Chapter 01 - Investments: Background and Issues

Chapter 01 Investments: Background and Issues

Multiple Choice Questions

1. Financial assets represent _____ of total assets of U. . households. !. over "0# B. over $0# C. under 10# %. a&out '0#

(. )eal assets in the econom* include all &ut +hich one of the follo+ing, !. -and B. Buildings C. Consumer dura&les %. Common stock

'. .et +orth represents _____ of the lia&ilities and net +orth of commercial &anks. !. a&out /0# B. a&out $0# C. a&out 10# %. a&out '0#

0. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest single asset of U. . households is ___. !. mutual fund shares B. real estate C. pension reserves %. corporate e2uit*

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Chapter 01 - Investments: Background and Issues

/. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest lia&ilit* of U. . households is ________. !. mortgages B. consumer credit C. &ank loans %. gam&ling de&ts

". ____ is not a derivative securit*. !. ! share of common stock B. ! call option C. ! futures contract %. !ll of the a&ove are derivative securities.

3. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest financial asset of U. . households is ____. !. mutual fund shares B. corporate e2uit* C. pension reserves %. personal trusts

4. !ctive trading in markets and competition among securities anal*sts helps ensure that __________. I. securit* prices approach informational efficienc* II. riskier securities are priced to offer higher potential returns III. investors are unlikel* to &e a&le to consistentl* find under- or overvalued securities !. I onl* B. I and II onl* C. II and III onl* %. I1 II and III

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Chapter 01 - Investments: Background and Issues

$. 5he material +ealth of societ* is determined &* the econom*6s _________1 +hich is a function of the econom*6s _________. !. investment &ankers1 financial assets B. investment &ankers1 real assets C. productive capacit*1 financial assets %. productive capacit*1 real assets

10. 7hich of the follo+ing is not a mone* market securit*, !. U. . 5reasur* &ill B. i8 month maturit* certificate of deposit C. Common stock %. Banker6s acceptance

11. __________ assets generate net income to the econom* and __________ assets define allocation of income among investors. !. Financial1 financial B. Financial1 real C. )eal1 financial %. )eal1 real

1(. 7hich of the follo+ing are financial assets, I. %e&t securities II. 92uit* securities III. %erivative securities !. I onl* B. I and II onl* C. II and III onl* %. I1 II and III

1'. __________ are e8amples of financial intermediaries. !. Commercial &anks B. Insurance companies C. Investment companies %. !ll of the a&ove are financial intermediaries

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Chapter 01 - Investments: Background and Issues

10. !sset allocation refers to the _________. !. allocation of the investment portfolio across &road asset classes B. anal*sis of the value of securities C. choice of specific assets +ithin each asset class %. none of the ans+ers define asset allocation

1/. 7hich one of the follo+ing &est descri&es the purpose of derivatives markets, !. 5ransferring risk from one part* to another B. Investing for a short time period to earn a small rate of return C. Investing for retirement %. 9arning interest income

1". __________ +as the first to introduce mortgage pass-through securities. !. Chase :anhattan B. Citicorp C. F.:! %. ;.:!

13. ecurit* selection refers to the ________. !. allocation of the investment portfolio across &road asset classes B. anal*sis of the value of securities C. choice of specific securities +ithin each asset class %. top do+n method of investing

14. _____ is an e8ample of an agenc* pro&lem. !. :anagers engage in empire &uilding B. :anagers protect their <o&s &* avoiding risk* pro<ects C. :anagers over consume lu8uries such as corporate <ets %. !ll of the ans+ers provide e8amples of agenc* pro&lems

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Chapter 01 - Investments: Background and Issues

1$. _____ is a mechanism to mitigate potential agenc* pro&lems. !. 5*ing income of managers to success of the firm B. %irectors defending top management C. !nti takeover strategies %. traight voting method of electing the &oard of directors

(0. __________ are real assets. !. Bonds B. =roduction e2uipment C. tocks %. Commercial paper

(1. __________ portfolio construction starts +ith selecting attractivel* priced securities. !. Bottom-up B. 5op-do+n C. Upside-do+n %. ide-to-side

((. In a capitalist s*stem capital resources are primaril* allocated &* ____________. !. governments B. the 9C C. financial markets %. investment &ankers

