The Investment Environment

Question 1

Which of the following best describes the importance of a corporate governance system? A strong corporate governance system:
Maximizes shareholder value.
Prevents costly regulation which can have an adverse effect on a firm’s profits and its operations.
Gives the firm the ability to attract and fairly compensate qualified managers to ensure that assets of the company are used efficiently and productively.
Is essential for companies to operate efficiently, while the lack of an effective corporate governance system can threaten the very existence of a firm.

Answer 1

A strong corporate governance system is essential for the companies and financial markets to operate efficiently, while the lack of strong corporate governance system represents a major operational risk that can threaten the very existence of a firm. A strong corporate governance system cannot in itself maximize shareholder value, but studies have shown that the lack of effective system certainly reduces shareholder value.

Question 2

The top-down approach of security analysis includes: 
Company analysis 
Economic analysis 
Industry analysis 
All of these choices are correct

Answer 2

Economic, industrial, and company analysis, in that order, must all be accomplished in the top-down approach.

Question 3

Which of the following is a different primary and secondary capital markets?
Primary markets are where stocks trade while secondary markets are where bonds trade.
Both primary and secondary markets relate to where stocks and bonds trade after their initial offering.
Primary capital markets relate to the sale of new issues of bonds, preferred, and common stocks, while secondary capital markets are where securities trade after their initial offering.
Secondary capital markets relate to the sale of new issues of bonds, preferred, and common stock, while primary capital markets are where securities trade after their initial offering.

Answer 3

Bonds and stocks are traded on both the primary and secondary markets.

Question 4

A large New York bank that holds shares in a Swiss company and sells claims to this company’s common stock in dollar denominations is issuing what type of equity investment? 
Euro equity 
American shares 
Global Depository Receipts 
American Depository Receipts

Answer 4

American Depository Receipts (ADRs) represents foreign stocks owned by a subsidiary of a large bank, held in the bank vault, and claims to these stocks are sold to investors.

Question 5

Which of the following is NOT one of the benefits of financial markets? 
Concentration of risk 
Consumption flexibility 
Information discovery 
Management/owner division

Answer 5

Risk allocations, not risk concentration, is a benefit of financial markets. Investors can choose their preferred risk/return level by investing in a portfolio of companies that best matches their profile.