Test Bank For Essentials Of Investments, 9th Edition

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Chapter 01Investments: Background and IssuesMultiple Choice Questions1.Financial assets represent _____ of total assets of U.S. households.A.over 60%B.over 90%C.under 10%D.about 30%2.Real assets in the economyinclude all but which one of the following?A.LandB.BuildingsC.Consumer durablesD.Common stock3.Net worth represents _____ of the liabilities and net worth of commercial banks.A.about 51%B.about 91%C.about11%D.about 31%4.According to theFlow of Funds Accounts of the United States,the largest single asset of U.S.households is ___.A.mutual fund sharesB.real estateC.pension reservesD.corporate equity5.According to theFlow of Funds Accounts of the United States,the largest liability of U.S.households is ________.A.mortgagesB.consumer creditC.bank loansD.gambling debts

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6.____ isnota derivative security.A.A share of common stockB.A call optionC.A futures contractD.None of these options (All of the answers are derivative securities.)7.According to theFlow of Funds Accounts of the United States,the largest financial asset of U.S.households is ____.A.mutual fund sharesB.corporate equityC.pension reservesD.personal trusts8.Active trading in markets and competition among securities analysts helps ensure that:I.Security prices approach informational efficiencyII. Riskier securities are priced to offer higher potential returnsIII. Investors are unlikely to be able to consistently find under-or overvalued securitiesA.I onlyB.I and II onlyC.II and III onlyD.I, II, and III9.The material wealth of society is determined by the economy's _________, which is a function ofthe economy's _________.A.investment bankers;financial assetsB.investment bankers;real assetsC.productive capacity;financial assetsD.productive capacity;real assets10.Which of the following isnota money market security?A.U.S. Treasury billB.6-month maturity certificate of depositC.Common stockD.Bankers'acceptance

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11.__________ assets generate net income to the economy, and __________ assets defineallocation of income among investors.A.Financial, financialB.Financial, realC.Real, financialD.Real, real12.Which of thefollowing are financial assets?I. Debt securitiesII. Equity securitiesIII. Derivative securitiesA.I onlyB.I and II onlyC.II and III onlyD.I, II, and III13.__________ are examples of financialintermediaries.A.Commercial banksB.Insurance companiesC.Investment companiesD.All of these options14.Asset allocationrefers to _________.A.the allocation of the investment portfolio across broad asset classesB.the analysis of the value of securitiesC.the choice of specific assets within each asset classD.none of these options15.Which one of the following best describes the purpose of derivatives markets?A.Transferring risk from oneparty to anotherB.Investing for a short time period to earn a small rate of returnC.Investing for retirementD.Earning interest income16.More than _____________ of currency is traded each day in the market for foreignexchange.A.$300 millionB.$1 billionC.$30 billionD.$1 trillion

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17.Security selectionrefers to the ________.A.allocation of the investment portfolio across broad asset classesB.analysis of the value ofsecuritiesC.choice of specific securities within each asset classD.top-down method of investing18.Which of the following is an example of an agency problem?A.Managers engage in empire building.B.Managers protect their jobs byavoiding risky projects.C.Managers over consume luxuries such as corporate jets.D.All of these options are examples of agency problems.19._____ is a mechanism for mitigating potential agency problems.A.Tying income ofmanagers to success of the firmB.Directors defending top managementC.Antitakeover strategiesD.The straight voting method of electing the board of directors20.__________ is (are) real assets.A.BondsB.ProductionequipmentC.StocksD.Commercial paper21.__________ portfolio construction starts with selecting attractively priced securities.A.Bottom-upB.Top-downC.Upside-downD.Side-to-side22.In a market economy,capital resources are primarily allocated by ____________.A.governmentsB.the SECC.financial marketsD.investment bankers

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23.__________ represents an ownership share in a corporation.A.A call optionB.Common stockC.A fixed-income securityD.Preferred stock24.The value of a derivative security _________.A.depends on the value of another related securityB.affects the value of a related securityC.is unrelated to the value of arelated securityD.can be integrated only by calculus professors25.Commodity and derivative markets allow firms to adjust their _________.A.management stylesB.focus from their main line of business to their investmentportfoliosC.ways of doing business so that they'll always have positive returnsD.exposure to various business risks26.__________ portfolio management calls for holding diversified portfolios without spending effort orresourcesattempting to improve investment performance through security analysis.A.ActiveB.MomentumC.PassiveD.Market-timing27.Financial markets allow for all but which one of the following?A.Shift consumption through time fromhigher-income periods to lowerB.Price securities according to their riskinessC.Channel funds from lenders of funds to borrowers of fundsD.Allow most participants to routinely earn high returns with low risk28.Financialintermediaries exist because small investors cannot efficiently _________.A.diversify their portfoliosB.gather informationC.monitor their portfoliosD.all of these options