('. ! __________ represents an o+nership share in a corporation. !. call option B. common stock C. fi8ed-income securit* %. preferred stock

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Chapter 01 - Investments: Background and Issues

(0. 5he value of a derivative securit* _________. !. depends on the value of other related securit* B. affects the value of a related securit* C. is unrelated to the value of a related securit* %. can onl* &e integrated &* calculus professors

(/. ! &ond issue is &roken up so that some investors +ill receive interest pa*ments +hile others +ill receive principal pa*ments. 5his is an e8ample of _________. !. &undling B. credit enhancement C. securiti>ation %. un&undling

(". __________ portfolio management calls for holding diversified portfolios +ithout spending effort or resources attempting to improve investment performance through securit* anal*sis. !. !ctive B. :omentum C. =assive %. :arket timing

(3. Financial markets allo+ for all &ut +hich one of the follo+ing, !. hift consumption through time from higher income periods to lo+er B. =rice securities according to their riskiness C. Channel funds from lenders of funds to &orro+ers of funds %. !llo+ most participants to routinel* earn high returns +ith lo+ risk

(4. Financial intermediaries e8ist &ecause small investors cannot efficientl* _________. !. diversif* their portfolios B. gather information C. monitor their portfolios %. all of the ans+ers provide reasons +h*

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Chapter 01 - Investments: Background and Issues

($. :ethods to encourage managers to act in shareholders6 &est interest include I. 5hreat of takeover II. =ro8* fights for control of the Board of %irectors III. 5*ing managers6 compensation to stock price performance !. I onl* B. I and II onl* C. II and III onl* %. I1 II and III

'0. Firms that speciali>e in helping companies raise capital &* selling securities to the pu&lic are called _________. !. pension funds B. investment &anks C. savings &anks %. )9I5s

'1. In securities markets1 there should &e a risk-return trade-off +ith higher-risk assets having _________ e8pected returns than lo+er-risk assets. !. higher B. lo+er C. the same %. Can6t tell from the information given

'(. __________ are an indirect +a* U. . investors can invest in foreign companies. !. !%)s B. I)!s C. %)s %. C=Cs

''. ecurit* selection refers to _________. !. choosing specific securities +ithin each asset-class B. deciding ho+ much to invest in each asset-class C. deciding ho+ much to invest in the market portfolio versus the riskless asset %. deciding ho+ much to hedge

1-3

Chapter 01 - Investments: Background and Issues

'0. !n e8ample of a derivative securit* is _________. !. a common share of ;eneral :otors B. a call option on Intel stock C. a Ford &ond %. a U. . 5reasur* &ond

'/. __________ portfolio construction starts +ith asset allocation. !. Bottom-up B. 5op-do+n C. Upside-do+n %. ide-to-side

'". 7hich one of the follo+ing firms falsel* claimed to have a ?0.4 &illion &ank account at Bank of !merica and vastl* understated its de&ts1 eventuall* resulting in the firm6s &ankruptc*, !. 7orldCom B. 9nron C. =armalat %. ;lo&al Crossing

'3. %e&t securities promise _________. I. a fi8ed 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 entit* !. I onl* B. I or II onl* C. I and III onl* %. II or III onl*

1-4

Chapter 01 - Investments: Background and Issues

'4. 5he ar&anes-@8le* !ct tightened corporate governance rules &* re2uiring all &ut +hich one of the follo+ing, !. )e2uired corporations to have more independent directors B. )e2uired the CF@ to personall* vouch for the corporation6s financial statements C. )e2uired that firms could no longer emplo* investment &ankers to sell securities to the pu&lic %. 5he creation of a ne+ &oard to oversee the auditing of pu&lic companies

'$. 5he success of common stock investments depends on the success of _________. !. derivative securities B. fi8ed income securities C. the firm and its real assets %. government methods of allocating capital

00. 5he historical average rate of return on the large compan* stocks since 1$(" has &een !. /# B. 4# C. 1(# %. (0#

01. 5he average rate of return on U. . 5reasur* &ills since 1$(" +as _________. !. 0./# B. (.0# C. '.4# %. ".0#

0(. !n e8ample of a real asset is _________. I. a college education II. customer good+ill III. a patent !. I onl* B. II onl* C. I and III onl* %. I1 II and III

