Chapter 13: Structure of the Investment Industry

Question 1

Help their clients understand their current and future financial needs, the risks they face when investing, their ability to tolerate investment risks, and their preferences for capital preservation versus capital growth.

Answer 1

Financial Planners

Question 2

Many investment professionals receive authority from their clients to trade securities and assets on their behalf. Those who have such discretionary authority are often called ____ or ____.

Answer 2

Investment managers or asset managers

Question 3

Indicates the proportion of a portfolio that should be invested in various asset classes to help meet financial goals.

Answer 3

Asset Allocation

Question 4

Indicates the price that investors would pay for the investment if they had a complete understanding of the investments characteristics.

Answer 4

Fundamental Value/Intrinsic Value

Question 5

Management that seeks to match the return and risk of an appropriate benchmark. Benchmarks include broad market indices that cover an entire asset class, indices for a specific industry, and benchmarks that are customized to the needs of a specific client.

Answer 5

Passive investment managers

Question 6

Management that tries to predict which securities and assets will outperform or underperform comparable securities and assets.

Answer 6

Active investment managers

Question 7

Involves estimating the fundamental value of potential investments and identifying attractive securities and assets.

Answer 7

Investment analysis

Question 8

The activity that brings everything together. It requires investment managers to invest in the attractive securities and assets they identified through their investment analysis, taking into account the clients requirements and appropriate asset allocation.

Answer 8

Portfolio Construction

Question 9

Investment research service providers that specialize in providing opinions about the credit quality of bonds and their issuers.

Answer 9

Credit rating agencies

Question 10

To invest and trade successfully, most investors need current and accurate data about companies and market conditions. Many ____ provide such data, including historical data and real time data.

Answer 10

Data vendors

Question 11

Provided to clients who want to buy and sell securities; They include not only execution services (that is, processing orders on behalf of clients) but also investment advice and research.

Answer 11

Brokerage services

Question 12

Agents who arrange trades for their clients. They do not trade with their clients. Instead, they search for traders who are willing to take the other side of their clients orders.

Answer 12

Brokers

Question 13

Help investors who want to trade large blocks of securities. Large block trades are hard to arrange because finding a counterparty willing to buy or sell a large number of securities is often quite difficult.

Answer 13

Block brokers

Question 14

Refers to a bundle of services that brokers provide some of their clients, usually investment professionals engaged in trading. In addition to the typical brokerage services, this broker helps these professionals finance their positions.

Answer 14

Prime brokerage/prime broker

Question 15

Make it possible for their clients to trade without having to wait to find a counterparty; they are ready to buy from clients who want to sell and to sell to clients who want to buy.

Answer 15

Dealers

Question 16

When brokers fill their clients orders by acting as proprietary traders rather than as agents — That is, by trading directly with their clients rather than by arranging trades with others on behalf of their clients

Answer 16

Internalization

Question 17

Typically banks and brokerage firms that hold money and securities for safekeeping on behalf of their clients

Answer 17

Custodians

Question 18

Typically, banks and brokerage firms that are regulated and act not only as custodians but also as monitors, playing an important role in preventing investment fraud.

Answer 18

Depositories

Question 19

Typically, investment banks, brokers, and dealers that provide investment products and services.

Answer 19

Sell-side firms

Question 20

Include firms that manage portfolios for clients and/or themselves.

Answer 20

Buy-side firms

Question 21

Consists of client facing activities that provide direct revenue generation. This includes the sales, marketing, and customer service departments.

Answer 21

Front office

Question 22

Includes the core activities of the firm. Risk management, information technology, corporate finance, portfolio management, and research are generally considered this type of activity.

Answer 22

Middle office

Question 23

Houses the administrative and support functions necessary to run the firm. These functions include accounting, human resources, payroll, and operations.

Answer 23

Back office