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29.Methods of encouraging managers to act inshareholders' best interest include:I. Threat of takeoverII. Proxy fights for control of the board of directorsIII. Tying managers' compensation to stock price performanceA.I onlyB.I and II onlyC.II and III onlyD.I, II, and III30.Firms that specialize in helping companies raise capital by selling securities to the public arecalled _________.A.pension fundsB.investment banksC.savings banksD.REITs31.In securities markets, there should be arisk-return trade-off with higher-risk assets having_________ expected returns than lower-risk assets.A.higherB.lowerC.the sameD.The answer cannot be determined from the information given.32.When the market is moreoptimistic about a firm, its share price will ______; as a result, it willneed to issue _______ shares to raise funds that are needed.A.rise;fewerB.fall;fewerC.rise;moreD.fall;more33.Security selectionrefers to _________.A.choosing specific securities within each asset classB.deciding how much to invest in each asset classC.deciding how much to invest in the market portfolio versus the riskless assetD.deciding how much tohedge

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34.An example of a derivative security is _________.A.a common share of General MotorsB.a call option on Intel stockC.a Ford bondD.a U.S. Treasury bond35.__________ portfolio construction starts with assetallocation.A.Bottom-upB.Top-downC.Upside-downD.Side-to-side36.Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank ofAmerica and vastly understated its debts, eventuallyresulting in the firm's bankruptcy?A.WorldComB.EnronC.ParmalatD.Global Crossing37.Debt securities promise:I. A fixed stream of incomeII. A stream of income that is determined according to a specific formulaIII. A share inthe profits of the issuing entityA.I onlyB.I or II onlyC.I and III onlyD.II or III only38.The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one ofthe following?A.Required thatcorporations have more independent directorsB.Required that the CFO personally vouch for the corporation's financial statementsC.Required that firms could no longer employ investment bankers to sell securities to the publicD.Required thecreation of a new board to oversee the auditing of public companies39.The success of common stock investments depends on the success of _________.A.derivative securitiesB.fixed-income securitiesC.the firm and its real assetsD.government methods of allocating capital

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40.The historical average rate of return on large company stocks since 1926 has been _____.A.5%B.8%C.12%D.20%41.The average rate of return on U.S. Treasury bills since 1926was _________.A.less than 1%B.less than 3%C.less than 4%D.less than 7%42.An example of a real asset is:I. A college educationII. Customer goodwillIII. A patentA.I onlyB.II onlyC.I and III onlyD.I,II, and III43.The 2002 law designed to improve corporate governance is titled the _____.A.Pension Reform ActB.ERISAC.Financial Services Modernization ActD.Sarbanes-Oxley Act44.Which of the following isnota financial intermediary?A.a mutual fundB.an insurance companyC.a real estate brokerage firmD.a savings and loan company45.The combined liabilities of American households representapproximately __________ ofcombined assets.A.11%B.19%C.25%D.33%

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46.In 2011 real assets represented approximately __________ of the total asset holdings ofAmerican households.A.32%B.42%C.48%D.55%47.In 2011 mortgages represented approximately __________ of total liabilities and net worth ofAmerican households.A.12%B.14%C.28%D.42%48.Liabilities equal approximately _____ of total assets for nonfinancial U.S.businesses.A.10%B.25%C.48%D.75%49.Which of the following isnotan example of a financial intermediary?A.Goldman SachsB.Allstate InsuranceC.First Interstate BankD.IBM50.Real assetsrepresent about ____ of total assets for commercial banks.A.1%B.15%C.25%D.40%51.Money market securities are characterized by:I. Maturity less than 1 yearII. Safety of the principal investmentIII. Low rates of returnA.I onlyB.I and II onlyC.I and III onlyD.I, II, and III

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52.After much investigation, an investor finds that Intel stock is currently underpriced. This is anexample of ______.A.asset allocationB.security analysisC.top-down portfolio managementD.passive management53.After considering current market conditions, an investor decides to place 60% of her funds inequities and the rest in bonds. This is an example of _____.A.asset allocationB.security analysisC.top-down portfolio managementD.passive management54.Suppose an investor is considering one of two investments that are identical in all respects exceptfor risk. If the investor anticipates a fair return for the riskof the security he invests in, he canexpect to _____.A.earn no more than the Treasury-bill rate on either security.B.pay less for the security that has higher risk.C.pay less for the security that has lower risk.D.earn more ifinterest rates are lower.55.The efficient market hypothesis suggests that _______.A.active portfolio management strategies are the most appropriate investment strategiesB.passive portfolio management strategies are the mostappropriate investment strategiesC.either active or passive strategies may be appropriate, depending on the expected direction ofthe marketD.a bottom-up approach is the most appropriate investment strategy56.In a perfectlyefficient market the best investment strategy is probably _____.A.an active strategy.B.a passive strategy.C.asset allocation.D.market timing.57.Market signals will help to allocate capital efficiently only if investors areacting _____.A.on the basis of their individual hunches.B.as directed by financial experts.C.as dominant forces in the economy.D.on accurate information.

