________. governments corporation CEOs financial markets investment bankers

financial markets

Toyota uses $10 million of cash on hand to purchase additional inventory of spare auto parts. The cash is a ___ asset that is traded in exchange for a __ asset, inventory.

1. Financial 2. Real

Toyota pays off its loan. When the loan is repaid, the ___ asset is ___ but the ___ asset continues to exist.

1. financial 2. Destroyed 3. Real

____ is not a derivative security. A share of common stock A call option A futures contract None of the options (All of the answers are derivative securities.)

A share of common stock

Asset allocation refers to _________. a. the allocation of the investment portfolio across broad asset classes b. the analysis of the value of securities c. the choice of specific assets within each asset class d. none of the options

A.

___ are examples of financial intermediaries Commercial banks Insurance companies Investment companies

All

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities I only I and II only II and III only I, II, and III

All 3

Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities. I only I and II only II and III only I, II, and III

All three

__________ portfolio construction starts with selecting attractively priced securities. Bottom-up Top-down Upside-down Side-to-side

Bottom-up

Security selection refers to the ________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific securities within each asset class D. top-down method of investing

C.

Real assets in the economy include all but which one of the following? land buildings consumer durables common stock

Common Stock

__________ represents an ownership share in a corporation. A call option Common stock A fixed-income security Preferred stock

Common Stock

Which of the following is an example of an agency problem? a. Managers engage in empire building. b. Managers protect their jobs by avoiding risky projects. c. Managers overconsume luxuries such as corporate jets. d. All of the options are examples of agency problems

D.

__________ assets generate net income to the economy, and __________ assets define allocation of income among investors.

Real, Financial

Suppose that in a wave of pessimism, housing prices fall by 10% across the entire economy. a. Has the stock of real assets of the economy changed? b. Are individuals less wealthy?

a. No b. Yes

____ is a mechanism for mitigating potential agency problems. Tying income of managers to success of the firm Directors defending top management Antitakeover strategies All of the options.

Tying income of managers to success of the firm

Toyota takes out a bank loan to finance the construction of a new factory. Toyota __ a __ asset—the factory. The loan is a ___ asset that is ___ in the transaction.

1. Creates 2. Real 3. Financial 4. Created

Lanni sells the shares of stock for $50 per share and uses part of the proceeds to pay off the bank loan. In selling 2,500 shares of stock for $125,000, Lanni is exchanging one _____for another. In paying off the IOU with $50,000, Lanni is exchanging _____. The loan is _____ in the transaction, since it is retired when paid.

1. Financial Asset 2. Financial Asset 3. Destroyed

Lanni uses the cash from the bank plus $20,000 of its own funds to finance the development of new financial planning software. The cash paid by Lanni is the transfer of a ___ to the software developer. In return, Lanni gets a ___ , the completed software.

1. Financial Asset 2. Real Asset

Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,000 and has cash on hand of $20,000 contributed by Lanni's owners. Choose the correct answer in the following statements about financial and real assets. a. Lanni takes out a bank loan. It receives $50,000 in cash and signs a note promising to pay back the loan over three years. The bank loan is a ___ for Lanni. Lanni's IOU is the bank's financial ____. The cash Lanni receives is a financial ___. A new financial asset _____ is Lanni's promissory note held by the bank.

1. financial liability 2. financial asset 3. financial asset 4. Created

Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 2,500 shares of Microsoft stock. Lanni sells the software, which is a ___, to Microsoft. In exchange Lanni receives a ____, 2,500 shares of Microsoft stock. A new financial asset is ____ correct if Microsoft issues new shares.

1. real asset 2. financial asset 3. Created

__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. Active Momentum Passive Market-timing

Passive

__________ is (are) real assets. Bonds Production equipment Stocks Life insurance

Production equipment

The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. investment bankers; financial assets investment bankers; real assets productive capacity; financial assets productive capacity; real assets

Productive capacity, real assets

Which one of the following best describes the purpose of derivatives markets? Transferring risk from one party to another. Investing for a short time period to earn a small rate of return. Investing for retirement. Earning interest income.

Transferring risk from one party to another