Finance 425 Chapter 1

Financial markets allow for all but which one of the following?a. shift consumption through time from higher-income periods to lowerb. price securities according to their riskinessc. channel funds from lenders of funds to borrowers of fundsd. allow most participants to routinely earn high returns with low risk d. allow most participants to routinely earn high returns with low risk
Asset allocation refers to _________.a. the allocation of the investment portfolio across broad asset classesb. the analysis of the value of securitiesc. the choice of specific assets within each asset classd. none of the options a. the allocation of the investment portfolio across broad asset classes
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 onlyb. I and II onlyc. II and III onlyd. I, II, and III d. I, II, and III
____ is not a derivative security.a. A share of common stockb. A call optionc. A futures contractd. None of the options (All of the answers are derivative securities.) a. A share of common stock
Real assets in the economy include all but which one of the following?a. landb. buildingsc. consumer durablesd. common stock d. common stock
type of asset- income generating, tangible assets used to produce goods/services- ex. land, buildings, machinery, gold/diamonds, real estate, art real assets
concerned with the acquisition, management, and financing of real assets- commonly called the “investing decision” corporate finance
real/financial assets? – generate net income to the economy real assets
real/financial assets?- define the allocation of income/wealth among investors financial assets
type of asset- claims on the real assets or the income generated by them- define the allocation of income/wealth among investors- ex. stocks, bonds, deposits, debt securities, etc- no more than sheets of paper or computer entries financial assets
what are the three broad types of financial assets? debtequityderivatives
type of financial asset – promise either a fixed stream of income or a stream of income that is determined according to a specific formula- – ex. bonds, PS, money market instruments (CDs, treasury bills) fixed income/debt securities
type of financial asset – represents an ownership share in the corporation- ownership stake in an entity, residual cash flow- can be risky- performance is tied directly to the success of the firm and its real assets common stock (equity)
type of financial asset – provide payoffs that are determined by the prices of other assets such as bond/stock prices- values derive from the price of other assets- one primary use is to hedge risks or transfer them to other parties- allow firms to adjust their exposure to various business risks- ex. contract, value derived from underlying market condition derivative securities
why dont people put all of their money in stocks? – because if a company goes out of business, the stockholders lose everything
conflicts of interest between managers and stockholders agency problems
collection of investment assets investor’s portfolio
the choice among broad asset classes- top down- ex. stocks, bonds, real estate, commodities –> individual who holds all of his money in a bank account would decide what proportion of his overall portfolio should be moved into stocks/bonds asset allocation
– choice of securities within each asset class- looking for a good deal (look @ fundamentals)- “bottom up”- investor might ask whether Merck or Pfizer is more attractively priced security selection
type of management- calls for holding highly diversified portfolios without spending effort or other resources attempting to improve investment perf through security analysis passive management
type of management- attempt to improve performance of broad asset classes active management
what are the three major players in financial markets? 1. firms –> net demanders of capital2. households–> suppliers of capital (purchase securities)3. governments –> can be borrowers or lenders
Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers.- bring together the suppliers of capital with the demanders of capital- ex. banks, investment companies, insurance companies, credit unions financial intermediaries
market for new issues of securities primary market
previously issued securities are traded among investors secondary market
money invested to finance a new firmex. angel investors, pension funds venture capital
investments in a company that are not traded on a stock exchange private equity
what did the financial crisis of 2008 show? the importance of systematic risk
The material wealth of society is determined by the economy’s _________, which is a function of the economy’s _________.a. productive capacity; financial assetsb. productive capacity; real assetsc. investment bankers; financial assetsd. investment bankers; real assets b. productive capacity; real assets
Which of the following is not a money market security?a. U.S. Treasury billb. Bankers’ acceptancec. Common stockd. 6-month maturity certificate of deposit c. Common stock
__________ assets generate net income to the economy, and __________ assets define allocation of income among investors.a. Real, realb. Financial, financialc. Financial, reald. Real, financial d. Real, financial
Which of the following are financial assets?I. Debt securitiesII. Equity securitiesIII. Derivative securitiesa. II and III onlyb. I, II, and IIIc. I and II onlyd. I only b. I, II, and III
__________ are examples of financial intermediaries.a. Insurance companiesb. Investment companiesc. Commercial banksd. All of these options d. All of these options
Which one of the following best describes the purpose of derivatives markets?a. Earning interest incomeb. Investing for retirementc. Investing for a short time period to earn a small rate of returnd. Transferring risk from one party to another d. Transferring risk from one party to another
Security selection refers to the ________.a. allocation of the investment portfolio across broad asset classesb. choice of specific securities within each asset classc. top-down method of investingd. analysis of the value of securities b. choice of specific securities within each asset class
__________ is (are) real assets.a. Bondsb. Stocksc. Production equipmentd. Commercial paper c. Production equipment
__________ portfolio construction starts with selecting attractively priced securities.a. Bottom-upb. Upside-downc. Top-downd. Side-to-side a. Bottom-up
In a market economy, capital resources are primarily allocated by ____________.a. governmentsb. investment bankersc. financial marketsd. the SEC c. financial markets
The value of a derivative security _________.a. can be integrated only by calculus professorsb. affects the value of a related securityc. depends on the value of another related securityd. is unrelated to the value of a related security c. depends on the value of another related security
Commodity and derivative markets allow firms to adjust their _________.a. management stylesb. focus from their main line of business to their investment portfoliosc. exposure to various business risksd. ways of doing business so that they’ll always have positive returns c. exposure to various business risks

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