fin360 exam 3

Two common mistakes entrepreneurs make are to hire friends and not to raise enough capital on-time to avoid dilution and loss of control

true

warren buffett is a valued investor

true; goes for matured companies that has competitive advantage

the dual mandate of the Fed is

employment maximization and price stabiltiy

when we drive a long distance to make use of a $5 coupon, our main behavioral finance problem is

prospect theory

the financial markets and the Fed follow PMI closely, like we all should. It is disclosed the first business day of every month and follows a monthly survey to

purchasing managers in private manufacturing companies bc they are credited with being accurate forecasters of market confidence

rational theories that attempt to explain stock market returns consider

systemic risk

Entrepreneurship skills can be taught, not everything is innate

true

active investors pay higher fees

true

beta is a measure of systematic risk

true

value investors think that financial markets are rational

false; they expect it to be behavioral

During dot-com, underpricing went over 50%

true

Small and non-US IPOs tend to do worse long-term

true

arbitrage are rare profit opportunities without incurring risk

true

Term sheets are invitations to dance with venture capitalists, the start point of negotiations with expected confidentiality

true

those that support high frequency trading say that it increases market liquidity

true

warren buffett learned from ben graham that the key to successful investing was the purchase of shares in good businesses when the market price was at large discount from underlying business values

true

when the fed backed the rescue of bear stearns in spring 2008 and did not rescure lehman in fall 2008, the intent was to punish moral hazard

true

moral malleability is temporary flexing of moral standards when it is legal with a purpose of consciously justifying immoral choices and behavior

false; consciously OR unconsciously

DuPont analysis only helps executives diagnose where the problem is coming from for declining ROE

false; helps a lot of people, not just executives. everyone who's involved with the firm uses this

market for lemons refers to adverse selection, a post-contract information asymmetry problem, in which investors do not trust investment options and capital raising is expensive

false; it's pre-contract

the big umbrella-term for obstacles to finance contracts is

information asymmetries

Value investors...

- consider quantitative and qualitative information such as governance - buy based on fundamental value and hold for a long time - do not need to diversify, but to know the limits of their knowledge

"law of small numbers" refers to representativeness, when people put too much weight on recent experience

true

As per Efficient markets, when the market has complete or at least adequate information, the prices are correct, reasonable, appropriate, with the stock price reflecting whatever is knowable.

true

Business plans change and need to break down sources of income and costs considering different scenarios and margins of error

true

ESG ratings, climate finance, carbon finance or sustainable finance are terms that overlap but not perfect synonyms

true

The most successful value investor of all times is

Warren Buffett

the capital asset pricing model (capm) defines a behavioral relation between risk and return

false

the academics that received a nobel prize in economics in 1997 started a fund, long term capital management, that later on failed. the reason it failed was:

over-reliance on the model

monetary policy is the variation in cash the Fed makes available to banks with the objective of either increasing (less cash) or decreasing (more cash) interest rate as a way to support the dual mandate

true

value investors consider behavioral finance

true; value investors are also active investors

most active investments underperform passive ones due to fees and luck vs skill

true

the fama 3 factor model considers behavioral finance

true

A major investment bank acts as major IPO underwriter or book runner. Book-building is the process of gauging interest from institutional investors. This helps:

- price the IPO shares that will be sold - estimate the number of shares that will be offered - estimate the IPO underpricing

Normal underpricing, or first day return, or money left on the table, is between 5 to 10%.

false

information asymmetry deals with the study of pre- and post- contract problems where at least one party has more or better information about themselves than they an either not communicate or try not to communicate

true

moral hazard refers to a form of risk and return trade-off without downside for extra-risk (only upside potential extra-profit) because someone else bears the potential losses

true

one of the most common mistakes entrepreneurs make is to hire people they like, not people they need

true

terms sheets are considered an "invitation to dance" between entrepreneurs and venture capitalists (VCs)

true

the 3-factor-model considers both rational and behavioral explanations for stock returns

true

the minimum rate we are going to pay is about 3% more than what banks charge one another

true

value investors do not seek to diversify portfolios to maximize return for risk

true

warren buffett is an active investor

true; he invests for himself and takes in whoever invests in him

Term sheets are non-contractual documents that detail the conditions for VCs to invest in ventures

True, term sheets are an "invitation to dance"

negative situational influences include

- overconfidence with respect to our capacity to handle moral challenges - conformism to peers and obedience to superiors - incentives that help frame conflicts of interest and lead to incrementalism

fintech is changing finance from "cradle to grave" with the help of artificial intelligence. This means that

- services include payments, insurance, investments and wealth management - traditional services are enriched with machine learning - all our digital footprint can potentially be used by credit cards and banks

IPO underpricing is unavoidable in bookbuilding as a way to compensate informed institutional investors for their interest and assistance in pricing the deal (OP)

True, normal underpricing is expected, and not a sign of corruption

Value investors always beat the market(t/f?)

false

In the US, average underpricing/first day return between 1980 and 2013 is 18%.

