(Chapter 1) INVESTMENTS Prac Q/As

The practice questions and answers.

Financial assets represents ___ of the US household’s total assets

Over 70% of the total assets

Active trading in markets and competition among securities analysts helps ensure that (3 options):

1. Security prices approach informational efficiency

2. Riskier securities are priced to offer higher potential returns.

3. Investors are unlikely to be able to consistently find under-valued or over-valued securities.

Commercial banks, Investment companies, and insurance companies are examples of

All three are examples of Financial Intermediaries

Asset allocation refers to

the allocation of investment portfolio across broad asset

Security selection refers to

the choice of specific assets within each asset class

WOTF is an example of an agency problem?
 a) managers engage in empire building. b) all of these choices. c) managers overconsume luxuries such as corporate jets. d) managers protect their jobs by avoiding risky projects

B) All of these choices [ are examples of agency problems ]

___ is a mechanism for mitigating potential agency problems.
a) directors defending top managers.
b) tying managers’ income to the firm’s success.
c) anti-takeover strategies.
d) all of the above

b) tying managers’ income to the firm’s success.

In securities markets, there should be a risk-return trade off with higher risk assets having ___ expected returns than lower-risk assets:
a) lower.
b) the same.
c) the answer cannot be determined from the information given.
d) higher.

d) higher. [ Because higher risk = higher expected return ]

When the market is more optimistic about a firm, its share price will ____; as a result, it will need to issue ___ shares to raise needed funds.
 a) Rise; More.
b) Fall; Fewer.
c) Fall; More.
d) Rise; Fewer

d) Rise; Fewer

Debt securities promise, choose between the answer choices:
1) a fixed-income stream.
2) an income stream determined according to a specific formula.
3) a profit share of the issuing entity. 

Options 1 and 2!
1) a fixed-income stream.
2) an income stream determined according to a specific formula.

The SOX Act tightened corporate governance rules by requiring all except:

Required that firms could no longer employ investment bankers to sell securities to the public

The historical average ROR on large company stocks since 1926 has been:

12% in the notes, but in the answer choices it says “11.5%”

The avg ROR on US Treasury Bills since 1926 has been:
a) less than 3%.
b) more than 7%.
c) less than 1%.
d) less than 4%

d) less than 4%

[Note: In the slides, it says 6% is the avg.]

Money-market securities are characterized by: 1. Maturities less than 1 year. 2. Safety of the principal investment. 3. Low rates and return

True or False?

True. All 3 are characterized by the Money-Market Securities

After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of:
a) top-down portfolio management.
b) asset allocation.
c) security analysis.
d) passive management

C) security analysis.

After considering current market conditions, an investor places 60% of their funds in equities and the rest in bonds. This is an example of what?

This is an example of Asset Allocation

Suppose an investor considers one of two investments, identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to:
a) earn no more than the treasury bill rate on either security.
b) pay less for the security that has lower risk.
c) pay less for the security that has higher risk.
d) earn more if the interest rates are lower

c) pay less for the security that has higher risk.

In a perfectly efficient market, the best investment strategy is probably:
a) asset allocation.
b) a passive strategy.
c) an active strategy.
d) market timing

B) a passive strategy.

Venture capital is:
a) supplied by venture capital funds and individuals to start-up companies. b) frequently used to explain the businesses of well-established companies. c) illegal under current US laws.
d) most frequently issued with the help of investment bankers

a) supplied by venture capital funds and individuals to start-up companies.

Financial institutions that specialize in assisting corporations in primary market transactions are called:

Investment Banks