Untitled Deck Flashcards
What are the main differences between hedge funds and mutual funds?
Hedge fundsare less regulated, use leverage, and employ diverse strategies, whilemutual fundsare more transparent and restricted in risk-taking.
How do hedge funds contribute to financial market liquidity?
Hedge fundsprovide liquidityby actively trading assets, helping price discovery.
Why are hedge funds often associated with both extreme gains and losses?
Hedge funds are highly leveraged, leading tohuge gains or lossesdepending on market conditions.
What role did hedge funds play in the 2008 financial crisis?
Some hedge funds played a role in the2008 crisisby taking on risky bets and contributing to market instability.
What is the difference between alpha and beta in hedge fund investing?
Alphais skill-based return;betais market-driven return. Hedge fund investors often confuse the two.
Why do investors chase hedge funds with high past returns, even if they might just be taking on unique risks?
Investorschase past performancewithout distinguishing between skill and risk exposure.
How do hedge fund investors behave differently from mutual fund investors?
Hedge fund investors take on more risk and are less concerned withperformance persistencethan mutual fund investors.
Why do investors pay high fees for hedge funds, even when returns may not be skill-based?
Investorspay high feesbecause they believe hedge funds provide exclusive access to unique returns.
How have private markets grown in importance over the last two decades?
Private markets have grown due tolow interest rates, deregulation, and institutional demand.
What advantages do private markets offer compared to public markets?
They offerlonger investment horizons, less public scrutiny, and higher potential returns.
Why are private markets considered procyclical despite their long investment horizons?
Private markets areprocyclicalbecause investors pour in money during good times but withdraw during downturns.
How do private markets respond to monetary policy changes?
Private credit fundsare the most sensitive to monetary policy changes.
What is Decentralized Finance (DeFi), and how does it differ from traditional finance?
DeFiis a blockchain-based financial system replacing banks with smart contracts.
How do smart contracts enable financial transactions in DeFi?
Smart contracts executefinancial transactions without intermediaries.
What are the risks of using DeFi compared to traditional banking?
Security risks, hacks, and lack of regulationsmake DeFi riskier than traditional finance.
Why is DeFi considered more transparent than centralized finance?
All transactions arevisible on the blockchain,increasing transparency.
What are the key differences between Proof of Work (PoW) and Proof of Stake (PoS) protocols?
PoWrelies on mining, whilePoSselects validators based on holdings, making it more energy-efficient.
How do stablecoins aim to maintain price stability?
Stablecoins are pegged tofiat currenciesor assets to maintain value stability.
What are the main challenges regulators face when dealing with cryptocurrencies?
Regulators struggle withfraud, money laundering, and tax compliancein crypto.
How do smart contracts impact the enforcement of financial agreements?
Smart contractsself-execute agreements, reducing the need for intermediaries.
What are the limitations of using cryptocurrencies as the foundation for a monetary system?
Crypto lacksa stable value, scalability, and strong regulation.
How could Central Bank Digital Currencies (CBDCs) improve the current monetary system?
CBDCscould providestability, efficiency, and trustin digital transactions.
Why does the paper argue that crypto lacks a stable nominal anchor?
Crypto pricesfluctuate too much,making it unreliable as a standard currency.
How do fast payment systems contribute to financial inclusion?
Fast payment systemsreduce costs and improve access to banking services.
What are the key differences between ETFs and mutual funds?
ETFs trade likestocks,while mutual funds trade atend-of-day prices.
How do authorized participants help maintain ETF price stability?
Authorized participantscreate and redeem ETF shares to keep prices stable.
What are some of the potential risks associated with ETFs?
ETFs can haveliquidity mismatches, systemic risks, and counterparty exposure.
Why have ETFs grown in popularity among investors?
ETFs providelow-cost diversification and easy market access.
How does the CAPM model lead to company misvaluations in M&A decisions?
CAPMmisprices firms,leading to bad M&A decisions.
Why do managers using CAPM tend to overvalue low-beta projects?
Managers overvaluelow-beta projectsbecause CAPM underestimates their cost of capital.
What is the security market line (SML), and how does it relate to CAPM?
Thesecurity market line (SML)shows the expected return based on risk.
How do firms’ capital budgeting decisions change when using CAPM?
CAPM leads firms tomisallocate capital, favoring low-risk investments.
