F18

Question 1

four princips in investment ethics

Answer 1

ethical understanding-make sure others understand information, you understand what you do
ethical use of information-ensured of all relevant information, pay for information that is not yours, don’t spread false or misleading info
responsible investing- not profit from others misery
trust and fairness- professionals held to higher standard cause of trust

Question 2

fiduciary and duties

Answer 2

person entrusted to act in interest of another
duties:
confidentially
fees that are relevant and is understandable
minimize effective spread (difference between price of transaction and halfway between bid and ask)

Question 3

market timing strategy

Answer 3

reallocate investment across markets depending on predictions on asset markets, stock or bond market

Question 4

hedge fund

Answer 4

higher returns but higher risk

don’t use usual strategies and are more free

Question 5

finding right investment depends on

Answer 5

risk that investment is willing to take
documentations of goals (clients investment goals and agreements)
commission (fee earned by making trade on behalf of client)

Question 6

churning

Answer 6

broker sell/buy securities in client’s account just to get commission

Question 7

pickers

Answer 7

investment professionals who make investment recommendations
help investors to pick good stocks
change grades on stocks all the time

Question 8

fundamental analysts

Answer 8

dig deeper
seek understanding on how firm generate profit
learn about company and it’s competitors

Question 9

quantitative analysts

Answer 9

use statistics or mathematic techniques

try to remove human judgement from fundamental analysis

Question 10

forecasters

Answer 10

forecast earnings regularly

earnings accuracy show how much the forecast error was

Question 11

buy-side analysts vs sell-side analysts

Answer 11

buy side= recommendations provided to portfolio managers

sell-side=analysts for companies with investment banking business

Question 12

dangerous behavior for star analysts

Answer 12

overconfidence or arrogance
overestimate earnings
regret aversion
affect market prices

Question 13

dangerous behavior in analyzing

Answer 13

herding (safety in numbers, mimic, afraid to be wrong)
anchoring (compare to past even if it is irrelevant)
overreaction to change in price or information

Question 14

proxy statements

Answer 14

info about financial performance, info about nominated directors and top five executives

Question 15

happenings in firm over the year that effect and can be effected by the shareholders

Answer 15

elect directors
direct hire CEO
CEO runs firm to maximize profits
profits are distributed to shareholders

Question 16

inside, outside, gray directors

Answer 16

inside=part of management
outside=independent management
gray=fit nowhere

Question 17

evaluate board

Answer 17

should alert shareholders
have experience, knowledge, independence, time, good age
good structure of board - not too small or too big
CEO not always present in meetings

Question 18

compensation, audit, nominating committee

Answer 18

compensation= sets compensation for CEO and top executives
audit= hire external auditor and oversee internal audit controls
nominating=nominate new directors

Question 19

CEO evaluation

Answer 19

compensation
benefits taken
short or long term incentives
control-related agreements
CEO's age, years till retirement
relationship to firm
accounting based bonus and what accounting measures

Question 20

stakeholder theory

Answer 20

firm should maximize welfare for all groups affected by firm
rights and responsibilities for each group
environment, employees, products, suppliers, community, human rights, sustainability

Question 21

screening

Answer 21

terms that companies must pass to be considered for investment
positive screen vs negative screen

Question 22

shareholder advocacy

Answer 22

buy stock from not responsible companies to have a voice and impact in company
express preference in proxy process
present shareholder reolutions

Question 23

divestment

Answer 23

sell stocks and encourage others to do the same

decline price and force company to make change

Question 24

microfinance lending

Answer 24

lending small amount money to able poor people to start company and receive living wage

Question 25

golden handcluffs

Answer 25

makes employees or CEO to stay in firm
ex. pay bonus after specified amount of time
develop firm specific skills

Question 26

explain problems with winners game and solution

Answer 26

mission is beating the market
not provide much needed investment counseling
allowing value of business being defined by return in their company
solution: focus on client-manager relationship