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Investments: Background and Issues
1. Net worth represents _____ of the Liabilities and Net Worth of nonfinancial U.S. businesses.
a.
about 50%
b.
over 90%
c.
under 10%
d.
about 30%
2. _______ are the least organized markets.
a.
Brokered markets
b.
Dealer markets
c.
Direct search markets
d.
Auction markets
3. In 1999 eleven countries established a new currency called the ______ .
a.
Nafta
b.
Global
c.
Euro
d.
Zeppo
4. Net worth represents _____ of the Liabilities and Net Worth of Financial Institutions.
a.
about 50%
b.
over 90%
c.
under 10%
d.
about 30%
5. According to the Flow of Funds Accounts of the United States, the largest asset of U.S. households is ____.
a.
mutual fund shares
b.
real estate
c.
pension reserves
d.
corporate equity
6. 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
7. ____ is not a derivative security.
a.
A share of common stock
b.
A call option
c.
A futures contract
d.
all of the above are derivative securities.
8. 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
9. According to the efficient market hypothesis, there should be __________ overpriced and __________ underpriced securities.
a.
no, no
b.
no, some
c.
some, no
d.
some, some
10. 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
11. In financial markets, corporations are net __________ and household are net __________.
a.
borrowers, borrowers
b.
borrowers, savers
c.
savers, borrowers
d.
savers, savers
12. __________ 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
13. Financial assets __________ means by which individuals hold claims on real assets. Financial assets __________ directly to the productive capacity of the economy.
a.
are, contribute
b.
are, do not contribute
c.
are not, contribute
d.
are not, do not contribute
14. __________ are examples of financial intermediaries.
a.
Commercial banks
b.
Insurance companies
c.
Investment companies
d.
All of the above
15. Asset allocation refers to the __________.
a.
allocation of the investment portfolio across broad asset classes
b.
analysis of the value of securities
c.
choice of specific assets within each asset class
d.
none of the above
16. __________ and __________ were two pioneers of modern portfolio theory who won Nobel prizes.
a.
Fama, Ross
b.
Jensen, Treynor
c.
Markowitz, Sharpe
d.
none of the above
17. __________ was the first to introduce mortgage pass-through securities.
a.
Chase Manhattan
b.
Citicorp
c.
FNMA
d.
GNMA
18. 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.
none of the above
19. _____ 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 the above
20. _____ is a mechanism to mitigate potential agency problems
a.
Tying income of managers to success of the firm
b.
Directors defending top management
c.
Anti takeover strategies
d.
all of the above
21. __________ are real assets.
a.
Bonds
b.
Machines
c.
Stocks
d.
None of the above
22. __________ portfolio construction starts with selecting attractively priced securities.
a.
Bottom-up
b.
Top-down
c.
Upside-down
d.
none of the above
23. __________ financial assets.
a.
Buildings are
b.
Lands are
c.
Machines are
d.
None of the above are
24. A __________ represents an ownership share in a corporation.
a.
call option
b.
common stock
c.
fixed-income security
d.
none of the above
25. The value of a derivative security __________.
a.
depends on the value of its related primitive security
b.
affects the value of its related primitive security
c.
is unrelated to the value of its related primitive security
d.
can only be integrated by calculus professors
26. A bond issue is broken up so that some investors will receive interest payments while others will receive principal payments. This is an example of __________.
a.
bundling
b.
credit enhancement
c.
securitization
d.
unbundling
27. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.
a.
Active
b.
Idiotic
c.
Passive
d.
none of the above
28. __________ helped US banks unload their portfolios of Third World debt.
a.
Financial engineering
b.
Dr. Douglas Peters (Canada's Secretary of State for International Financial Institutions)
c.
Securitization
d.
none of the above
29. The New York Stock Exchange is a good example of __________.
a.
an auction market
b.
a brokered market
c.
a dealer market
d.
a direct search market
30. Financial intermediaries exist because small investors cannot efficiently __________.
a.
diversify their portfolios
b.
gather information
c.
monitor their portfolios
d.
all of the above
31. ECU is __________
a.
a mutual fund that invests internationally
b.
an example of financial engineering
c.
an index of a basket of European currency values
d.
the abbreviation for the name of a university which has an excellent business school
32. Firms that specialize in helping companies raise capital by selling securities are called __________.
a.
commercial banks
b.
investment banks
c.
savings banks
d.
none of the above
33. 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.
none of the above
34. The primary market where new security issues are offered to the public is a good example of __________.
a.
an auction market
b.
a brokered market
c.
a dealer market
d.
a direct search market
35. __________ are an indirect way U.S. investors can invest in foreign companies.
a.
