Deck 1: Investments: Background and Issues

Question 1

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)top down method of investing

Answer 1

C

Question 2

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 answers define asset allocation

Answer 2

A

Question 3

________ are real assets.

A)Bonds
B)Items of production equipment
C)Shares
D)Commercial papers

Answer 3

B

Question 4

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

Question 5

Which of the following are financial assets?
I) Debt securities
II) Equity securities
III) Derivative securities

A)I only
B)I and II only
C)II and III only
D)I, II and III

Question 6

________ are examples of financial intermediaries.

A)Commercial banks
B)Insurance companies
C)Investment companies
D)All of the answers are financial intermediaries

Question 7

________ is a mechanism to mitigate potential agency problems.

A)Tying income of managers to the success of the firm
B)Directors defending top management
C)Anti-takeover strategies
D)The straight-voting method of electing the board of directors

Question 8

According to Australian household balance sheet, the largest financial asset of Australian households is ________.

A)mutual fund shares
B)corporate equity
C)insurance and superannuation reserves
D)personal trusts

Question 9

Net worth represents ________ of the liabilities and net worth of Australian households.

A)about 50%
B)about 90%
C)about 80%
D)about 30%

Question 10

Which of the following is not a money market security?

A)Australian government bond
B)Six month maturity certificate of deposit
C)Common shares
D)Banker's acceptance

Question 11

________ 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

Question 12

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 over-valued securities

A)I only
B)I and II only
C)II and III only
D)I, II and III

Question 13

Real assets in the economy include all but which one of the following?

A)Land
B)Buildings
C)Consumer durables
D)Common shares

Question 14

________ is not a derivative security.

A)A share of common shares
B)A call option
C)A futures contract
D)All of the answers are derivative securities.

Question 15

In a capitalist system capital resources are primarily allocated by ________.

A)governments
B)regulatory authorities
C)financial markets
D)investment bankers

Question 16

________ is an example of an agency problem.

A)Managers engaging in empire building
B)Managers protecting their jobs by avoiding risky projects
C)Managers over-consuming luxuries such as corporate jets
D)All of the answers provide examples of agency problems

Question 17

Financial assets represent ________ of total assets of Australian households in 2011.

A)over 35%
B)over 90%
C)under 10%
D)about 30%

Question 18

________ portfolio construction starts with selecting attractively priced securities.

A)Bottom-up
B)Top-down
C)Upside-down
D)Side-to-side

Question 19

Which one of the following best describes the purpose of derivatives markets?

A)Transferring risk from one party to another
B)Investing for a short time period to earn a small rate of return
C)Investing for retirement
D)Earning interest income

Question 20

According to Australian household balance sheet, the largest liability of Australian households is ________.

A)mortgages
B)consumer credit
C)bank loans
D)gambling debts

Question 21

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

A)derivative securities
B)fixed income securities
C)the firm and its real assets
D)government methods of allocating capital

Question 22

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

A)I only
B)I and II only
C)I and III only
D)I, II and III

Question 23

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

A)Shifting of consumption through time from higher income periods to lower
B)Pricing of securities according to their riskiness
C)Channelling of funds from lenders of funds to borrowers of funds
D)Most participants to routinely earn high returns with low risk

Question 24

The value of a derivative security ________.

A)depends on the value of other related security
B)affects the value of a related security
C)is unrelated to the value of a related security
D)can only be integrated by calculus professors

Question 25

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)deciding how much to hedge

Question 26

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

A)I only
B)I and II only
C)II and III only
D)I, II and III

Question 27

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

Question 28

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

A)pension funds
B)investment banks
C)savings banks
D)REITs

Question 29

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

A)66%
B)42%
C)48%
D)55%

Question 30

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

A)I only
B)II only
C)I and III only
D)I, II and III

Question 31

Financial intermediaries exist because small investors cannot efficiently ________.

A)diversify their portfolios
B)gather information
C)monitor their portfolios
D)all of the answers provide reasons

Question 32

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

A)asset allocation
B)security analysis
C)top-down portfolio management
D)passive management

Question 33

________ portfolio construction starts with asset allocation.

A)Bottom-up
B)Top-down
C)Upside-down
D)Side-to-side

Question 34

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

A)Active
B)Momentum
C)Passive
D)Market timing

Question 35

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

A)Goldman Sachs
B)Allstate Insurance
C)First Interstate Bank
D)IBM

Question 36

A ________ represents an ownership share in a corporation.

A)call option
B)common share
C)fixed-income security
D)preferred share

Question 37

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

A)I only
B)I or II only
C)I and III only
D)II or III only

Question 38

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

A)12%
B)20%
C)28%
D)42%

Question 39

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)Can't tell from the information given

Question 40

An example of a derivative security is ________.

A)a common share of Telstra
B)a call option on an ANZ share
C)a Telstra bond
D)an Australian government bond

Question 41

In 2008 the largest corporate bankruptcy in US history involved the investment banking firm of ________.

A)Goldman Sachs
B)Lehman Brothers
C)Morgan Stanley
D)Merrill Lynch

Question 42

After considering current market conditions an investor decides to place 60% of their funds in equities and the rest in bonds. This is an example of ________.

A)asset allocation
B)security analysis
C)top down portfolio management
D)passive management

Question 43

An important trend that has changed the contemporary investment market is ________.

A)financial engineering
B)globalisation
C)securitisation
D)all of these answers

Question 44

The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?

A)Auditing
B)Public finance
C)Corporate governance
D)Public reporting

Question 45

Suppose an investor is considering one of two investments which are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security they invest in they can expect to ________.

A)earn no more than the Treasury bond rate on either security
B)pay less for the security that has higher risk
C)pay less for the security that has lower risk
D)earn more if interest rates are lower

Question 46

In a perfectly efficient market the best investment strategy is probably a/an

A)active strategy
B)passive strategy
C)asset allocation
D)market timing

Question 47

Accounting scandals can often be attributed to a particular concept in the study of finance known as the ________.

A)agency problem
B)risk-return trade-off
C)allocation of risk
D)securitisation

Question 48

The efficient markets hypothesis suggests that ________.

A)active portfolio management strategies are the most appropriate investment strategies
B)passive portfolio management strategies are the most appropriate investment strategies
C)either active or passive strategies may be appropriate, depending on the expected direction of the market
D)a bottom up approach is the most appropriate investment strategy

Question 49

Financial institutions that specialise in assisting corporations in primary market transactions are called ________.

A)mutual funds
B)investment bankers
C)pension funds
D)globalisation specialists

Question 50

Real assets are ________.

A)assets used to produce goods and services
B)always the same as financial assets
C)always equal to liabilities
D)claims on company's income

Question 51

Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because ________.
I) intermediaries are better diversified than most individuals
II) intermediaries can exploit economies of scale in investing that individual investors cannot
III) intermediated investments usually offer higher rates of return than direct capital market claims

A)I only
B)I and II only
C)II and III only
D)I, II and III

Question 52

Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1000 common shares of Microsoft. 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

Question 53

An investment advisor has decided to purchase gold, real estate, shares and bonds in equal amounts. This decision reflects which part of the investment process?

A)Asset allocation
B)Investment analysis
C)Portfolio analysis
D)Security selection

Question 54

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)A real asset was created in this transaction.

Question 55

An intermediary that pools and manages funds for many investors is called a/an ________.

A)investment company
B)savings and loan
C)investment banker
D)ADR