Chapter 2 - Securities Law, Market Structure & Asset Classes

Question 1

Best effort basis

Answer 1

Investment bank sells securities to investors and unsold shares are returned to issuer

Question 2

Firm commitment agreement

Answer 2

investment bank purchases all the securities from the firm and then sells them to the public

Question 3

Modern Portfolio Theory

Answer 3

Assumes publicly traded assets are fairly priced and that combining them together produces the most efficient portfolio. Returns are random variables and reflect all available public and private information.
- investors are rational and risk averse
- investors make decisions that maximize their expected wealth
- investors are not biased
- investors don’t consider trading costs

Question 4

Efficient market hypothesis

Answer 4

Financial markets are informationally efficient
Investors form rational expectations regarding future price movements
Security prices follow a random walk
Changes in relevant information will be instantaneously reflected in changes in price
Prices changes are virtually impossible to predict

Question 5

Weak form efficiency

Answer 5

Investors cannot use this information set (past prices and volume) to generate a return that exceeds its risk adjusted expected value. Technical analysis is useless.
Investors can beat the market with fundamental analysis and insider trading.

Question 6

Semi-strong form

Answer 6

Asset prices reflect all publicly available information. Investors cannot use publicly available information to generate excess return. Investors can only beat the market with insider trading.

Question 7

Strong form

Answer 7

Asset prices reflect all relevant information including private information. Investors cannot use any information including private information to generate excess return. All attempts to beat the market are pointless - even insider trading

Question 8

Investment advisor registration

Answer 8

> $100 million register with SEC
<$100 million register with state