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33. Important trends changing the contemporary investment environment are
A. globalization.
B. securitization.
Difficulty: Easy
34. The means by which individuals hold their claims on real assets in a well-developed
economy are
A. investment assets.
B. depository assets.
Difficulty: Easy
35. Which of the following financial assets made up the greatest proportion of the financial
assets held by U.S. households?
D. debt securities
E. personal trusts
Difficulty: Moderate
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36. Which of the following are mechanisms that have evolved to mitigate potential agency
problems?
I) compensation in the form of the firm’s stock options
II) hiring bickering family members as corporate spies
III) underperforming management teams being forced out by boards of directors
IV) security analysts monitoring the firm closely
V) takeover threats
A. II and V
B. I, III, and IV
Difficulty: Moderate
37. Commercial banks differ from other businesses in that both their assets and their liabilities
are mostly
A. illiquid.
Difficulty: Easy
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38. Which of the following is true about GNMA pass-throughs?
I) They aggregate individual home mortgages into heterogeneous pools.
II) The purchaser of a GNMA receives monthly interest and principal payments received from
payments made on the pool.
III) The banks that originated the mortgages maintain ownership of them.
IV) The banks that originated the mortgages continue to service them.
A. II, III, and IV
Difficulty: Moderate
39. Although derivatives can be used as speculative instruments, businesses most often use
them to
A. attract customers.
B. appease stockholders.
Difficulty: Easy
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40. An ETF
A. limits the diversification potential of investors who hold it.
Difficulty: Moderate
41. A country ETF
A. invests in real estate in the country.
Difficulty: Moderate
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42. During the period between 2000 and 2002, a large number of scandals were uncovered.
Most of these scandals were related to
I) Manipulation of financial data to misrepresent the actual condition of the firm.
II) Misleading and overly optimistic research reports produced by analysts.
III) Allocating IPOs to executives as a quid pro quo for personal favors.
IV) Greenmail.
A. II, III, and IV
B. I, II, and IV
Difficulty: Moderate
43. A disadvantage of using stock options to compensate managers is that
A. it encourages mangers to undertake projects that will increase stock price.
B. it encourages managers to engage in empire building.
Difficulty: Easy
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44. A fixed-income security pays ____________.
A. a fixed level of income for the life of the owner
Difficulty: Easy
45. Money market securities ____________.
A. are short term
B. pay a fixed income
Difficulty: Easy
46. Financial assets permit all of the following except ____________.
A. consumption timing
Difficulty: Moderate
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47. The Sarbanes-Oxley Act ____________.
A. requires corporations to have more independent directors
Difficulty: Moderate
48. Asset allocation refers to ____________.
A. choosing which securities to hold based on their valuation
Difficulty: Moderate
49. Which of the following portfolio construction methods starts with security analysis?
Difficulty: Moderate
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D. Buy and hold
E. Asset allocation
Difficulty: Moderate
Short Answer Questions
51. Discuss the agency problem in detail.
Managers are the agents of the shareholders, and should act on their behalf to maximize
shareholder wealth (the value of the stock). A conflict (the agency conflict) arises when
managers take self-interested actions to the detriment of shareholders. The roles of the board
Difficulty: Moderate
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52. Discuss the similarities and differences between real and financial assets.
Real assets represent the productive capacity of the firm, and appear as assets on the firm’s
balance sheet. Financial assets are claims against the firm, and thus appear as liabilities on the
firm’s balance sheet. On the other hand, financial assets are listed on the asset side of the
Difficulty: Moderate
53. Discuss the euro in relation to its impact on globalization. How is it currently used and
what are the plans for its future use?
The euro was introduced in 1999 as a new currency and has replaced the currencies of twelve
participating countries so there will be one common European currency in the participating
Difficulty: Moderate
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54. Discuss the following ongoing trends as they relate to the field of investments:
globalization, financial engineering, securitization, and computer networks.
Globalization offers a wider array of investment choices than what would be available to
investors who could only choose domestic securities. As efficient communication technology
has become available, globalization of markets has been significantly enhanced. There are
many mechanisms by which one country’s investors can hold foreign companies’ securities.
Difficulty: Moderate