Essentials of Investments, 11e (Bodie)
Chapter 1 Investments: Background and Issues
1) Financial assets represent ________ of total assets of U.S. households.
A) under 70%
B) over 90%
C) under 10%
D) about 30%
2) Real assets in the economy include all but which one of the following?
A) land
B) buildings
C) consumer durables
D) common stock
3) Net worth represents ________ of the liabilities and net worth of commercial banks.
A) about 51%
B) about 91%
C) about 11%
D) about 31%
4) According to the Flow of Funds Accounts of the United States, the largest single asset of U.S.
households is ________.
A) mutual fund shares
B) real estate
C) pension reserves
D) corporate equity
5) According to the Flow of Funds Accounts of the United States, the largest liability of U.S.
households is ________.
A) mortgages
B) consumer credit
C) bank loans
D) gambling debts
6) ________ is not a derivative security.
A) A share of common stock
B) A call option
C) A futures contract
D) None of the options (All of the answers are derivative securities.)
7) According to the Flow of Funds Accounts of the United States, the largest financial asset of
U.S. households is ________.
A) mutual fund shares
B) corporate equity
C) pension reserves
D) deposits
8) Active trading in markets and competition among securities analysts helps ensure that:
I. Security prices approach informational efficiency.
II. Riskier securities are priced to offer higher potential returns.
III. Investors are unlikely to be able to consistently find under- or overvalued securities.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
9) The material wealth of society is determined by the economy’s ________, which is a function
of the economy’s ________.
A) investment bankers; financial assets
B) investment bankers; real assets
C) productive capacity; financial assets
D) productive capacity; real assets
10) Which of the following is not a money market security?
A) U.S. Treasury bill
B) 6-month maturity certificate of deposit
C) common stock
D) All of the options.
11) ________ assets generate net income to the economy, and ________ assets define allocation
of income among investors.
A) Financial, financial
B) Financial, real
C) Real, financial
D) Real, real
12) Which of the following are financial assets?
I. Debt securities
II. Equity securities
III. Derivative securities
A) I only
B) I and II only
C) II and III only
D) I, II, and III
13) ________ are examples of financial intermediaries.
A) Commercial banks
B) Insurance companies
C) Investment companies
D) All of the options
14) Asset allocation refers to ________.
A) the allocation of the investment portfolio across broad asset classes
B) the analysis of the value of securities
C) the choice of specific assets within each asset class
D) none of the options
15) Which one of the following best describes the purpose of derivatives markets?
A) Transferring risk from one party to another.
B) Investing for a short time period to earn a small rate of return.
C) Investing for retirement.
D) Earning interest income.
16) Security selection refers to the ________.
A) allocation of the investment portfolio across broad asset classes
B) analysis of the value of securities
C) choice of specific securities within each asset class
D) top-down method of investing
17) 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.
18) ________ is a mechanism for mitigating potential agency problems.
A) Tying income of managers to success of the firm
B) Directors defending top management
C) Antitakeover strategies
D) All of the options.
19) ________ is (are) real assets.
A) Bonds
B) Production equipment
C) Stocks
D) Life insurance
20) ________ portfolio construction starts with selecting attractively priced securities.
A) Bottom-up
B) Top-down
C) Upside-down
D) Side-to-side
21) In a market economy, capital resources are primarily allocated by ________.
A) governments
B) corporation CEOs
C) financial markets
D) investment bankers
22) ________ represents an ownership share in a corporation.
A) A call option
B) Common stock
C) A fixed-income security
D) Preferred stock
23) The value of a derivative security ________.
A) depends on the value of another related security
B) affects the value of a related security
C) is unrelated to the value of a related security
D) can be integrated only by calculus professors
24) Commodity and derivative markets allow firms to adjust their ________.
A) management styles
B) focus from their main line of business to their investment portfolios
C) ways of doing business so that they’ll always have positive returns
D) exposure to various business risks
25) ________ portfolio management calls for holding diversified portfolios without spending
effort or resources attempting to improve investment performance through security analysis.
A) Active
B) Momentum
C) Passive
D) Market-timing
26) Financial markets allow for all but which one of the following?
A) shift consumption through time from higher-income periods to lower
B) price securities according to their riskiness
C) channel funds from lenders of funds to borrowers of funds
D) allow most participants to routinely earn high returns with low risk
27) Financial intermediaries exist because small investors cannot efficiently ________.
A) diversify their portfolios
B) gather information
C) assess and monitor the credit risk of borrowers
D) all of the options
28) Methods of encouraging managers to act in shareholders’ best interest include:
I. Threat of takeover.
II. Proxy fights for control of the board of directors.
III. Tying managers’ compensation to stock price performance.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
29) Firms that specialize in helping companies raise capital by selling securities to the public are
called ________.
A) pension funds
B) investment banks
C) savings banks
D) REITs
30) In securities markets, there should be a risk-return trade-off with higher-risk assets having
________ expected returns than lower-risk assets.
A) higher
B) lower
C) the same
D) The answer cannot be determined from the information given.
31) 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.
A) rise; fewer
B) fall; fewer
C) rise; more
D) fall; more
32) Security selection refers to ________.
A) choosing specific securities within each asset class
B) deciding how much to invest in each asset class
C) deciding how much to invest in the market portfolio versus the riskless asset
D) deciding how much to hedge
33) An example of a derivative security is ________.
A) a common share of General Motors
B) a call option on Intel stock
C) a Ford bond
D) a U.S. Treasury bond
34) ________ portfolio construction starts with asset allocation.
A) Bottom-up
B) Top-down
C) Upside-down
D) Side-to-side
35) Which one of the following firms falsely claimed to have a $4.8 billion bank account,
eventually resulting in the firm’s bankruptcy?
A) WorldCom
B) Enron
C) Parmalat
D) Global Crossing
36) 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.
A) I only
B) I or II only
C) I and III only
D) II or III only
37) The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one
of the following?
A) Required that corporations have more independent directors.
B) Required that the CFO personally vouch for the corporation’s financial statements.
C) Required that firms could no longer employ investment bankers to sell securities to the public.
D) Required the creation of a new board to oversee the auditing of public companies.
38) The success of common stock investments depends on the success of ________.
A) derivative securities
B) fixed-income securities
C) the firm and its real assets
D) government methods of allocating capital
39) The historical average rate of return on large company stocks since 1926 has been ________.
A) almost 5%
B) almost 8%
C) almost 12%
D) almost 20%
40) The average rate of return on U.S. Treasury bills since 1926 was ________.
A) less than 1%
B) less than 3%
C) less than 4%
D) less than 7%
41) An example of a real asset is:
I. A college education
II. Customer goodwill
III. A patent
A) I only
B) II only
C) I and III only
D) I, II, and III
42) The 2002 law designed to improve corporate governance is titled the ________.
A) Pension Reform Act
B) ERISA
C) Financial Services Modernization Act
D) Sarbanes-Oxley Act