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Chapter 01 - Investments: Background and Issues

0'. 5he (00( la+ designed to improve corporate governance is titled the !. =ension )eform !ct B. 9)I ! C. Financial ervices :oderni>ation !ct %. ar&anes-@8le* !ct

00. 7hich of the follo+ing is not a financial intermediar*, !. a mutual fund B. an insurance compan* C. a real estate &rokerage firm %. a savings and loan compan*

0/. 5he com&ined lia&ilities of !merican households represent appro8imatel* __________ percent of com&ined assets. !. 11# B. (1# C. (/# %. ''#

0". In (004 real assets represented appro8imatel* __________ percent of the total asset holdings of !merican households. !. '3# B. 0(# C. 04# %. //#

03. In (004 mortgages represented appro8imatel* __________ percent of total lia&ilities and net +orth of !merican households. !. 1(# B. 1/# C. (4# %. 0(#

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Chapter 01 - Investments: Background and Issues

04. -ia&ilities e2ual appro8imatel* _____ of total assets for nonfinancial U. . &usinesses. !. 10# B. (/# C. 00# %. 3/#

0$. 7hich of the follo+ing is not an e8ample of a financial intermediar*, !. ;oldman achs B. !llstate Insurance C. First Interstate Bank %. IB:

/0. )eal assets represent a&out ____ of total assets for financial institutions. !. 1# B. 1/# C. (/# %. 00#

/1. :one* :arket securities are characteri>ed &* ________. I. maturit* less than one *ear II. safet* of the principal investment III. lo+ rates of return !. I onl* B. I and II onl* C. I and III onl* %. I1 II and III

/(. !fter much investigation an investor finds that Intel stock is currentl* under priced. 5his is an e8ample of ______. !. asset allocation B. securit* anal*sis C. top do+n portfolio management %. passive management

1-11

Chapter 01 - Investments: Background and Issues

/'. !fter considering current market conditions an investor decides to place "0# of their funds in e2uities and the rest in &onds. 5his is an e8ample of !. asset allocation B. securit* anal*sis C. top do+n portfolio management %. passive management

/0. uppose an investor is considering one of t+o investments +hich are identical in all respects e8cept for risk. If the investor anticipates a fair return for the risk of the securit* the* invest in the* can e8pect to !. earn no more than the 5reasur* &ill rate on either securit* B. pa* less for the securit* that has higher risk C. pa* less for the securit* that has lo+er risk %. earn more if interest rates are lo+er

//. 5he efficient markets h*pothesis suggests that _______. !. 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 ma* &e appropriate1 depending on the e8pected direction of the market %. a &ottom up approach is the most appropriate investment strateg*

/". In a perfectl* efficient market the &est investment strateg* is pro&a&l* aAan !. active strateg* B. passive strateg* C. asset allocation %. market timing

/3. !n important trend that has changed the contemporar* investment market is _________. !. financial engineering B. glo&ali>ation C. securiti>ation %. all three of the other ans+ers

1-1(

Chapter 01 - Investments: Background and Issues

/4. ecuriti>ation refers to the creation of ne+ securities &* _________. !. selling individual cash flo+s of a securit* or loan B. repackaging individual cash flo+s of a securit* or loan into a ne+ pa*ment pattern C. taking an illi2uid asset and converting it into a marketa&le securit* %. selling financial services overseas as +ell as in the U. .

/$. Brad* &onds +ere an e8ample of _________. !. securiti>ation B. mortgagi>ation C. &undling %. pass through securities

"0. Individuals ma* find it more advantageous to purchase claims from a financial intermediar* rather than directl* purchasing claims in capital markets &ecause I. intermediaries are &etter diversified than most individuals II. intermediaries can e8ploit economies of scale in investing that individual investors cannot III. intermediated investments usuall* offer higher rates of return than direct capital market claims !. I onl* B. I and II onl* C. II and III onl* %. I1 II and III

"1. urf Cit* oft+are Compan* develops ne+ surf forecasting soft+are. It sells the soft+are to :icrosoft in e8change for 1000 shares of :icrosoft common stock. urf Cit* oft+are has e8changed a _____ asset for a _____ asset in this transaction. !. real1 real B. financial1 financial C. real1 financial %. financial1 real

1-1'

Chapter 01 - Investments: Background and Issues

"(. tone Bar&or =roducts takes out a &ank loan. It receives ?1001000 and signs a promissor* note to pa* &ack the loan over / *ears. !. ! ne+ financial asset +as created in this transaction. B. ! financial asset +as traded for a real asset in this transaction. C. ! financial asset +as destro*ed in this transaction. %. ! real asset +as created in this transaction.

