Multiple Choice
1. Financial assets represent _________ of total assets of U.S. households.
A. over 60%
B. over 90%
C. under 10%
D. about 30%
Answer: A. over 60%
2. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock
Answer: 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%
Answer: C. about 11%
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
Answer: B. real estate
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
Answer: A. mortgages
6. _________ is not a derivative security.
A. A share of common stock
B. A call option
C. A futures contract
D. None of these options (All of the answers are derivative securities.)
Answer: A. A share of common stock
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. personal trusts
Answer: C. pension reserves
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
Answer: 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
Answer: 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. Bankers' acceptance
Answer: C. Common stock
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
Answer: C. Real, financial
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
Answer: D. I, II, and III
13. __________________ are examples of financial intermediaries.
A. Commercial banks
B. Insurance companies
C. Investment companies
D. All of these options
Answer: D. All of these 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 these options
Answer: A. the allocation of the investment portfolio across broad asset classes
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
Answer: A. Transferring risk from one party to another
16. More than _____________________ of currency is traded each day in the market for
foreign exchange.
A. $300 million
B. $1 billion
C. $30 billion
D. $1 trillion
Answer: D. $1 trillion
17. 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
Answer: C. choice of specific securities within each asset class
18. 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 over consume luxuries such as corporate jets.
D. All of these options are examples of agency problems.
Answer: D. All of these options are examples of agency problems.
19. _________ 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. The straight voting method of electing the board of directors
Answer: A. Tying income of managers to success of the firm
20. __________________ is (are) real assets.
A. Bonds
B. Production equipment
C. Stocks
D. Commercial paper
Answer: B. Production equipment
21. __________________ portfolio construction starts with selecting attractively priced
securities.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
Answer: A. Bottom-up
22. In a market economy, capital resources are primarily allocated by
____________________.
A. governments
B. the SEC
C. financial markets
D. investment bankers
Answer: C. financial markets
23. __________________ represents an ownership share in a corporation.
A. A call option
B. Common stock
C. A fixed-income security
D. Preferred stock
Answer: B. Common stock
24. 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
Answer: A. depends on the value of another related security
25. 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
Answer: D. exposure to various business risks
26. __________________ 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
Answer: C. Passive
27. 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
Answer: D. Allow most participants to routinely earn high returns with low risk
28. Financial intermediaries exist because small investors cannot efficiently _____________.
A. diversify their portfolios
B. gather information
C. monitor their portfolios
D. all of these options
Answer: D. all of these options
29. 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
Answer: D. I, II, and III
30. 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
Answer: B. investment banks
31. 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.
Answer: A. higher
32. 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
Answer: A. rise; fewer
33. 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
Answer: A. choosing specific securities within each asset class
34. 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
Answer: B. a call option on Intel stock
35. __________________ portfolio construction starts with asset allocation.
A. Bottom-up
B. Top-down
C. Upside-down
D. Side-to-side
Answer: B. Top-down
36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at
Bank of America and vastly understated its debts, eventually resulting in the firm's
bankruptcy?
A. WorldCom
B. Enron
C. Parmalat
D. Global Crossing
Answer: C. Parmalat
37. 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
Answer: B. I or II only
38. 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
Answer: C. Required that firms could no longer employ investment bankers to sell securities
to the public
39. 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
Answer: C. the firm and its real assets
40. The historical average rate of return on large company stocks since 1926 has been
_________.
A. 5%
B. 8%
C. 12%
D. 20%
Answer: C. 12%
41. 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%
Answer: C. less than 4%
42. 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
Answer: D. I, II, and III
43. 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
Answer: D. Sarbanes-Oxley Act
44. Which of the following is not a financial intermediary?
A. a mutual fund
B. an insurance company
C. a real estate brokerage firm
D. a savings and loan company
Answer: C. a real estate brokerage firm
45. The combined liabilities of American households represent approximately
__________________ of combined assets.
A. 11%
B. 19%
C. 25%
D. 33%
Answer: B. 19%
46. In 2011 real assets represented approximately __________________ of the total asset
holdings of American households.
A. 32%
B. 42%
C. 48%
D. 55%
Answer: A. 32%
47. In 2011 mortgages represented approximately __________________ of total liabilities
and net worth of American households.
A. 12%
B. 14%
C. 28%
D. 42%
Answer: B. 14%
48. Liabilities equal approximately _________ of total assets for nonfinancial U.S.
businesses.
A. 10%
B. 25%
C. 48%
D. 75%
Answer: C. 48%
49. Which of the following is not an example of a financial intermediary?
A. Goldman Sachs
B. Allstate Insurance
C. First Interstate Bank
D. IBM
Answer: D. IBM
50. Real assets represent about ____ of total assets for commercial banks.
A. 1%
B. 15%
C. 25%
D. 40%
Answer: A. 1%
51. Money market securities are characterized by:
I. Maturity less than 1 year
II. Safety of the principal investment
III. Low rates of return
A. I only
B. I and II only
C. I and III only
D. I, II, and III
Answer: D. I, II, and III
52. After much investigation, an investor finds that Intel stock is currently underpriced. This
is an example of __________.
