Investment Management Chapter 1

The Volker Rule Prohibits banks from prop trading Restricts banks' investments in hedge funds Restricts banks' investments in private equity funds All of the options.

All of the options

________ are examples of financial intermediaries. Commercial Banks Insurance Companies Investment Companies All of the options

All of the options

The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?

Corporate Governance

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

Yes

Which of the following is not a money market security?

Common

Commodity and derivative markets allow firms to adjust their _____

Exposure to various business risks

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

Financial, destroyed, real

Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return

I, II, and III

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. The bank loan is a financial _____ 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.

Liability, asset, asset, created

After much investigation, an investor finds that Intel stock is currently underpriced.

This is an example of Security analysis

Real assets in the economy include all but which one of the following?

Common stock

Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?

General Electric

Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm's bankruptcy?

Parmalat

_____ portfolio construction starts with asset allocation.

Top-down

In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______.

Lehman Brothers

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

No

The efficient market hypothesis suggests that _______.

Passive portfolio management strategies are the most appropriate investment strategies.

In 2014 real assets represented approximately __________ of the total asset holdings of American households.

30%

Net worth represents _____ of the liabilities and net worth of commercial banks.

About 11%

The difference between LIBOR and the Treasury-bill rate Is called the TED spread Measures credit risk in the banking sector Was very low just before the 2008 financial crisis. All of the options

All of the options.

Financial markets allow for all but which one of the following?

Allow most participants to routinely earn high returns with low risk

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 financial _______ to the software developer. In return, Lanni gets a real _____ , the completed software.

Asset, asset

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 real _______, to Microsoft. In exchange Lanni receives a financial _____, 2,500 shares of Microsoft stock. A new financial asset is ______ if Microsoft issues new shares.

Asset, asset, 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 financial ______ for another. In paying off the IOU with $50,000, Lanni is exchanging financial _____. The loan is ______ in the transaction, since it is retired when paid.

Asset, assets, destroyed

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

Creates, real, financial, created

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

Financial, real

In recent years the greatest dollar amount of securitization occurred for which type of loan?

Home mortgages

Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because: I. Intermediaries are better diversified than most individuals. II. Intermediaries can exploit economies of scale in investing that individual investors cannot. III. Intermediated investments usually offer higher rates of return than direct capital market claims.

I and II only

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, II, III

An example of a real asset is: I. A college education II. Customer goodwill III. A patent

I, II, and III

Methods of encouraging managers to act in shareholders' best interest include: I. Threat of takeover. II. Proxy fights for control of the board of directors. III. Tying managers' compensation to stock price performance.

I, II, and III

Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

Investment banks

Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ .

Pay less for the security that has higher risk

According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___.

Real estate