ADRs
b.
IRAs
c.
SDRs
d.
none of the above
36. 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.
none of the above
37. An example of a derivative security is __________.
a.
a common share of General Motors
b.
a call option on Mobil stock
c.
both a and b
d.
neither a nor b
38. __________ portfolio construction starts with asset allocation.
a.
Bottom-up
b.
Top-down
c.
Upside-down
d.
one of the above
39. __________ of an investment bank.
a.
Bank of New York is an example
b.
Citicorp is an example
c.
Goldman Sachs is an example
d.
None of the above are examples
40. Fixed-income securities promise __________.
a.
a fixed stream of income
b.
a stream of income that is determined according to a specific formula
c.
either a or b
d.
neither a nor b
41. The sale of a mortgage portfolio through setting up mortgage pass-through securities is an example of __________.
a.
bundling
b.
credit enhancement
c.
securitization
d.
unbundling
42. 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.
none of the above
43. The rate of return on the stock market in its best year, 1933, was __________ while in. its worst year, 1931, the rate of return was __________
a.
43%, -54%
b.
43%, -43%
c.
54%, -54%
d.
54%, -43%
44. The average rate of return on common stocks of large firms since 1926 was __________.
a.
8%
b.
9%
c.
12%
d.
13%
45. An example of a real asset is __________.
a.
a college education
b.
customer goodwill
c.
a patent
d.
all of the above
46. An example of a financial asset is __________.
a.
a patient
b.
a Treasury bill
c.
land
d.
none of the above
47. 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
48. The combined liabilities of American households represent approximately __________ percent of combined assets.
a.
11%
b.
16%
c.
24%
d.
32%
49. Tangible assets represent approximately __________ percent of the total asset holdings of American households.
a.
33%
b.
42%
c.
48%
d.
55%
50. Financial assets represent approximately___________ percent of total asset holdings of American households.
a.
37%
b.
45%
c.
58%
d.
67%
51. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.
a.
10%
b.
25%
c.
50%
d.
75%
52. _____ is an example of a financial intermediary.
a.
Salomon Smith Barney
b.
Allstate Insurance
c.
Fifth Third Bank
d.
all of the above
53. Tangible assets represent about ____ of total assets for financial institutions.
a.
4%
b.
15%
c.
25%
d.
40%
54. Money Market securities are characterized by _________.
a.
a very short tern to maturity
b.
a medium return to maturity
c.
a long term to maturity
d.
none of the above
55. Pass-through securities are backed by __________
a.
equity securities issued by foreign companies
b.
Treasury bills
c.
loans
d.
foreign governments
56. Owners of pass-through securities receive __________
a.
a specified portion of the principle and interest payments made by borrowers
b.
all of the principal and interest payments made by borrowers
c.
a fee paid by lenders
d.
none of the above
57. Holders of highly diversified investment portfolios most likely practice __________
a.
active management
b.
quantitative management
c.
qualitative management
d.
passive management
58. The efficient markets hypothesis suggests that ________
a.
active portfolio management strategies are most appropriate
b.
passive portfolio management strategies are most appropriate
c.
either active or passive strategies may be appropriate, depending on the direction of the market.
d.
the Peter Lynch (former manager of Fidelity's Magellan Fund) portfolio management strategy is most appropriate.
59. Security analysis refers to the __________.
a.
allocation of the investment portfolio across broad asset classes
b.
analysis of the value of securities
c.
choice of specific assets within each asset class
d.
none of the above
60. The over-the-counter securities market is a good example of __________.
a.
an auction market
b.
a brokered market
c.
a dealer market
d.
a direct search market
61. An important trend that has changed the contemporary investment market is __________.
a.
financial engineering
b.
globalization
c.
securitization
d.
all of the above
62. Financial engineering refers to the creation of new securities by __________.
a.
bundling
b.
unbundling
c.
both a and b
d.
neither a nor b
63. You discover a treasure chest of $5 billion in cash.
a.
This is a real asset.
b.
This makes you wealthier.
c.
This makes society Wealthier.
d.
All of the above
64. The rate of return on investments in large stocks has outpaced that on investments in Treasury bills since 1926. _______
a.
As a result only government trust funds invest in Treasury bills.
b.
Investors wanting very low risk still invest in Treasury bills.
c.
As a result, the government quit selling Treasury bills in the 1950s.
d.
That is why only currency traders buy Treasury bills.
65. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1000 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
66. 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.
a.
A new financial asset was created in this transaction.
b.
A financial asset was traded for a real asset in this transaction.
c.
A financial asset was destroyed in this transaction.
d.
None of the above.
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