true

Long-term IPO performance is not strong, especially for small IPOs out of the U.S.

true

Most successful entrepreneurs are highly educated and have experience working for others

true

One of the most common mistakes entrepreneurs make is not to raise enough capital

true

we need financial institutions because

they provide broker and asset transformation services

There is more luck than skill among active investors that charge higher fees

True, that's why the best way to prepare for retirement is to start early with passive index investments that charge lower management fees

the most regulated financial institutions are the depository institutions. They include

commercial banks, credit unions and thrifts

most entrepreneurs are smart college dropouts

false

Value investing considers Mr. Market, competitive advantages and a margin for error in the analysis of fundamentals (t/f?)

true

Value investors are criticized for investing in monopolies and very mature markets, not contributing to development

true

Venture capitalists provide not just funding but also advice once a firm has matured beyond angel financing

true

as per efficient markets, when the market has complete or at least adequate information, the prices are correct, reasonable, appropriate, with the stock price reflecting whatever is knowable

true

evidence shows that, in the long run, investors are better off planning retirement index funds because management fees are minimum

true

financial literacy includes many topics, including procrastination of financial decisions

true

for value investors, the size of the circle of investment competence is not as important as knowing where the limit is

true

in short-selling equity the debt is shares that are owed and variable in price, while in buying-on-margin equity includes fixed debt

true

The Fama 3 factor model is based on efficient markets but includes space for behavioral factors

true

Some underpricing is needed in IPOs to

compensate institutional investors that help price the deal

the academics that developed the balck & scholes formula received, along with merton, the nobel prize in economics in 1997

false

the black&scholes formula used to price derivatives was developed during the 50s

false

value investors study the firm they eventually invest in for years, including financial statements, management and business partners. They look for management that ranks high in integrity, thrift, kinship, innovation, and dependence

false

the fama 3 factor model incorporates the expectation, based on historical findings, for high book/market and small cap stocks to have worse returns going forward

false; to have "better" returns going forward

the main financial regulators were founded following serious economic challenges, The main bank regulators are

fed, occ, fdic

mr. market has rational sentiments

false

technical analysis leads to dependable predictions and always beating the market

false

term sheets include specifics of the negotiations between entrepreneurs and venture capitalists. they are binding documents

false

CAPM model is rational and the Fama 3-factor model includes both rational and behavioral factors that explain stock returns

True, the rational factors include the risk free and beta, and the behavioral ones include market cap and m/b ratio effects

Firms pursue Initial Public Offerings (IPOs) to have access to large markets of retail investors, despite SEC regulations that include making public information that may help competitors

true

IPO underpricing is the return on the first day of trading = (end price -OP)/OP

true

Most active investments underperform due to fees and skills vs luck

true

the United States is getting close to having a digital dollar backed by the Fed and the Treasury that is likely to be called Fedcoin

true

when stock prices are more and more likely to experience a downward correction, many investors try to time their

short-selling strategies

The origin of value investing is in

Columbia University

IPOs usually involve a roadshow, which includes

- a prospectus explain what the venture does and why the IPO - two weeks of presentations before institutional investors - Q&A with founders supported by lawyers and underwriters in charge of bookbuilding

warren buffett is a growth investor

false

Bonus research essay question: socially responsible investments can beat the market

True, SRIs perform well

intrinsic value includes competitive advantage

true

The trend is for firms to go public with M&A, and to engage in SPACs

True, and the market is able to distinguish between high and lower value SPACs

Most entrepreneurs finish their undergraduate degrees, and many have masters and even phds

True, even if their stories do not make it in the press, those are the statistics

Money left of the table is =(end price - OP)x number of shares

True, money left on the table by the founders, happy to have a successful IPO

the fama model, unlike CAPM, does not give room for value investing opportunities

false

Firms decide to go public independently through an IPO to:

Have access to a large pool of unsophisticated small investors

some entrepreneur skills are innate, but most are learned

true

Prof. Shiller believes that finance can do a lot of good to society because

- increases in financial literacy will force more transparency and accountability - it is an innovative discipline - it is effective at detecting sociopaths

the monthly PMI moves financial markets and affects monetary policy because

- it is the earliest macroeconomic indicator, followed by other monthly public indicator such as unemployment and real estate data - it is not estimated by the govt, which is important even in the US and even more important in other nations with pegged currencies where GDP is not trusted by foreign investors - it is the result of a survey to purchasing managers in private manufacturing companies that do not need to disclose anything to the public through SEC documentation, and are known for accurate estimations of forthcoming consumer confidence

The Google IPO was different because

- it used an auction process instead of bookbuilding - there was less support from underwriters - the founders did not do well in the Q&A with institutional investors

Identity theft can be prevented by

- not using public computers or public networks - not saving passwords - changing strong passwords frequently

Venture founders accept underpricing because of:

- risk aversion to failed offerings - asymmetric information - compensation to institutional investors and publicity

Fintech products and services are all based on blockchain technology

False, careful because not all services and products run on blockchain

Rational theories that attempt to explain stock market returns consider:

Systematic risk