overview of financial markets

Question 1

What are the characteristics of a simple market? (5)

Answer 1

1. There are buyers and sellers
2. Market takes place in a particular location
3. Prices are indicated on a simple table
4. What you buy is to be consumed
5. Buyer pays seller directly in exchange for good/service

Question 2

What are the characteristics of a financial market? (5)

Answer 2

1. There are investors
2. Market does not take place in a particular location
3. Prices are indicated on computers
4. What you purchase is essentially a piece of paper
5. When there are transactions, payment is not done directly

Question 3

Define risk-return relationship

Answer 3

If investors only consider optimal investments, it’s not possible to achieve excess returns without taking some level of risk.

Question 4

How is volatility measured?

Answer 4

By the standard deviation on the rate of return (percentage of a stock)

Question 5

Define volatility

Answer 5

A statistical measure of the dispersion of returns for a given security market index.

Question 6

Define market

Answer 6

The institutional mechanism that allows buyers and sellers to trade goods or financial securities.

Question 7

Define good

Answer 7

is a product (tangible or intangible) that is used to satisfy some need or desire.

Question 8

Explain what a numeraire is

Answer 8

an item which is used as a medium of exchange (gold, tobacco, whiskey, cigarettes): if gold is the numeraire, prices are expressed in ounces of gold.

Question 9

What are the criteria for a commodity to function as money? (4)

Answer 9

1. Has to be widely accepted
2. Must be divisible (simple to make change)
3. Must be easy to carry
4. Must not deteriorate quickly

Question 10

What is fiat money?

Answer 10

any legal currency that is not backed by a physical commodity. It maintains its value because of the stability of the government and economy it belongs to. Example: all paper currencies in the world pretty much.

Question 11

What is bitcoin?

Answer 11

• online currency that can be sent and received by Peer-to-peer by anyone in the world. Computers control the transfer and creation of money.
• It is based on a technology called the blockchain: a decentralised database where untrusted parties come to agreement on the state of the database, without using a middle man.

Question 12

What are the three important characteristics for a market to behave efficiently?

Answer 12

1. Property rights are correctly enforced
2. Transparency of institutional framework
3. Confidence in the institutional framework

Question 13

What are the three main functions of money?

Answer 13

1. Numeraire: a medium of exchange
2. Unit of account: used to measure value in an economy
3. Store of value: a repository of purchasing power over time