Exam 1 - Chapter 1 [Book]

Question 1

Investment:

Answer 1

the current commitment

of money or other resources in the expectation of reaping future benefits.

Question 2

Real assets:

Answer 2

the land, buildings, machines, and knowledge that can

be used to produce goods and services.

Question 3

Financial assets:

Answer 3

such as stocks and bonds.

Question 4

Fixed-income or debt securities :

Answer 4

promise either a fixed stream of

income or a stream of income determined by a specified formula.

Question 5

What’s another name for Fixed-income

Answer 5

Debt securities

Question 6

equity:

Answer 6

common stock, or equity, in a firm represents an ownership

share in the corporation.

Question 7

derivative securities:

Answer 7

such as options and futures contracts provide payoffs that are determined by the prices of other assets such as bond or stock prices.

Question 8

Stock prices reflect investors’ collective assessment

Answer 8

of a firm’s current performance and future prospects.

Question 9

Virtually all real assets involve some ____

Answer 9

risk.

Question 10

An investor’s portfolio is simply his collection of ______ _____

Answer 10

investment assets.

Question 11

Asset allocation:

Answer 11

decision is the choice among these broad asset classes,

Question 12

Security selection:

Answer 12

decision is the choice of which particular securities to hold within each asset class.

Question 13

“Top-down” portfolio construction starts with ____ _____

Answer 13

asset allocation.

Question 14

Security analysis:

Answer 14

involves the valuation of particular securities that might be included
in the portfolio.

Question 15

Risk–return trade-off:

Answer 15

in the securities markets, with higher-risk assets priced to offer higher expected returns than lower-risk assets.

Question 16

Passive management calls

Answer 16

for holding highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis.

Question 17

Active management

Answer 17

is the attempt to improve performance either by identifying mispriced securities or by timing the performance of broad asset classes

Question 18

Financial intermediaries:

Answer 18

have evolved to bring the suppliers of capital (investors) together with the demanders of capital (primarily corporations and the federal government).

Question 19

Investment companies

Answer 19

which pool and manage the money of many investors, also arise out of economies of scale.

Question 20

____ _____ that specialize in such activities can offer their services at a cost below that of maintaining an in-house security issuance division. In this role,

Answer 20

Investment bankers

Question 21

What are Investment bankers also called?

Answer 21

Underwriters.

Question 22

primary market, .

Answer 22

where new

issues of securities are offered to the public

Question 23

The equity investment in these young companies is called _______ _____

Answer 23

venture capital (VC)

Question 24

Securitization:

Answer 24

These pools, which were essentially claims on the underlying mortgages,
were soon dubbed mortgage-backed securities, and the process was called

Question 25

This new financial model was brimming with ____ _____, a potential breakdown
of the financial system when problems in one market spill over and disrupt others.

Answer 25

Systemic risk

Question 26

Later, investors can trade previously issued

securities among themselves in the so-called _____ ____

Answer 26

Secondary market.

Question 27

Real assets create what?.

Answer 27

wealth

Question 28

Financial assets represent

Answer 28

claims to parts or all of that wealth.

Question 29

Financial

assets determines what?

Answer 29

how the ownership of real assets is distributed among investors.

Question 30

Financial assets can be categorized as ____ _____,

Answer 30

fixed income
equity
derivative instruments.

Question 31

Top-down

portfolio construction techniques start

Answer 31

with the asset allocation decision—the allocation of funds across broad asset classes—and then progress to more specific security-selection decisions.

Question 32

Competition in financial markets leads to a

Answer 32

risk–return trade-off, in which securities that offer

higher expected rates of return also impose greater risks on investors.

Question 33

Financial intermediaries

Answer 33

pool investor funds and invest them.

Question 34

Investment banking brings

Answer 34

efficiency to corporate fundraising.

Question 35

Investment bankers develop

Answer 35

expertise in pricing new issues and in marketing them to investors. By the end of 2008,

Question 36

The financial crisis of 2008 showed the importance of _____ ______

Answer 36

systemic risk.

Question 37

Systemic risk can be

Answer 37

limited by transparency that allows traders and investors to assess the risk of their counter parties; capital requirements to prevent trading participants from being brought down by potential losses; frequent settlement of gains or losses to prevent losses from accumulating beyond an
institution’s ability to bear them; incentives to discourage excessive risk taking; and accurate
and unbiased analysis by those charged with evaluating security risk.