What are the two main pillars of asset pricing discussed in the paper?
Market efficiencyandasset pricing modelsare the two pillars.
How do efficient market hypothesis and asset pricing models interact?
Efficient markets assumeall available information is reflected in prices.
What are the weaknesses of the CAPM in explaining asset returns?
CAPM fails becausereal-world returns don’t follow its predictions.
How did Fama and French improve upon the CAPM?
Fama-French added size and value factorsto improve CAPM.
How do CFOs make real-world capital budgeting decisions compared to textbook theories?
CFOsfollow conservative decision rulesrather than complex financial models.
Why are corporate decision rules often conservative and slow to change?
Companies rarely change policiesdue to risk aversion and inertia.
How do CFOs’ expectations about the future influence their financial decisions?
CFOs useshort-term forecasts, often misestimating long-term risks.
Why is there often a gap between financial theory and real-world corporate behavior?
Financial theories assumerational decision-making, but real-world finance is messier.
Why has the number of public corporations in the US declined over the last 40 years?
Regulation, private capital growth, and M&A trendshave reduced public companies.
How has the age and size of public corporations changed over time?
Public firms are nowolder, larger, and concentrated in fewer industries.
What factors explain the shift from public to private markets?
Private equity and venture capitaloffer alternatives to public markets.
How has R&D investment changed the structure of public corporations?
Public firms invest more inR&Dthan in physical assets.
How do Automated Market Makers (AMMs) differ from traditional market makers?
AMMs set pricesalgorithmicallyrather than through order books.
Why do AMMs suffer from adverse selection risks?
AMMscannot adjust to new information, leading to arbitrage losses.
What are the main advantages of AMMs for liquidity providers?
AMMs provideconstant liquiditywithout relying on traditional market makers.
How do AMMs use smart contracts to facilitate trading?
Smart contractsautomate tradesbased on predefined rules.
How does social media influence stock market predictions?
Social mediapredicts market trendsby aggregating investor opinions.
Why do individual investors trust social media for financial advice?
People trust social mediadue to accessibility and peer influence.
How do online investor opinions predict future stock returns?
User-generated stock discussionscan predict earnings surprises.
What are the risks of relying on social media for financial decisions?
Misinformation and hypemake social media investing risky.
What are the key differences between green, social, and sustainability bonds?
Green bondsfinance environmental projects;social bondsfund social initiatives.
Why were sovereign issuers initially slow to enter the sustainable bond market?
Governments hesitated due tobudget restrictions and transparency issues.
How do sustainability-linked bonds differ from traditional GSS bonds?
Sustainability-linked bondsoffer flexible spending but require strong accountability.
Why do sovereigns face challenges in issuing green and social bonds?
Sovereigns struggle tomatch GSS bonds with fiscal policies.
How did the COVID-19 pandemic impact corporate financing decisions?
COVID-19 forced companies tocut spending, raise debt, and conserve cash.
What were the main financial challenges companies faced during the pandemic?
Firms facedliquidity shortages, revenue drops, and supply chain issues.
How did corporate debt levels change due to the pandemic?
Corporate debt increased due togovernment stimulus and cheap credit.
Why did stock markets recover faster than the real economy during COVID-19?
TheFed’s interventions and investor optimismfueled stock market recovery.
How did the Federal Reserve’s monetary policy impact stock markets during COVID-19?
TheFed’s quantitative easingdrove stock market rebounds.
What role did bond yields play in the Fed’s influence on equity markets?
Lower bond yieldsboosted stock valuationsby reducing discount rates.
Why are stock markets more sensitive to the Fed reducing its balance sheet than expanding it?
Markets reactmore negativelywhen the Fed contracts its balance sheet.
How did quantitative easing impact investor expectations?
Investor expectationsdrive market movements more than actual Fed actions.
What is the Law of One Price, and why is it important in financial markets?
The Law of One Price statesidentical assets should have identical prices.
How do arbitrage opportunities arise when the Law of One Price is violated?
Arbitrage occurs whenprice differences exist across markets.
What are the main limitations of the Law of One Price in practice?
Transaction costs, liquidity issues, and regulationsprevent perfect price alignment.
How do transaction costs prevent full price convergence in financial markets?
High fees and market frictionsdelay price adjustments.
