FIN 430 Chapter 1

Real assets represent about ____ of total assets for commercial banks. A. 1% B. 15% C. 25% D. 40%

A. 1%

In 2011 real assets represented approximately __________ of the total asset holdings of American households. A. 32% B. 42% C. 48% D. 55%

A. 32%

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

A. A share of common stock

An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? A. Asset allocation B. Investment analysis C. Portfolio analysis D. Security selection

A. Asset allocation

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

A. Bottom-up

Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A. General Electric B. Parmalat C. Enron D. WorldCom

A. General Electric

In recent years the greatest dollar amount of securitization occurred for which type of loan? A. Home mortgages B. Credit card debt C. Automobile loans D. Equipment leasing

A. Home mortgages

Which of the following is (are) true about hedge funds? I. They are open to institutional investors. II. They are open to wealthy individuals. III. They are more likely than mutual funds to pursue simple strategies. A. I and II only B. I and III only C. II and III only D. I, II, and III

A. I and II only

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

A. Transferring risk from one party to another

_____ is a mechanism for mitigating potential agency problems. A. Tying income of managers to success of the firm B. Directors defending top management C. Antitakeover strategies D. The straight voting method of electing the board of directors

A. Tying income of managers to success of the firm

Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _____. A. a new financial asset was created B. a financial asset was traded for a real asset C. a financial asset was destroyed D. a real asset was created

A. a new financial asset was created

Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____. A. agency problem B. risk-return trade-off C. allocation of risk D. securitization

A. agency problem

An intermediary that pools and manages funds for many investors is called ______. A. an investment company B. a savings and loan C. an investment banker D. a commercial bank

A. an investment company

After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____. A. asset allocation B. security analysis C. top-down portfolio management D. passive management

A. asset allocation

Real assets are ______. A. assets used to produce goods and services B. always the same as financial assets C. always equal to liabilities D. claims on a company's income

A. assets used to produce goods and services

Security selection refers to _________. A. choosing specific securities within each asset class B. deciding how much to invest in each asset class C. deciding how much to invest in the market portfolio versus the riskless asset D. deciding how much to hedge

A. choosing specific securities within each asset class

The value of a derivative security _________. A. depends on the value of another related security B. affects the value of a related security C. is unrelated to the value of a related security D. can be integrated only by calculus professors

A. depends on the value of another related security

In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. A. higher B. lower C. the same D. The answer cannot be determined from the information given.

A. higher

According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________. A. mortgages B. consumer credit C. bank loans D. gambling debts

A. mortgages

Financial assets represent _____ of total assets of U.S. households. A. over 60% B. over 90% C. under 10% D. about 30%

A. over 60%

When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed. A. rise; fewer B. fall; fewer C. rise; more D. fall; more

A. rise; fewer

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 these options

A. the allocation of the investment portfolio across broad asset classes

In 2011 mortgages represented approximately __________ of total liabilities and net worth of American households. A. 12% B. 14% C. 28% D. 42%

B. 14%

The combined liabilities of American households represent approximately __________ of combined assets. A. 11% B. 19% C. 25% D. 33%

B. 19%

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

B. Common stock

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 A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

Debt securities promise: I. A fixed stream of income II. A stream of income that is determined according to a specific formula III. A share in the profits of the issuing entity A. I only B. I or II only C. I and III only D. II or III only

B. I or II only

In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______. A. Goldman Sachs B. Lehman Brothers C. Morgan Stanley D. Merrill Lynch

B. Lehman Brothers

__________ is (are) real assets. A. Bonds B. Production equipment C. Stocks D. Commercial paper

B. Production equipment

__________ portfolio construction starts with asset allocation. A. Bottom-up B. Top-down C. Upside-down D. Side-to-side

B. Top-down

An example of a derivative security is _________. A. a common share of General Motors B. a call option on Intel stock C. a Ford bond D. a U.S. Treasury bond

B. a call option on Intel stock

In a perfectly efficient market the best investment strategy is probably _____. A. an active strategy. B. a passive strategy. C. asset allocation. D. market timing.

B. a passive strategy.

Financial institutions that specialize in assisting corporations in primary market transactions are called _______. A. mutual funds B. investment bankers C. pension funds D. globalization specialists

B. investment bankers

Firms that specialize in helping companies raise capital by selling securities to the public are called _________. A. pension funds B. investment banks C. savings banks D. REITs

B. investment banks

The efficient market hypothesis suggests that _______. A. active portfolio management strategies are the most appropriate investment strategies B. passive portfolio management strategies are the most appropriate investment strategies C. either active or passive strategies may be appropriate, depending on the expected direction of the market D. a bottom-up approach is the most appropriate investment strategy

B. passive portfolio management strategies are the most appropriate investment strategies

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 _____. A. earn no more than the Treasury-bill rate on either security. B. pay less for the security that has higher risk. C. pay less for the security that has lower risk. D. earn more if interest rates are lower.

