Chapter 01 – Investments: Background and Issues
CHAPTER 01
INVESTMENTS: BACKGROUND AND ISSUES
3. Asset allocation is the allocation of an investment portfolio across broad asset classes.
Security selection is the choice of specific securities within each asset class.
4. Agency problems are conflicts of interest between managers and stockholders. They can
5. Real assets are assets used to produce goods and services. Financial assets are claims on
real assets or the income generated by them.
7.
a. Toyota creates a real asset—the factory. The loan is a financial asset that is created in
8.
a. No. The real estate in existence has not changed, only the perception of its value has.
b. Yes. The financial asset value of the claims on the real estate has changed, and thus
the balance sheet of individual investors has been reduced.
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Chapter 01 – Investments: Background and Issues
9.
a. The bank loan is a financial liability for Lanni. Lanni’s IOU is the bank’s financial
asset. The cash Lanni receives is a financial asset. The new financial asset created is
Lanni’s promissory note held by the bank.
10.
..
..
Ratio of real to total assets =
$30 ,000
$100 ,000
= 0.3
…
…
Ratio of real to total assets =
$100 ,000
$100 ,000
= 1
a.
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whole or part.
Chapter 01 – Investments: Background and Issues
11. Passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act
12. For commercial banks, the ratio is:
$157 .0
$12 ,157 . 3
= 0.0129
For non-financial firms, the ratio is:
$13 ,661
$28 ,196
= 0.4845
The difference should be expected since the business of financial institutions is to make
loans that are financial assets.
13. National wealth is a measurement of the real assets used to produce GDP in the
14.
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whole or part.
Chapter 01 – Investments: Background and Issues
unreasonable revenue recognition. That is what audits and external analysts will
look out for.
15. Even if an individual investor has the expertise and capability to monitor and improve
the managers’ performance, the payoffs would not be worth the effort, since his
ownership in a large corporation is so small compared to that of institutional investors.
16. Since the traders benefited from profits but did not get penalized by losses, they were
17. Securitization requires access to a large number of potential investors. To attract these
investors, the capital market needs:
(1) A safe system of business laws and low probability of confiscatory
Chapter 01 – Investments: Background and Issues
18. Progress in securitization facilitates the shifting of default risk from the intermediates to
the investors of such a security. Since the intermediates no longer bear the default risk,
their role and motivation in assessing and monitoring the quality of the borrowers is
19. Mutual funds accept funds from small investors and invest, on behalf of these investors,
in the national and international securities markets.
20. Even if the firm does not need to issue stock in any particular year, the stock market is
still important to the financial manager. The stock price provides important information
about how the market values the firm’s investment projects. For example, if the stock
21. Treasury bills serve a purpose for investors who prefer a low-risk investment. The
22. You should be skeptical. If the author actually knows how to achieve such returns, one
must question why the author would then be so ready to sell the secret to others.
Financial markets are very competitive; one of the implications of this fact is that riches