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58.Which of the following is (are) true about hedge funds?I. They areopen to institutional investors.II. They are open to wealthy individuals.III. They are more likely than mutual funds to pursue simple strategies.A.I and II onlyB.I and III onlyC.II and III onlyD.I, II, and III59.Venture capital is _________.A.frequently used to expand the businesses of well-established companiesB.supplied by venture capital funds and individuals to start-up companiesC.illegal under current U.S. lawsD.most frequentlyissued with the help of investment bankers60.Individuals may find it more advantageous to purchase claims from a financial intermediary ratherthan directly purchasing claims in capital markets because:I. Intermediaries are betterdiversified than most individualsII. Intermediaries can exploit economies of scale in investing that individual investors cannotIII. Intermediated investments usually offer higher rates of return than direct capital market claimsA.I onlyB.I and II onlyC.II and III onlyD.I, II, and III61.Surf City Software Company develops new surf forecasting software. It sells the software toMicrosoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software hasexchanged a _____ asset for a _____ asset in this transaction.A.real;realB.financial;financialC.real;financialD.financial;real62.Stone Harbor Products takes out a bank loan. It receives $100,000 and signs apromissory note topay back the loan over 5 years. In this transaction, _____.A.a new financial asset was createdB.a financial asset was traded for a real assetC.a financial asset was destroyedD.a real asset was created

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63.Which of the following firms wasnotengaged in a major accounting scandal between 2000 and2005?A.General ElectricB.ParmalatC.EnronD.WorldCom64.Accounting scandals can often be attributed to a particular concept in thestudy of finance knownas the _____.A.agency problemB.risk-return trade-offC.allocation of riskD.securitization65.An intermediary that pools and manages funds for many investors is called ______.A.an investmentcompanyB.a savings and loanC.an investment bankerD.a commercial bank66.Financial institutions that specialize in assisting corporations in primary market transactions arecalled _______.A.mutual fundsB.investmentbankersC.pension fundsD.globalization specialists67.When a pass-through mortgage security is issued, what does the issuing agency expect toreceive?A.The amount of the original loan plus a servicing feeB.The principal andinterest that are paid by the homeownerC.The principal and interest that are paid by the homeowner, minus a servicing feeD.The interest paid by the homeowner, plus a servicing fee68.In 2008 the largest corporate bankruptcy in U.S.history involved the investment banking firm of______.A.Goldman SachsB.Lehman BrothersC.Morgan StanleyD.Merrill Lynch

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69.The inability of shareholders to influence the decisions of managers, despite overwhelmingshareholder support, is a breakdown in what process or mechanism?A.AuditingB.Public financeC.Corporate governanceD.Public reporting70.Real assets are ______.A.assets used to produce goods and servicesB.always thesame as financial assetsC.always equal to liabilitiesD.claims on a company's income71.A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.A.private equity investmentsB.securitizationC.negative analyst recommendationsD.online trading72.In recent years the greatest dollar amount of securitization occurred for which type of loan?A.Home mortgagesB.Credit card debtC.Automobile loansD.Equipment leasing73.Which of the following is (are) true about nonconforming mortgage loans?A.They are also known assubprime loans.B.They have higher default risk than conforming loans.C.They were able to be offered without due diligence.D.All ofthese options are true.74.The systemic risk that led to the financial crisis of 2008 was increased by _____.A.collateralized debt obligationsB.subprime mortgagesC.credit default swapsD.all of the options

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75.Aninvestment adviser has decided to purchase gold, real estate, stocks, and bonds in equalamounts. This decision reflects which part of the investment process?A.Asset allocationB.Investment analysisC.Portfolio analysisD.Security selection

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Chapter 01 Investments: Background and IssuesAnswerKeyMultiple Choice Questions1.Financial assets represent _____ of total assets of U.S. households.A.over 60%B.over 90%C.under 10%D.about 30%AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 01-02 Distinguish between real assets and financial assets.Topic: Real Assets versus Financial Assets2.Real assets in the economy include all but which one of thefollowing?A.LandB.BuildingsC.Consumer durablesD.Common stockAACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 01-02 Distinguish between real assets and financial assets.Topic: Real Assets versusFinancial Assets3.Net worth represents _____ of the liabilities and net worth of commercial banks.A.about 51%B.about 91%C.about 11%D.about 31%AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearningObjective: 01-02 Distinguish between real assets and financial assets.Topic: Financial Intermediaries

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