"'. 7hich of the follo+ing firms +as not engaged in a ma<or accounting scandal &et+een (000 and (00/, !. ;eneral 9lectric B. =armalat C. 9nron %. 7orldCom

"0. !ccounting scandals can often &e attri&uted to a particular concept in the stud* of finance kno+n as the !. agenc* pro&lem B. risk - return trade - off C. allocation of risk %. securiti>ation

"/. !n intermediar* that pools and manage funds for man* investors is called aAan ______. !. investment compan* B. savings and loan C. investment &anker %. !%)

"". Financial institutions that speciali>e in assisting corporations in primar* market transactions are called _______. !. mutual funds B. investment &ankers C. pension funds %. glo&ali>ation specialists

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Chapter 01 - Investments: Background and Issues

"3. 79B allo+ investors to _______. !. invest in U. . mortgage &acked securities B. invest in an individual foreign stock C. invest in a portfolio of foreign stocks %. avoid an* e8posure to foreign e8change risk

"4. In (004 the largest corporate &ankruptc* in the U. . histor* involved the investment &anking firm of ______. !. ;oldman achs B. -ehman Brothers C. :organ tanle* %. :errill -*nch

"$. 5he ina&ilit* of shareholders to influence the decisions of managers1 despite over+helming shareholder support1 is a &reakdo+n in +hat process or mechanism, !. !uditing B. =u&lic finance C. Corporate governance %. =u&lic reporting

30. )eal assets are ______. !. are assets used to produce goods and services B. al+a*s the same as financial assets C. al+a*s e2ual to lia&ilities %. claims on compan*6s income

31. ! ma<or cause of mortgage market meltdo+n in (003 and (004 +as linked to ________. !. glo&ali>ation B. securiti>ation C. negative anal*st recommendations %. online trading

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Chapter 01 - Investments: Background and Issues

3(. In recent *ears the greatest dollar amount of securiti>ation occurred for +hich t*pe loan, !. Bome mortgages B. Credit card de&t C. !utomo&ile loans %. 92uipment leasing

3'. 5he process of securiti>ing poor 2ualit* &ank loans made to developing nations resulted in the creation of __________. !. =ass-throughs B. Brad* &onds C. 79B %. FB-:C participation certificates

30. U. . 5reasur* &onds pa* interest ever* si8 months and repa* the principal at maturit*. 5he U. . 5reasur* routinel* sells individual interest pa*ments on these &onds to investors. 5his is an e8ample of ___________. !. un&undling B. &undling C. securiti>ation %. securit* selection

3/. !n investment advisor has decided to purchase gold1 real estate1 stocks1 and &onds in e2ual amounts. 5his decision reflects +hich part of the investment process, !. !sset allocation B. Investment anal*sis C. =ortfolio anal*sis %. ecurit* selection

Chapter 01 Investments: Background and Issues !ns+er Ce*

Multiple Choice Questions

1-1"

Chapter 01 - Investments: Background and Issues

1. Financial assets represent _____ of total assets of U. . households. A. over "0# B. over $0# C. under 10# %. a&out '0#

Difficulty: Easy

(. )eal assets in the econom* include all &ut +hich one of the follo+ing, !. -and B. Buildings C. Consumer dura&les D. Common stock

Difficulty: Easy

'. .et +orth represents _____ of the lia&ilities and net +orth of commercial &anks. !. a&out /0# B. a&out $0# C. a&out 10# %. a&out '0#

Difficulty: Medium

0. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest single asset of U. . households is ___. !. mutual fund shares B. real estate C. pension reserves %. corporate e2uit*

Difficulty: Medium

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Chapter 01 - Investments: Background and Issues

/. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest lia&ilit* of U. . households is ________. A. mortgages B. consumer credit C. &ank loans %. gam&ling de&ts

Difficulty: Medium

". ____ is not a derivative securit*. A. ! share of common stock B. ! call option C. ! futures contract %. !ll of the a&ove are derivative securities.

