Deck 1: Investments: Background and Issues

Question 1

________ is not a derivative security.

A) A share of common stock
B) A call option
C) A futures contract
D) None of the options (All of the answers are derivative securities.)

Answer 1

A

Question 2

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

Answer 2

D

Question 3

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

A) land
B) buildings
C) consumer durables
D) common stock

Answer 3

D

Question 4

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

Question 5

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

Question 6

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

Question 7

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 the options

Question 8

________ portfolio construction starts with selecting attractively priced securities.

A) Bottom-up
B) Top-down
C) Upside-down
D) Side-to-side

Question 9

________ are examples of financial intermediaries.

A) Commercial banks
B) Insurance companies
C) Investment companies
D) All of the options

Question 10

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) All of the options.

Question 11

________ 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) All of the options.

Question 12

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.

Question 13

________ 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

Question 14

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) deposits

Question 15

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

A) about 51%
B) about 91%
C) about 11%
D) about 31%

Question 16

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

Question 17

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 overconsume luxuries such as corporate jets.
D) All of the options are examples of agency problems.

Question 18

________ is (are) real assets.

A) Bonds
B) Production equipment
C) Stocks
D) Life insurance

Question 19

Financial assets represent ________ of total assets of U.S. households.

A) under 70%
B) over 90%
C) under 10%
D) about 30%

Question 20

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

Question 21

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%

Question 22

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

Question 23

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

Question 24

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

Question 25

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.

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

________ 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

Question 31

Financial intermediaries exist because small investors cannot efficiently ________.

A) diversify their portfolios
B) gather information
C) assess and monitor the credit risk of borrowers
D) all of the options

Question 32

In a market economy, capital resources are primarily allocated by ________.

A) governments
B) corporation CEOs
C) financial markets
D) investment bankers

Question 33

Which one of the following firms falsely claimed to have a $4.8 billion bank account, eventually resulting in the firm's bankruptcy?

A) WorldCom
B) Enron
C) Parmalat
D) Global Crossing

Question 34

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

Question 35

________ portfolio construction starts with asset allocation.

A) Bottom-up
B) Top-down
C) Upside-down
D) Side-to-side

Question 36

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

Question 37

The historical average rate of return on large company stocks since 1926 has been ________.

A) almost 5%
B) almost 8%
C) almost 12%
D) almost 20%

Question 38

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

Question 39

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.

Question 40

________ represents an ownership share in a corporation.

A) A call option
B) Common stock
C) A fixed-income security
D) Preferred stock

Question 41

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

Question 42

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

Question 43

Real assets represent about ________ of total assets for commercial banks.

A) 1%
B) 15%
C) 25%
D) 40%

Question 44

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

Question 45

Liabilities equal approximately ________ of total assets for nonfinancial U.S. businesses.

A) 10%
B) 25%
C) 45%
D) 75%

Question 46

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

Question 47

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

A) 30%
B) 42%
C) 48%
D) 55%

Question 48

Which of the following is not an example of a financial intermediary?

A) Goldman Sachs
B) Allstate Insurance
C) First Interstate Bank
D) IBM

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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.

Question 54

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

Question 55

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

Question 56

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 credit union

Question 57

In 2017 mortgages represented approximately ________ of total liabilities and net worth of American households.

A) 10%
B) 14%
C) 28%
D) 42%

Question 58

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

Question 59

The combined liabilities of American households represent approximately ________ of combined assets.

A) 11%
B) 14%
C) 25%
D) 33%

Question 60

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

Question 61

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

Question 62

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

Question 63

An intermediary that pools and manages funds for many investors is called ________.

A) an investment company
B) a credit union
C) an investment banker
D) a commercial bank

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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

Question 71

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 the options are true.

Question 72

Until 1999, the ________ Act separated commercial banking and investment banking activities.

A) Dodd-Frank Wall Street Reform and Consumer Protection
B) Sarbanes-Oxley
C) Glass-Steagall
D) Volcker Rule

Question 73

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

Question 74

Which insurance company sold more than $400 billion of CDS contracts on subprime mortgages prior to the 2008 market crash?

A) Metlife
B) AIG
C) Northwestern Mutual
D) New York Life

Question 75

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

Question 76

The Volcker Rule

A) prohibits banks from proprietary trading.
B) restricts banks' investments in hedge funds.
C) restricts banks' investments in private equity funds.
D) All of the options.

Question 77

A major cause of the mortgage market meltdown in 2007 and 2008 was linked to ________.

A) private equity investments
B) securitization
C) negative analyst recommendations
D) online trading

Question 78

The Dodd-Frank Reform Act does all of the following except:

A) reduces capital requirements for banks.
B) increases transparency in the derivatives market
C) limits the risk-taking in which banks can engage
D) requires public companies to set "claw-back" provisions
E) creates an office within the SEC to oversee credit rating agencies.

Question 79

The difference between LIBOR and the Treasury-bill rate

A) is called the TED spread.
B) measures credit risk in the banking sector.
C) was very low just before the 2008 financial crisis.
D) All of the options.