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Exam 1: Investments: Background and Issues

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Question 1

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Which of the following is not an example of a financial intermediary?

A) Goldman Sachs
B) Allstate Insurance
C) First Interstate Bank
D) IBM

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D

Question 2

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Which of the following is an example of an agency problem?

A) Managers engage in empire building.
B) Managers protect their jobs by avoiding risky projects.
C) Managers overconsume luxuries such as corporate jets.
D) All of the options are examples of agency problems.

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Question 3

Multiple Choice

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Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities

In a perfectly efficient market the best investment strategy is probably ________.

In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ________.

The Volcker Rule

Debt securities promise: I. A fixed stream of income. II. A stream of income that is determined according to a specific formula. III. A share in the profits of the issuing entity.

Liabilities equal approximately ________ of total assets for nonfinancial U.S. businesses.

The value of a derivative security ________.

Financial intermediaries exist because small investors cannot efficiently ________.

Venture capital is ________.

________ is not a derivative security.

Which insurance company sold more than $400 billion of CDS contracts on subprime mortgages prior to the 2008 market crash?

________ assets generate net income to the economy, and ________ assets define allocation of income among investors.

Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because: I. Intermediaries are better diversified than most individuals. II. Intermediaries can exploit economies of scale in investing that individual investors cannot. III. Intermediated investments usually offer higher rates of return than direct capital market claims.

When the market is more optimistic about a firm, its share price will ________; as a result, it will need to issue ________ shares to raise funds that are needed.

After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ________.

Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?

________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

The systemic risk that led to the financial crisis of 2008 was increased by ________.