Difficulty: Easy

3. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest financial asset of U. . households is ____. !. mutual fund shares B. corporate e2uit* C. pension reserves %. personal trusts

Difficulty: Medium

1-14

Chapter 01 - Investments: Background and Issues

4. !ctive trading in markets and competition among securities anal*sts helps ensure that __________. I. securit* prices approach informational efficienc* II. riskier securities are priced to offer higher potential returns III. investors are unlikel* to &e a&le to consistentl* find under- or overvalued securities !. I onl* B. I and II onl* C. II and III onl* D. I1 II and III

Difficulty: Hard

$. 5he material +ealth of societ* is determined &* the econom*6s _________1 +hich is a function of the econom*6s _________. !. investment &ankers1 financial assets B. investment &ankers1 real assets C. productive capacit*1 financial assets D. productive capacit*1 real assets

Difficulty: Medium

10. 7hich of the follo+ing is not a mone* market securit*, !. U. . 5reasur* &ill B. i8 month maturit* certificate of deposit C. Common stock %. Banker6s acceptance

Difficulty: Medium

1-1$

Chapter 01 - Investments: Background and Issues

11. __________ assets generate net income to the econom* and __________ assets define allocation of income among investors. !. Financial1 financial B. Financial1 real C. )eal1 financial %. )eal1 real

Difficulty: Medium

1(. 7hich of the follo+ing are financial assets, I. %e&t securities II. 92uit* securities III. %erivative securities !. I onl* B. I and II onl* C. II and III onl* D. I1 II and III

Difficulty: Hard

1'. __________ are e8amples of financial intermediaries. !. Commercial &anks B. Insurance companies C. Investment companies D. !ll of the a&ove are financial intermediaries

Difficulty: Easy

10. !sset allocation refers to the _________. A. allocation of the investment portfolio across &road asset classes B. anal*sis of the value of securities C. choice of specific assets +ithin each asset class %. none of the ans+ers define asset allocation

Difficulty: Easy

1-(0

Chapter 01 - Investments: Background and Issues

1/. 7hich one of the follo+ing &est descri&es the purpose of derivatives markets, A. 5ransferring risk from one part* to another B. Investing for a short time period to earn a small rate of return C. Investing for retirement %. 9arning interest income

Difficulty: Medium

1". __________ +as the first to introduce mortgage pass-through securities. !. Chase :anhattan B. Citicorp C. F.:! D. ;.:!

Difficulty: Easy

13. ecurit* selection refers to the ________. !. allocation of the investment portfolio across &road asset classes B. anal*sis of the value of securities C. choice of specific securities +ithin each asset class %. top do+n method of investing

Difficulty: Medium

14. _____ is an e8ample of an agenc* pro&lem. !. :anagers engage in empire &uilding B. :anagers protect their <o&s &* avoiding risk* pro<ects C. :anagers over consume lu8uries such as corporate <ets D. !ll of the ans+ers provide e8amples of agenc* pro&lems

Difficulty: Easy

1-(1

Chapter 01 - Investments: Background and Issues

1$. _____ is a mechanism to mitigate potential agenc* pro&lems. A. 5*ing income of managers to success of the firm B. %irectors defending top management C. !nti takeover strategies %. traight voting method of electing the &oard of directors

Difficulty: Hard

(0. __________ are real assets. !. Bonds B. =roduction e2uipment C. tocks %. Commercial paper

Difficulty: Easy

(1. __________ portfolio construction starts +ith selecting attractivel* priced securities. A. Bottom-up B. 5op-do+n C. Upside-do+n %. ide-to-side

Difficulty: Easy

((. In a capitalist s*stem capital resources are primaril* allocated &* ____________. !. governments B. the 9C C. financial markets %. investment &ankers

Difficulty: Easy

1-((

Chapter 01 - Investments: Background and Issues

('. ! __________ represents an o+nership share in a corporation. !. call option B. common stock C. fi8ed-income securit* %. preferred stock

Difficulty: Easy

(0. 5he value of a derivative securit* _________. A. depends on the value of other related securit* B. affects the value of a related securit* C. is unrelated to the value of a related securit* %. can onl* &e integrated &* calculus professors

