Question 1

The success of common share investments depends on the success of ________.

Accepted Answer

Common shares represent ownership in a company, so their success is directly tied to the success of the company and its real assets. The success of derivative securities or fixed income securities does not necessarily determine the success of common share investments. Government methods of allocating capital may have some impact but are not the primary factor in determining the success of common share investments.

Question 2

Money Market securities are characterised by ________.
I. maturity less than one year
II. safety of the principal investment
III. low rates of return

Accepted Answer

Money Market securities typically have a maturity of less than one year, are considered safe investments with low risk to the principal, and generally offer low rates of return compared to other investment types.

Question 3

Financial markets allow for all but which one of the following?

Accepted Answer

Most participants in financial markets cannot routinely earn high returns with low risk. This is because higher returns typically come with a higher degree of risk. Financial markets provide opportunities for investors to earn higher returns, but this often requires taking on more risk.

Question 4

The value of a derivative security ________.

Accepted Answer

The value of a derivative security depends on the value of other related security, such as an underlying asset, index, or benchmark. Derivatives derive their value from these underlying assets or benchmarks. Thus, the value of a derivative security is dependent on the performance of the underlying assets or benchmarks.

Question 5

Security selection refers to ________.

Accepted Answer

Security selection refers to the process of choosing individual securities within a particular asset class. This involves analyzing and evaluating different securities' characteristics, such as financial ratios, earnings trends, and industry dynamics, to select the securities that offer the best risk-adjusted returns.

Question 6

Methods to encourage 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 share price performance

Accepted Answer

All three methods mentioned in the statement are effective ways of encouraging managers to act in shareholders' best interests. The threat of takeover and proxy fights for control of the Board of Directors can increase the pressure on managers to make decisions that benefit the shareholders. Tying managers' compensation to share price performance can align their interests with those of the shareholders and motivate them to work towards increasing the company's value. Hence, all three methods (I, II, and III) can be effective in ensuring that managers act in shareholders' best interests.

Question 7

Which of the following is not a financial intermediary?

Accepted Answer

A financial intermediary is an organization that collects money from savers and channels it to borrowers or investors. Mutual funds, insurance companies, and savings and loan companies all perform this function. However, a real estate brokerage firm facilitates the buying and selling of real estate properties and is not involved in the intermediation of funds.

Question 8

Firms that specialise in helping companies raise capital by selling securities to the public are called ________.

Accepted Answer

Investment banks specialize in helping companies raise capital by selling securities to the public through initial public offerings (IPOs) and other means. Pension funds, savings banks, and REITs are all different types of financial institutions with different functions.

Question 9

In 2011 real assets represented approximately ________ per cent of the total asset holdings of Australian households.

Accepted Answer

In 2011, real assets accounted for approximately 66% of the total asset holdings of Australian households.

Question 10

An example of a real asset is ________.
I. a college education
II. customer goodwill
III. a patent

Accepted Answer

The answer of An example of a real asset is...

Question 11

Financial intermediaries exist because small investors cannot efficiently ________.

Accepted Answer

Financial intermediaries serve as intermediaries between parties that need to invest and parties that need to borrow, and they exist because small investors cannot efficiently diversify their portfolios, gather information, and monitor their portfolios. Therefore, all of the answers provide the reasons why financial intermediaries exist.

Question 12

After much investigation an investor finds that Intel shares are currently under-priced. This is an example of ________.

Accepted Answer

This situation describes security analysis, as the investor has conducted research and analysis on Intel shares to determine that they are under-priced. Asset allocation involves determining how to divide funds among different types of assets, top-down portfolio management involves making decisions based on macroeconomic factors, and passive management involves simply tracking a market index rather than actively selecting individual stocks.

Question 13

________ portfolio construction starts with asset allocation.

Accepted Answer

Top-down portfolio construction starts with asset allocation, meaning the overall market and economic conditions are analyzed to determine the appropriate allocation of assets across different sectors and securities. Bottom-up portfolio construction, on the other hand, focuses on individual securities and selecting those that are expected to outperform the market without considering the overall asset allocation. Upside-down and side-to-side are not commonly used terms in portfolio construction.

Question 14

________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

Accepted Answer

Passive portfolio management, also known as index investing, focuses on creating portfolios that match the performance of a given index, such as the S&P 500. The goal is to minimize costs and maximize diversification without expending resources on security analysis or attempting to beat the market. This approach is popular among investors who believe in efficient market theory or who prefer a low-maintenance investment strategy.

Question 15

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

Accepted Answer

IBM is not a financial intermediary as it is primarily a technology company and does not facilitate the transfer of funds between savers and borrowers. Goldman Sachs, Allstate Insurance, and First Interstate Bank are all examples of financial intermediaries as they engage in activities such as providing loans and investment services, underwriting securities, and managing risk for their clients.

Question 16

A ________ represents an ownership share in a corporation.

Accepted Answer

A common share represents an ownership share in a corporation.

Question 17

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

Accepted Answer

Debt securities promise either a fixed stream of income (I) or a stream of income determined according to a specific formula (II). However, they do not offer a share in the profits of the issuing entity (III), which would be a characteristic of equity securities. Therefore, the best choice is either I or II only, which is option B.

Question 18

In 2011 mortgages represented approximately ________ per cent of the total liabilities and net worth of Australian households.

Accepted Answer

The answer of In 2011 mortgages represented approximately ________ per...

Question 19

In securities markets, there should be a risk-return trade-off with higher-risk assets having ________ expected returns than lower-risk assets.

Accepted Answer

The risk-return trade-off theory states that investors will only take on additional risk if they expect to be compensated with higher returns. Therefore, higher-risk assets should have higher expected returns compared to lower-risk assets.

Question 20

An example of a derivative security is ________.

Accepted Answer

A call option is a derivative security because its value is derived from the underlying asset, in this case an ANZ share. The option gives the holder the right, but not the obligation, to buy the underlying asset at a certain price (the strike price) before a certain date (the expiration date). This means that the value of the call option is based on the price of the ANZ share and how much time is left until the option expires. The other choices, a common share of Telstra, a Telstra bond, and an Australian government bond, are not derivative securities as their value is not derived from another asset.

Quiz 1: Investments: Background and Issues