Chapter 1 Introduction

An example of a derivative security is

• a common share of Microsoft

• a commodity futures contract

• a call option on Intel stock and a commodity futures contract

• a common share of Microsoft and a call option on Intel stock

The material wealth of a society is a function of

• all financial assets

• all real assets

• all financial and real assets

• all physical assets

Compared to investments in debt securities, equity investments tend to be

• equally risky

• riskier

• less risky

• more important

_______ are real assets.

• Land

• Machines

• Stocks and bonds

• Knowledge

• Land, machines, and knowledge

The value of a derivative security

• depends on the value of the related security

• is unable to be calculated

• is unrelated to the value of the related security

• has been enhanced due to the recent misuse and negative publicity regarding these instruments

• is worthless today

The ____________ refers to the potential conflict between management and shareholders.

• agency problem

• diversification problem

• liquidity problem

• solvency problem

• regulatory problem

Which of the following portfolio construction methods starts with security analysis?

• Top-down

• Bottom-up

• Middle-out

• Buy and hold

• Asset allocation

Financial intermediaries exist because small investors cannot efficiently

• diversify their portfolios

• assess credit risk of borrowers

• advertise for needed investments

• diversify their portfolios and assess credit risk of borrowers

• All of the Above

New issues of securities are sold in the ________ market(s).

• primary

• secondary

• over-the-counter

• primary and secondary

Investment bankers perform which of the following role(s)?

• Market new stock and bond issues for firms

• Provide advice to the firms as to market conditions, price, etc.

• Design securities with desirable properties

• All of the Above

• None of the Above