Difficulty: Easy

(/. ! &ond issue is &roken up so that some investors +ill receive interest pa*ments +hile others +ill receive principal pa*ments. 5his is an e8ample of _________. !. &undling B. credit enhancement C. securiti>ation D. un&undling

Difficulty: Easy

(". __________ portfolio management calls for holding diversified portfolios +ithout spending effort or resources attempting to improve investment performance through securit* anal*sis. !. !ctive B. :omentum C. =assive %. :arket timing

Difficulty: Easy

1-('

Chapter 01 - Investments: Background and Issues

(3. Financial markets allo+ for all &ut +hich one of the follo+ing, !. hift consumption through time from higher income periods to lo+er B. =rice securities according to their riskiness C. Channel funds from lenders of funds to &orro+ers of funds D. !llo+ most participants to routinel* earn high returns +ith lo+ risk

Difficulty: Medium

(4. Financial intermediaries e8ist &ecause small investors cannot efficientl* _________. !. diversif* their portfolios B. gather information C. monitor their portfolios D. all of the ans+ers provide reasons +h*

Difficulty: Easy

($. :ethods to encourage managers to act in shareholders6 &est interest include I. 5hreat of takeover II. =ro8* fights for control of the Board of %irectors III. 5*ing managers6 compensation to stock price performance !. I onl* B. I and II onl* C. II and III onl* D. I1 II and III

Difficulty: Easy

'0. Firms that speciali>e in helping companies raise capital &* selling securities to the pu&lic are called _________. !. pension funds B. investment &anks C. savings &anks %. )9I5s

Difficulty: Easy

1-(0

Chapter 01 - Investments: Background and Issues

'1. In securities markets1 there should &e a risk-return trade-off +ith higher-risk assets having _________ e8pected returns than lo+er-risk assets. A. higher B. lo+er C. the same %. Can6t tell from the information given

Difficulty: Easy

'(. __________ are an indirect +a* U. . investors can invest in foreign companies. A. !%)s B. I)!s C. %)s %. C=Cs

Difficulty: Easy

''. ecurit* selection refers to _________. A. choosing specific securities +ithin each asset-class B. deciding ho+ much to invest in each asset-class C. deciding ho+ much to invest in the market portfolio versus the riskless asset %. deciding ho+ much to hedge

Difficulty: Easy

'0. !n e8ample of a derivative securit* is _________. !. a common share of ;eneral :otors B. a call option on Intel stock C. a Ford &ond %. a U. . 5reasur* &ond

Difficulty: Easy

1-(/

Chapter 01 - Investments: Background and Issues

'/. __________ portfolio construction starts +ith asset allocation. !. Bottom-up B. 5op-do+n C. Upside-do+n %. ide-to-side

Difficulty: Easy

'". 7hich one of the follo+ing firms falsel* claimed to have a ?0.4 &illion &ank account at Bank of !merica and vastl* understated its de&ts1 eventuall* resulting in the firm6s &ankruptc*, !. 7orldCom B. 9nron C. =armalat %. ;lo&al Crossing

Difficulty: Medium

'3. %e&t securities promise _________. I. a fi8ed 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 entit* !. I onl* B. I or II onl* C. I and III onl* %. II or III onl*

Difficulty: Medium

1-("

Chapter 01 - Investments: Background and Issues

'4. 5he ar&anes-@8le* !ct tightened corporate governance rules &* re2uiring all &ut +hich one of the follo+ing, !. )e2uired corporations to have more independent directors B. )e2uired the CF@ to personall* vouch for the corporation6s financial statements C. )e2uired that firms could no longer emplo* investment &ankers to sell securities to the pu&lic %. 5he creation of a ne+ &oard to oversee the auditing of pu&lic companies

Difficulty: Medium

'$. 5he success of common stock investments depends on the success of _________. !. derivative securities B. fi8ed income securities C. the firm and its real assets %. government methods of allocating capital

Difficulty: Easy

00. 5he historical average rate of return on the large compan* stocks since 1$(" has &een !. /# B. 4# C. 1(# %. (0#

Difficulty: Medium

01. 5he average rate of return on U. . 5reasur* &ills since 1$(" +as _________. !. 0./# B. (.0# C. '.4# %. ".0#

