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.