Finance 4360 – Chapter 1

Which of the following is/are considered financial assets?a- Only bondsb- Machines and Equipmentc- Stocks and Bondsd- Knowledge C. Stocks and Bonds
Which of the following statement is correct about financial assets?a- Do not contribute to the country’s productive capacity either directly or indirectlyb- Contribute to the country’s productive capacity both directly and indirectlyc- Directly contribute to the country’s productive capacityd- Indirectly contribute to the country’s productive capacity D. Indirectly contribute to the country’s productive capacity
A fixed income security is generally defined as:a- A fixed or variable income stream at the option of the ownerb- A risk-free return that is fixed for lifec- A fixed stream of income that is determined according to a specified formula for the life of the securityd- A fixed level of income for the life of the owner C. A fixed stream of income that is determined according to a specified for the life of the security
Money market securities are:a- Generally very low riskb- Highly marketablec- Short-term investmentsd- All of the above D. All of the above
In constructing a portfolio, the choice among the broad assets classes to include in theportfolio is regarded as a _____________ decision.a- Security selectionb- Asset allocationc- Security analysisd- Risk-reward trade off B. Asset Allocation
Security analysis is defined as:a- The process where a portfolio is constructed from the securities that seem attractivelypriced without as much concern for the resultant asset allocation.b- The rebalancing of an existing portfolio by selling existing securities and using theproceeds to buy new securities.c- The decision of how much of one’s portfolio to place in safe assets such as money marketsecurities.d- The valuation of particular securities that might be included in the portfolio D. The valuation of particular securities that might be included in portfolio.
Although derivatives can be used as speculative instruments, they are most often used by corporations to:a- Enhance their balance sheetb- Offset debtc- Attract customersd- Hedge risks D. Hedge Risks
Financial assets can be used for the following reasons except:a- Easy transfer of ownershipb- Allocation of riskc- Consumption timingd- Elimination of risk D. Elimination of Risk
Which of the following statements is incorrect?a- The agency problem refers to the potential conflict between managers and shareholders.b- Risk-return trade-off implies that higher-risk assets should be priced to offer higherexpected returns than lower-risk assets.c- Passive management of a portfolio is the attempt to improve performance by identifyingmispriced securities.d- The role of financial intermediaries is to bring lenders and borrowers together. C. Passive management of a portfolio is the attempt to improve performance by identifying mispriced securities.
The external mechanism that protects corporate shareholders from incompetent managementdecisions is:a- The ability to call shareholders meetingsb- The ability to engage in proxy fightsc- The voting rights during the board members electionsd- The treat of takeover by other firms D. The threat of takeover by other firms.
Which of the following are mechanisms that have evolved to mitigate potential agency problemsI- Security analyst monitoring the firm closelyII- Including stock options in the compensation packageIII- Takeover treatsIV- Having a large number of insiders among the board membersV- Incompetent managers ousted by the board of directors.a- I, II and Vb- I, II, III and IVc- I, II, III and Vd- II, III, VI and V c- I, II, III and V
Security selection refers to ________a- Moving assets between stocks and bondsb- Choosing which securities to hold based on their valuationc- The allocation of assets into broad asset classesd- The top-down analysis of portfolio construction B. Choosing which securities to hold based on their valuation
Which of the following portfolio construction methods starts with security analysis?a- Top-downb- Bottom-upc- Buy and holdd- Asset allocation B. Bottom-up
__________ are examples of financial intermediaries.a- Commercial banksb- Credit unionsc- Investment companiesd- All of the above D. All of the above
Financial intermediaries exist because small investors cannot efficiently _______.a- Diversify their portfoliosb- Assess credit risk of borrowersc- Diversify their portfolios, assess credit risk of borrowers, or advertise for needed investmentsd- Diversify their portfolios or assess credit risk of borrowers. C. Diversify their portfolios, assess credit risk of borrowers, or advertise for needed investments
New issues of securities are sold in the ________ market(s).a- primaryb- secondaryc- over the counterd- primary and over the counter A. Primary
The financial instruments that are designed to concentrate the credit risk of a pool of loans onone class of investor, leaving the other investors in the pool relatively protected from that risk is:a- Collateralized debt obligationsb- Stocksc- Bondsd- Derivatives A. Collateralized debt obligations
Investment bankers perform which of the following role(s):I- Market new stock and bond issues for firmsII- Advise firms on market conditions and appropriate ways to raise capitalIII- Perform due diligence on the firm before a security issueIV- Design securities with desirable propertiesa- I, II and IIIb- II, III and IVc- I, II and IVd- I, II, III, and IV d- I, II, III, and IV
The sale of a mortgage portfolio by setting up mortgage pass-through securities is anexample of ______.a- Securitizationb- Credit enhancementc- Unbundlingd- Derivatives a- Securitization
The financial instruments that are a form of insurance contract against the default of one ormore borrowers:a- CMOsb- ETFsc- Credit default swapsd- Collateralized debt obligations c- Credit default swaps
Asset allocation is:a- The process of dividing funds into asset classes.b- Concerned with returns variability.c- Concerned with the relationship among investments’ returns.d- All of the above d- All of the above
– Which one of the following statements is correct?a- A market where prices adjust rapidly to new information is considered to be internallyefficientb- The primary market is where assets are traded between current and potential ownersc- Information efficiency is where the cost of acquiring information is very cheapd- A continuous market that has price continuity requires depth of buyers and sellers d- A continuous market that has price continuity requires depth of buyers and sellers
All of the following are considered real assets except:a- Buildingsb- Patentsc- Landd- Common stock d- Common stock
The competition between securities analysts and the active trading in the markets help ensurethat:I- Riskier securities are priced to offer higher expected returnsII- Investors are more likely and consistently able to find undervalued and overvaluedsecuritiesIII- Security prices approach informational efficiency, and any new relevant information isreflected in the security prices.a- I onlyb- I and II onlyc- I and III onlyd- all of the above c- 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 isalso a function of the economy’s reals assetsII- Financial assets generate net income to the economy, and real assets define allocation ofincome among investorsIII- Security selection refers to the choice of specific securities among each asset classa- I onlyb- I and II onlyc- I and III onlyd- all of the above c- I and III only
Which of the following are mechanisms expected to force corporate managers to act in theshareholders’ best interest:I- Indexing the managers’ compensation to the stock price performanceII- Threat of takeoverIII- Proxy fights by shareholders or outsiders for control of the board of directors.a- I onlyb- I and II onlyc- I and III onlyd- all of the above d- all of the above
An investor undertake an extensive analysis of current market conditions, and decided toplace 70% of the portfolio in equity and the remaining 30% in bonds. This is an example of:a. asset allocationb. top-down portfolio managementc. passive managementd. security analysis a. asset allocation
Which of the following statements are correct?I- Venture capital is frequently used to raise fund for well-established companiesII- The efficient market hypothesis suggests that passive portfolio management strategiesare the most appropriate investment strategiesIII- In an efficient capital market, an investor expects to pay less for the security that hashigher riska- I and II onlyb- II and III onlyc- I and III onlyd- All of the above b- II and III only
The increase in the systematic risk that led to the financial crisis of 2008 was triggered by:a- credit default swapsb- securitization of subprime mortgagesc- collateralized debt obligationsd- all of the above d- all of the above
Financial institutions that specialize in assisting corporations in primary market transactionsare called:a- pension fundsb- mutual fundsc- market specialistsd- investment bankers d- investment bankers

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