Chapter 1

Question 1

What is an investment?

Answer 1

The current commitment of money or other resources in expectation of reaping future benefits.

Question 2

What is a real asset?

Answer 2

Knowledge and tangible assets that can produce goods and services, they directly affect the economies productive capacity.

Question 3

What are financial assets?

Answer 3

Assets that are a means to a claim on real assets divided profits.

Question 4

What are the four areas of finance?

Answer 4

I.) Personal Finance
II.) Corporate Finance
III.) Public/Govt. Finance
IV.) Entrepreneurial Finance

Question 5

What are the 5 features of Real assets?

Answer 5

i.) They produce outputs of G/S
ii.) They contribute to the growth in capital stock, therefore allowing a society to create wealth.
iii.) Real assets include, land, buildings, knowledge, human capital etc.
iv.) They can both be tangible and intangible if they produce societal wealth.
v.) The sun of real assets create the net worth of the economy.

Question 6

What are the five features of financial assets?

Answer 6

i.) They are claims laid on the real assets or income generated by such.
ii.) They are often more liquid and have more transparent pricing due to market efficiency
iii.) A financial asset represents a ready vehicle to transfer consumption and wealth through time
iv.) Used to allocate the wealth.
v.) Can be equity, securities, or derivatives.

Question 7

What is the domestic net worth shown by?

Answer 7

The sum of all real assets.

Question 8

What are the five roles of a market?

Answer 8

I.) Consumption timing
II.) Informational roles
III.) Risk allocation
IV.) Ethical corporate governance
V.) Separation or Ownership and management.

Question 9

What are the two types of fixed income (debt securities)?

Answer 9

I.) Money market
II.) Capital market

Question 10

What is the difference between capital markets and money markets?

Answer 10

Money markets represent short term, liquid, and highly marketable securities, while capital is long term

Question 11

What are the mitigation techniques to avoid the agency problem?

Answer 11

I.) Compensation tied to the performance of the company
II.) The forcing out of director backed management
III.) Security analysts and institutional investors analyzing public records
IV.) The threat of takeover

Question 12

What does the market value of a firm represent?

Answer 12

A collective assessment of the firms current performance and future prospects.

Question 13

What is the role of a financial intermediary?

Answer 13

To bring together the suppliers and demanders of capital.

Question 14

How do financial intermediaries do their job?

Answer 14

By issuing their own securities in order to raise funds to purchase the securities of other corporations.

Question 15

What is the role of an investment analysts?

Answer 15

Investment analysts make the market more informationally efficient

Question 16

What was the results of the Sarbanes Oxley act?

Answer 16

I.) requires more independent directors.
II.) CFO signature upon financial statements.
III.) oversight board during audits.
IV.) prohibition of auditors providing other services.

Question 17

What are the two major components of the investment process?

Answer 17

Asset allocation, and security selection.

Question 18

Which component of the investment process is closely tied to top down investment strategies

Answer 18

Asset allocation

Question 19

What is considered the primary determinant of a portfolios return

Answer 19

Asset allocation

Question 20

If an investor would like increases their risk, what do they require?

Answer 20

Higher return

Question 21

What is an ARM?

Answer 21

An adjustable rate mortgage, which usually has an initially low rate, which is reset to market.

Question 22

What is a Ted spread gauge?

Answer 22

Credit risk within the banking sector

Question 23

What is the purpose of a CDO?

Answer 23

To concentrate debt risk on a bundle of loans for specific tranch

Question 24

What is the Dodd Frank reform?

Answer 24

Following 2008 it was a reform that insured banks were up to standards through using stress test, liquidity and capital policies. It also created an office for credit rating.