Difficulty: Medium

1-(3

Chapter 01 - Investments: Background and Issues

0(. !n e8ample of a real asset is _________. I. a college education II. customer good+ill III. a patent !. I onl* B. II onl* C. I and III onl* D. I1 II and III

Difficulty: Medium

0'. 5he (00( la+ designed to improve corporate governance is titled the !. =ension )eform !ct B. 9)I ! C. Financial ervices :oderni>ation !ct D. ar&anes-@8le* !ct

Difficulty: Easy

00. 7hich of the follo+ing is not a financial intermediar*, !. a mutual fund B. an insurance compan* C. a real estate &rokerage firm %. a savings and loan compan*

Difficulty: Medium

0/. 5he com&ined lia&ilities of !merican households represent appro8imatel* __________ percent of com&ined assets. !. 11# B. (1# C. (/# %. ''#

Difficulty: Medium

1-(4

Chapter 01 - Investments: Background and Issues

0". In (004 real assets represented appro8imatel* __________ percent of the total asset holdings of !merican households. A. '3# B. 0(# C. 04# %. //#

Difficulty: Medium

03. In (004 mortgages represented appro8imatel* __________ percent of total lia&ilities and net +orth of !merican households. !. 1(# B. 1/# C. (4# %. 0(#

Difficulty: Medium

04. -ia&ilities e2ual appro8imatel* _____ of total assets for nonfinancial U. . &usinesses. !. 10# B. (/# C. 00# %. 3/#

Difficulty: Medium

0$. 7hich of the follo+ing is not an e8ample of a financial intermediar*, !. ;oldman achs B. !llstate Insurance C. First Interstate Bank D. IB:

Difficulty: Easy

1-($

Chapter 01 - Investments: Background and Issues

/0. )eal assets represent a&out ____ of total assets for financial institutions. A. 1# B. 1/# C. (/# %. 00#

Difficulty: Medium

/1. :one* :arket securities are characteri>ed &* ________. I. maturit* less than one *ear II. safet* of the principal investment III. lo+ rates of return !. I onl* B. I and II onl* C. I and III onl* D. I1 II and III

Difficulty: Easy

/(. !fter much investigation an investor finds that Intel stock is currentl* under priced. 5his is an e8ample of ______. !. asset allocation B. securit* anal*sis C. top do+n portfolio management %. passive management

Difficulty: Medium

/'. !fter considering current market conditions an investor decides to place "0# of their funds in e2uities and the rest in &onds. 5his is an e8ample of A. asset allocation B. securit* anal*sis C. top do+n portfolio management %. passive management

Difficulty: Medium

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Chapter 01 - Investments: Background and Issues

/0. uppose an investor is considering one of t+o investments +hich are identical in all respects e8cept for risk. If the investor anticipates a fair return for the risk of the securit* the* invest in the* can e8pect to !. earn no more than the 5reasur* &ill rate on either securit* B. pa* less for the securit* that has higher risk C. pa* less for the securit* that has lo+er risk %. earn more if interest rates are lo+er

Difficulty: Hard

//. 5he efficient markets h*pothesis suggests that _______. !. 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 ma* &e appropriate1 depending on the e8pected direction of the market %. a &ottom up approach is the most appropriate investment strateg*

Difficulty: Easy

/". In a perfectl* efficient market the &est investment strateg* is pro&a&l* aAan !. active strateg* B. passive strateg* C. asset allocation %. market timing

Difficulty: Easy

/3. !n important trend that has changed the contemporar* investment market is _________. !. financial engineering B. glo&ali>ation C. securiti>ation D. all three of the other ans+ers

Difficulty: Easy

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Chapter 01 - Investments: Background and Issues

/4. ecuriti>ation refers to the creation of ne+ securities &* _________. !. selling individual cash flo+s of a securit* or loan B. repackaging individual cash flo+s of a securit* or loan into a ne+ pa*ment pattern C. taking an illi2uid asset and converting it into a marketa&le securit* %. selling financial services overseas as +ell as in the U. .