A. asset allocation
B. security analysis
C. top-down portfolio management
D. passive management
Answer: B. security analysis
53. After considering current market conditions, an investor decides to place 60% of her
funds in equities and the rest in bonds. This is an example of _________.
A. asset allocation
B. security analysis
C. top-down portfolio management
D. passive management
Answer: A. asset allocation
54. Suppose an investor is considering one of two investments that are identical in all respects
except for risk. If the investor anticipates a fair return for the risk of the security he invests in,
he can expect to _________.
A. earn no more than the Treasury-bill rate on either security.
B. pay less for the security that has higher risk.
C. pay less for the security that has lower risk.
D. earn more if interest rates are lower.
Answer: B. pay less for the security that has higher risk.
55. The efficient market hypothesis suggests that ___________.
A. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies may be appropriate, depending on the expected direction
of the market
D. a bottom-up approach is the most appropriate investment strategy
Answer: B. passive portfolio management strategies are the most appropriate investment
strategies
56. In a perfectly efficient market the best investment strategy is probably _________.
A. an active strategy.
B. a passive strategy.
C. asset allocation.
D. market timing.
Answer: B. a passive strategy.
57. Market signals will help to allocate capital efficiently only if investors are acting
_________.
A. on the basis of their individual hunches.
B. as directed by financial experts.
C. as dominant forces in the economy.
D. on accurate information.
Answer: D. on accurate information.
58. Which of the following is (are) true about hedge funds?
I. They are open to institutional investors.
II. They are open to wealthy individuals.
III. They are more likely than mutual funds to pursue simple strategies.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
Answer: A. I and II only
59. Venture capital is _____________.
A. frequently used to expand the businesses of well-established companies
B. supplied by venture capital funds and individuals to start-up companies
C. illegal under current U.S. laws
D. most frequently issued with the help of investment bankers
Answer: B. supplied by venture capital funds and individuals to start-up companies
60. 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
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Answer: B. I and II only
61. Surf City Software Company develops new surf forecasting software. It sells the software
to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software
has exchanged a _________ asset for a _________ asset in this transaction.
A. real; real
B. financial; financial
C. real; financial
D. financial; real
Answer: C. real; financial
62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory
note to pay back the loan over 5 years. In this transaction, _________.
A. a new financial asset was created
B. a financial asset was traded for a real asset
C. a financial asset was destroyed
D. a real asset was created
Answer: A. a new financial asset was created
63. Which of the following firms was not engaged in a major accounting scandal between
2000 and 2005?
A. General Electric
B. Parmalat
C. Enron
D. WorldCom
Answer: A. General Electric
64. Accounting scandals can often be attributed to a particular concept in the study of finance
known as the _________.
A. agency problem
B. risk-return trade-off
C. allocation of risk
D. securitization
Answer: A. agency problem
65. An intermediary that pools and manages funds for many investors is called __________.
A. an investment company
B. a savings and loan
C. an investment banker
D. a commercial bank
Answer: A. an investment company
66. Financial institutions that specialize in assisting corporations in primary market
transactions are called ___________.
A. mutual funds
B. investment bankers
C. pension funds
D. globalization specialists
Answer: B. investment bankers
67. When a pass-through mortgage security is issued, what does the issuing agency expect to
receive?
A. The amount of the original loan plus a servicing fee
B. The principal and interest that are paid by the homeowner
C. The principal and interest that are paid by the homeowner, minus a servicing fee
D. The interest paid by the homeowner, plus a servicing fee
Answer: C. The principal and interest that are paid by the homeowner, minus a servicing fee
68. In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking
firm of __________.
A. Goldman Sachs
B. Lehman Brothers
C. Morgan Stanley
D. Merrill Lynch
Answer: B. Lehman Brothers
69. The inability of shareholders to influence the decisions of managers, despite
overwhelming shareholder support, is a breakdown in what process or mechanism?
A. Auditing
B. Public finance
C. Corporate governance
D. Public reporting
Answer: C. Corporate governance
70. Real assets are __________.
A. assets used to produce goods and services
B. always the same as financial assets
C. always equal to liabilities
D. claims on a company's income
Answer: A. assets used to produce goods and services
71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to
____________.
A. private equity investments
B. securitization
C. negative analyst recommendations
D. online trading
Answer: B. securitization
72. In recent years the greatest dollar amount of securitization occurred for which type of
loan?
A. Home mortgages
B. Credit card debt
C. Automobile loans
D. Equipment leasing
Answer: A. Home mortgages
73. Which of the following is (are) true about nonconforming mortgage loans?
A. They are also known as subprime loans.
B. They have higher default risk than conforming loans.
C. They were able to be offered without due diligence.
D. All of these options are true.
Answer: D. All of these options are true.
74. The systemic risk that led to the financial crisis of 2008 was increased by _________.
A. collateralized debt obligations
B. subprime mortgages
C. credit default swaps
D. all of the options
Answer: D. all of the options
75. An investment adviser has decided to purchase gold, real estate, stocks, and bonds in
equal amounts. This decision reflects which part of the investment process?
A. Asset allocation
B. Investment analysis
C. Portfolio analysis
D. Security selection
Answer: A. Asset allocation
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
