Investments 4360 Chapter 1 review

All of the following are considered real assets except:

Common stock

__________ are examples of financial intermediaries

-Commercial banks -Credit unions -Investment companies

Money market securities are:

-Generally very low risk -Highly marketable -Short-term investments

Asset allocation is:

-The process of dividing funds into asset classes. -Concerned with returns variability. - Concerned with the relationship among investments' returns.

The increase in the systematic risk that led to the financial crisis of 2008 was triggered by:

-credit default swaps -secularization of subprime mortgages -collateralized debt obligations

Which one of the following statements is correct?

A continuous market that has price continuity requires depth of buyers and sellers

A fixed income security is generally defined as:

A fixed stream of income that is determined according to a specified formula for the life of the security

In constructing a portfolio, the choice among the broad assets classes to include in the portfolio is regarded as a _____________ decision.

Asset allocation

Which of the following portfolio construction methods starts with security analysis?

Bottom-up

Security selection refers to ________

Choosing which securities to hold based on their valuation

The financial instruments that are designed to concentrate the credit risk of a pool of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk is:

Collateralized debt obligations

The financial instruments that are a form of insurance contract against the default of one or more borrowers:

Credit default swaps

Financial intermediaries exist because small investors cannot efficiently _______.

Diversify their portfolios, assess credit risk of borrowers, or advertise for needed investments

Financial assets can be used for the following reasons except:

Elimination of risk

Although derivatives can be used as speculative instruments, they are most often used by corporations to

Hedge risks

The competition between securities analysts and the active trading in the markets help ensure that: I- Riskier securities are priced to offer higher expected returns II- Investors are more likely and consistently able to find undervalued and overvalued securities III- Security prices approach informational efficiency, and any new relevant information is reflected in the security prices.

I and III only

Which of the following statements are correct? I- The economy's productive capacity determines the material wealth of a society and is also a function of the economy's reals assets II- Financial assets generate net income to the economy, and real assets define allocation of income among investors III- Security selection refers to the choice of specific securities among each asset class

I and III only

Which of the following are mechanisms that have evolved to mitigate potential agency problems? I- Security analyst monitoring the firm closely II- Including stock options in the compensation package III- Takeover treats IV- Having a large number of insiders among the board members V- Incompetent managers ousted by the board of directors.

I, II, III and V

Investment bankers perform which of the following role(s): I- Market new stock and bond issues for firms II- Advise firms on market conditions and appropriate ways to raise capital III- Perform due diligence on the firm before a security issue IV- Design securities with desirable properties

I, II, III, and IV

Which of the following are mechanisms expected to force corporate managers to act in the shareholders' best interest: I- Indexing the managers' compensation to the stock price performance II- Threat of takeover III- Proxy fights by shareholders or outsiders for control of the board of directors.

I,II,III all of the above

Which of the following statements are correct? I- Venture capital is frequently used to raise fund for well-established companies II- The efficient market hypothesis suggests that passive portfolio management strategies are the most appropriate investment strategies III- In an efficient capital market, an investor expects to pay less for the security that has higher risk

II and III only

Which of the following statement is correct about financial assets?

Indirectly contribute to the country's productive capacity

Which of the following statements is incorrect?

Passive management of a portfolio is the attempt to improve performance by identifying mispriced securities.

The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of ______.

Securitization

Which of the following is/are considered financial assets?

Stocks and Bonds

The external mechanism that protects corporate shareholders from incompetent management decisions is:

The treat of takeover by other firms

Security analysis is defined as:

The valuation of particular securities that might be included in the portfolio

An investor undertake an extensive analysis of current market conditions, and decided to place 70% of the portfolio in equity and the remaining 30% in bonds. This is an example of

asset allocation

Financial institutions that specialize in assisting corporations in primary market transactions are called:

investment bankers

New issues of securities are sold in the ________ market(s).

primary