B. 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 ___. A. mutual fund shares B. real estate C. pension reserves D. corporate equity

B. real estate

A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________. A. private equity investments B. securitization C. negative analyst recommendations D. online trading

B. securitization

After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______. A. asset allocation B. security analysis C. top-down portfolio management D. passive management

B. security analysis

Venture capital is _________. A. frequently used to expand the businesses of well-established companies B. supplied by venture capital funds and individuals to start-up companies C. illegal under current U.S. laws D. most frequently issued with the help of investment bankers

B. supplied by venture capital funds and individuals to start-up companies

The historical average rate of return on large company stocks since 1926 has been _____. A. 5% B. 8% C. 12% D. 20%

C. 12%

Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses. A. 10% B. 25% C. 48% D. 75%

C. 48%

Which of the following is not a money market security? A. U.S. Treasury bill B. 6-month maturity certificate of deposit C. Common stock D. Bankers' acceptance

C. Common stock

The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism? A. Auditing B. Public finance C. Corporate governance D. Public reporting

C. Corporate governance

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? A. WorldCom B. Enron C. Parmalat D. Global Crossing

C. Parmalat

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

C. Passive

__________ assets generate net income to the economy, and __________ assets define allocation of income among investors. A. Financial, financial B. Financial, real C. Real, financial D. Real, real

C. Real, financial

The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A. Required that corporations have more independent directors B. Required that the CFO personally vouch for the corporation's financial statements C. Required that firms could no longer employ investment bankers to sell securities to the public D. Required the creation of a new board to oversee the auditing of public companies

C. Required that firms could no longer employ investment bankers to sell securities to the public

When a pass-through mortgage security is issued, what does the issuing agency expect to receive? A. The amount of the original loan plus a servicing fee B. The principal and interest that are paid by the homeowner C. The principal and interest that are paid by the homeowner, minus a servicing fee D. The interest paid by the homeowner, plus a servicing fee

C. The principal and interest that are paid by the homeowner, minus a servicing fee

Which of the following is not a financial intermediary? A. a mutual fund B. an insurance company C. a real estate brokerage firm D. a savings and loan company

C. a real estate brokerage firm

Net worth represents _____ of the liabilities and net worth of commercial banks. A. about 51% B. about 91% C. about 11% D. about 31%

C. about 11%

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. choice of specific securities within each asset class

In a market economy, capital resources are primarily allocated by ____________. A. governments B. the SEC C. financial markets D. investment bankers

C. financial markets

The average rate of return on U.S. Treasury bills since 1926 was _________. A. less than 1% B. less than 3% C. less than 4% D. less than 7%

C. less than 4%

According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____. A. mutual fund shares B. corporate equity C. pension reserves D. personal trusts

C. pension reserves

Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. A. real; real B. financial; financial C. real; financial D. financial; real

C. real; financial

The success of common stock investments depends on the success of _________. A. derivative securities B. fixed-income securities C. the firm and its real assets D. government methods of allocating capital

C. the firm and its real assets

More than _____________ of currency is traded each day in the market for foreign exchange. A. $300 million B. $1 billion C. $30 billion D. $1 trillion

D. $1 trillion

__________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of these options

D. All of these options

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 over consume luxuries such as corporate jets. D. All of these options are examples of agency problems.

D. All of these options are examples of agency problems.

Which of the following is (are) true about nonconforming mortgage loans? A. They are also known as subprime loans. B. They have higher default risk than conforming loans. C. They were able to be offered without due diligence. D. All of these options are true.

D. All of these options are true.

Financial markets allow for all but which one of the following? A. Shift consumption through time from higher-income periods to lower B. Price securities according to their riskiness C. Channel funds from lenders of funds to borrowers of funds D. Allow most participants to routinely earn high returns with low risk

D. Allow most participants to routinely earn high returns with low risk

Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common stock

D. Common stock

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 A. I only B. I and II only C. II and III only D. I, II, and III

D. I, II, and III

An example of a real asset is: I. A college education II. Customer goodwill III. A patent A. I only B. II only C. I and III only D. I, II, and III

D. 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 A. I only B. I and II only C. II and III only D. I, II, and III

D. I, II, and III

Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return A. I only B. I and II only C. I and III only D. I, II, and III

D. I, II, and III

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

D. I, II, and III

Which of the following is not an example of a financial intermediary? A. Goldman Sachs B. Allstate Insurance C. First Interstate Bank D. IBM

D. IBM

The 2002 law designed to improve corporate governance is titled the _____. A. Pension Reform Act B. ERISA C. Financial Services Modernization Act D. Sarbanes-Oxley Act

D. Sarbanes-Oxley Act

The systemic risk that led to the financial crisis of 2008 was increased by _____. A. collateralized debt obligations B. subprime mortgages C. credit default swaps D. all of the options

D. all of the options

Financial intermediaries exist because small investors cannot efficiently _________. A. diversify their portfolios B. gather information C. monitor their portfolios D. all of these options

D. all of these options

Commodity and derivative markets allow firms to adjust their _________. A. management styles B. focus from their main line of business to their investment portfolios C. ways of doing business so that they'll always have positive returns D. exposure to various business risks

D. exposure to various business risks

Market signals will help to allocate capital efficiently only if investors are acting _____. A. on the basis of their individual hunches. B. as directed by financial experts. C. as dominant forces in the economy. D. on accurate information.

D. on accurate information.

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

D. productive capacity; real assets