Difficulty: Easy

/$. Brad* &onds +ere an e8ample of _________. !. securiti>ation B. mortgagi>ation C. &undling %. pass through securities

Difficulty: Medium

"0. Individuals ma* find it more advantageous to purchase claims from a financial intermediar* rather than directl* purchasing claims in capital markets &ecause I. intermediaries are &etter diversified than most individuals II. intermediaries can e8ploit economies of scale in investing that individual investors cannot III. intermediated investments usuall* offer higher rates of return than direct capital market claims !. I onl* B. I and II onl* C. II and III onl* %. I1 II and III

Difficulty: Hard

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Chapter 01 - Investments: Background and Issues

"1. urf Cit* oft+are Compan* develops ne+ surf forecasting soft+are. It sells the soft+are to :icrosoft in e8change for 1000 shares of :icrosoft common stock. urf Cit* oft+are has e8changed a _____ asset for a _____ asset in this transaction. !. real1 real B. financial1 financial C. real1 financial %. financial1 real

Difficulty: Medium

"(. tone Bar&or =roducts takes out a &ank loan. It receives ?1001000 and signs a promissor* note to pa* &ack the loan over / *ears. A. ! ne+ financial asset +as created in this transaction. B. ! financial asset +as traded for a real asset in this transaction. C. ! financial asset +as destro*ed in this transaction. %. ! real asset +as created in this transaction.

Difficulty: Hard

"'. 7hich of the follo+ing firms +as not engaged in a ma<or accounting scandal &et+een (000 and (00/, A. ;eneral 9lectric B. =armalat C. 9nron %. 7orldCom

Difficulty: Easy

"0. !ccounting scandals can often &e attri&uted to a particular concept in the stud* of finance kno+n as the A. agenc* pro&lem B. risk - return trade - off C. allocation of risk %. securiti>ation

Difficulty: Easy

1-''

Chapter 01 - Investments: Background and Issues

"/. !n intermediar* that pools and manage funds for man* investors is called aAan ______. A. investment compan* B. savings and loan C. investment &anker %. !%)

Difficulty: Easy

"". Financial institutions that speciali>e in assisting corporations in primar* market transactions are called _______. !. mutual funds B. investment &ankers C. pension funds %. glo&ali>ation specialists

Difficulty: Easy

"3. 79B allo+ investors to _______. !. invest in U. . mortgage &acked securities B. invest in an individual foreign stock C. invest in a portfolio of foreign stocks %. avoid an* e8posure to foreign e8change risk

Difficulty: Medium

"4. In (004 the largest corporate &ankruptc* in the U. . histor* involved the investment &anking firm of ______. !. ;oldman achs B. -ehman Brothers C. :organ tanle* %. :errill -*nch

Difficulty: Medium

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Chapter 01 - Investments: Background and Issues

"$. 5he ina&ilit* of shareholders to influence the decisions of managers1 despite over+helming shareholder support1 is a &reakdo+n in +hat process or mechanism, !. !uditing B. =u&lic finance C. Corporate governance %. =u&lic reporting

Difficulty: Medium

30. )eal assets are ______. A. are assets used to produce goods and services B. al+a*s the same as financial assets C. al+a*s e2ual to lia&ilities %. claims on compan*6s income

Difficulty: Easy

31. ! ma<or cause of mortgage market meltdo+n in (003 and (004 +as linked to ________. !. glo&ali>ation B. securiti>ation C. negative anal*st recommendations %. online trading

Difficulty: Medium

3(. In recent *ears the greatest dollar amount of securiti>ation occurred for +hich t*pe loan, A. Bome mortgages B. Credit card de&t C. !utomo&ile loans %. 92uipment leasing

Difficulty: Medium

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Chapter 01 - Investments: Background and Issues

3'. 5he process of securiti>ing poor 2ualit* &ank loans made to developing nations resulted in the creation of __________. !. =ass-throughs B. Brad* &onds C. 79B %. FB-:C participation certificates

Difficulty: Medium

30. U. . 5reasur* &onds pa* interest ever* si8 months and repa* the principal at maturit*. 5he U. . 5reasur* routinel* sells individual interest pa*ments on these &onds to investors. 5his is an e8ample of ___________. A. un&undling B. &undling C. securiti>ation %. securit* selection

Difficulty: Medium

3/. !n investment advisor has decided to purchase gold1 real estate1 stocks1 and &onds in e2ual amounts. 5his decision reflects +hich part of the investment process, A. !sset allocation B. Investment anal*sis C. =ortfolio anal*sis %. ecurit* selection

Difficulty: Medium

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