Investments Exam 1 Study Guide 1 Asset Allocation Process a Definition the allocation of an investment portfolio across broad asset classes Top down starts with asset allocation b Security selection is when you choose among these asset classes Bottom up starts with choosing the specific security c Asset allocation refers to the A allocation of the investment portfolio across broad asset classes B analysis of the value of securities C choice of specific assets within each asset class D none of the answers define asset allocation d portfolio construction starts with asset allocation A Bottom up B Top down C Upside down D Side to side 2 Securitization a Definition pooling loans into standardized securities backed by those loans which can then be traded like any other security b This pertains particularly to the securitization of mortgage backed loans Fannie Mae and Freddie Mac were the two biggest investing firms c An important trend that has changed the contemporary investment market is A financial engineering B globalization C securitization D all three of the other answers d Securitization refers to the creation of new securities by A selling individual cash flows of a security or loan B repackaging individual cash flows of a security or loan into a new payment pattern C taking an illiquid asset and converting it into a marketable security D selling financial services overseas as well as in the U S e A major cause of mortgage market meltdown in 2007 and 2008 was linked to A globalization B securitization C negative analyst recommendations D online trading f In recent years the greatest dollar amount of securitization occurred for which type loan A Home mortgages B Credit card debt C Automobile loans D Equipment leasing 3 Money Market Instruments a Definition Short term highly liquid and relatively low risk debt instruments b Treasury bills certificates of deposit commercial paper bankers acceptances Eurodollars repos and reverses federal funds brokers calls c Which of the following is not a money market instrument A Treasury bill B Commercial paper C Preferred stock D Banker s acceptance d Thirteen week T bill auctions are conducted A daily B weekly C monthly D quarterly e A dollar denominated deposit at a London bank is called A eurodollars B LIBOR C fed funds D banker s acceptance f Money market securities are sometimes referred to as cash equivalent because A they are safe and marketable B they are not liquid C they are high risk D they are low denomination g The most actively traded money market security is A Treasury bills B Bankers Acceptances C Certificates of Deposit D Common stock h Which of the following is not a characteristic of a money market instrument A Liquidity B Marketability C Low risk D Maturity greater than one year calculate taxable tax free yields 4 Financial Assets a Definition claims on real assets or the income generated by them Stocks bonds loans etc b 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 c Financial assets represent of total assets of U S households A over 60 B over 90 C under 10 D about 30 d 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 e 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 5 Price Dollar Weighted Averages a Definition an average computed by adding the prices of the stocks by a divisor b The Dow Jones is a price weighted average c Three stocks have share prices of 12 75 and 30 with total market values of 400 million 350 million and 150 million respectively If you were to construct a price weighted index of the three stocks what would be the index value A 300 B 39 C 43 D 30 Index 12 75 30 3 39 6 Residual Claims a Definition the feature of common stock that puts shareholders at the very last in line to any claim on the assets and income of a corporation even though they can potentially lose their entire investment unlimited liability b In a liquidation scenario shareholders are entitled to whatever is left of a company after paying off every single thing that they owe to other parties c Which of the following are not characteristic of common stock ownership A Residual claimant B Unlimited liability C Voting rights D Limited life of the security 7 Common Hedging Strategies a The most common hedging strategy is investment in derivative securities These investments provide payoffs that depend on the values of other assets Calls put options b Call the right to buy an asset at a specified price on or before a specified expiration date c Put the right to sell an asset at a specified price on or before the expiration date d If you thought prices of stock would be rising over the next few months you may wish to on the stock A purchase a call option B purchase a put option C sell a futures contract D place a short sale order 8 Types of Securities Underwritten by Investment Banks a Investment banks are primarily employed to underwrite brand new securities on the primary market the market for new security issues IPOs b Underwriting is one of the services provided by A the SEC B investment bankers C publicly traded companies D FDIC 9 Shelf Registration a One initially registered securities can be retained on the company s shelf for up to two years and then later sold without having to complete additional paperwork or incurring other costs b According to SEC Rule 415 regarding shelf registration firms can gradually sell securities to the public for following initial registration A 1 year B 2 years C 3 years D 4 years 10 Types of Securities Markets a Primary market this is where brand new securities that have never been owned by anyone are sold to their first owner b Secondary market this is the market for already existing securities People like you and I would buy stock on the secondary market c OTC market also known as the third market the over the counter market is where an informal network of brokers and dealers negotiate the sales of securities d Transactions that do not involve the original issue of securities take place in A primary markets B secondary markets C over the counter markets D