Inv Ch 1

Question 1

investment

Answer 1

commitment of current resources in the expectation of deriving greater resources in the future

Question 2

real assets

Answer 2

assets used to produce goods and services such as land, buildings, and equipment

Question 3

financial assets

Answer 3

financial assets such as stocks and bonds are claims to the income generated by real assets or claims on income from the government

Question 4

fixed-income (debt) securities

Answer 4

a security such as a bond that pays a specified cash flow over a specific period

Question 5

equity

Answer 5

ownership share in a firm

Question 6

derivative securities

Answer 6

a security whose payoff depends on the value of other financial variables such as stock prices, interest rates, or exchange rates

Question 7

agency problem

Answer 7

conflicts of interest among stockholders, bondholders, and managers

Question 8

asset allocation

Answer 8

allocating a portfolio across broad asset classes such as stocks versus bonds

Question 9

security selection

Answer 9

choice of specific securities within a given asset class

Question 10

security analysis

Answer 10

determining correct value of a security in the marketplace

Question 11

risk-return trade-off

Answer 11

assets with higher expected return entail greater risk

Question 12

passive management

Answer 12

buying a diversified portfolio, often a broad-based market index, without attempting to identify mispriced securities

Question 13

active management

Answer 13

attempts to achieve portfolio returns more than commensurate with risk, either by forecasting broad market trends or by identifying mispriced sectors of a market or particular securities

Question 14

financial intermediates

Answer 14

institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers

Question 15

investment companies

Answer 15

financial intermediaries that pool and invest the funds of individual investors in securities or other assets

Question 16

investment bankers

Answer 16

firms specializing in the sale of new securities to the public, typically by underwriting the issue

Question 17

primary market

Answer 17

the market in which new issues of securities are offered to the public

Question 18

secondary market

Answer 18

already-existing securities are bought and sold on the exchanges or in the OTC market

Question 19

venture capital (vc)

Answer 19

money invested to finance a new, not yet publicly traded firm

Question 20

private equity

Answer 20

investments in companies whose shares are not publicly traded in a stock market

Question 21

securitization

Answer 21

pooling loans for various purposes into standardized securities backed by those loans, which can then be traded like any other security

Question 22

systemic risk

Answer 22

risk of breakdown in the financial system, particularly due to spillover effects from one market into others