MBA 622 – MIDTERM STUDY GUIDE
Real Assets - Answers -Have productive capacity; they are assets used to produce
goods and services. These assets are tangible (Ex: Machinery, Power Plant) or
intangible (Ex: Patent on a good)
Financial Assets - Answers -Are claims on real assets or the income generating them
(bonds).
Asset Allocation - Answers -Is the allocation of an investment portfolio across broad
asset classes.
Security Selection - Answers -Is the choice of specific securities within each asset
class.
Role of Financial Intermediaries - Answers -These groups pool investor funds and
invest them. Their services are in demand because small investors can't efficiently
gather information, diversify, and monitor portfolios. They can act as a large investor
that can take advantage of scale economies.
Investment Banks - Answers -Are firms specializing in the sale of new securities to the
public, typically by underwriting the issue.
Commerical Banks - Answers -Accept deposits and lend the money to other borrowers.
Mutual Funds - Answers -Accept funds from small investors and invest on behalf of
these investors, in the national and international securities market.
Pension Funds - Answers -Accept funds and then invest, on behalf of current and
future retirees. Thereby channeling funds from one sector of the economy to another.
Venture Capital Funds - Answers -Pool funds of private investors and invest in start-up
firms.
Risk - Return Tradeoff - Answers -Assets with greater expected returns entail greater
risk.
There should be a tradeoff in the securities market, with higher risk assets priced to
offer higher expected returns than lower risk assets.
Characteristics of Money Market Securities - Answers -1) Short - Term
2) Relatively low risk
3) Highly Liquid
4) Their value almost never changes
, Money Market Securities "Cash Equivalents" - Answers -Because of their great liquidity
and stability. They can be converted into cash on short notice.
What is the most marketable money market security? - Answers -Treasury Bills are the
most marketable of all money market securities.
Price - weighted average (Index Example) - Answers -An index average computed by
adding the prices of the stocks and dividing by a "divisor" (Dow Jones).
Example of Price - weighted index: - Answers -Dow Jones Industrial Average
Value - weighted averages (Index Example) - Answers -Index return equals the
weighted average of all security returns, with weights proportional to their outstanding
market value (S&P 500)
Example of Value - weighted index - Answers -S&P 500
Equally weighted average - Answers -Index computed from a simple average of returns
Characteristics of Common Stock ownership - Answers -Is an ownership share in a
publicly held corporation. Shareholders have voting rights and may receive dividends
(not contractually obligated to do so).
The two most important characteristics: Residual Claim and Limited Liability.
Residual Claim - Answers -Stockholders are the last in line to receive or make a claim
on the assets and income of a corporation.
Limited Liability - Answers -The most shareholders can lose in the event of failure (of a
corporation), is their original investment.
Preferred Stock - Answers -Represents nonvoting shares in a corporation, usually
paying a fixed stream of dividends (not contractually obligated to do so). Corporations
may exclude 50% of dividends received from domestic corporations in the computation
of their taxable income.
Corporate Bonds - Answers -Are long-term debt issued by corporations, the bonds pay
semi-annual coupons (contractually obligated to pay) and return the face value of the
bond at maturity date.
Municipal Bond Tax Exemption - Answers -Coupons paid by municipal bonds are
exempt from federal income tax and from many state taxes. Therefore, the higher the
tax bracket that the investor is in, the more valuable tax-exempt municipal bonds are.
What is the best investment strategy in an efficient market? - Answers -Passive
investment strategy
Real Assets - Answers -Have productive capacity; they are assets used to produce
goods and services. These assets are tangible (Ex: Machinery, Power Plant) or
intangible (Ex: Patent on a good)
Financial Assets - Answers -Are claims on real assets or the income generating them
(bonds).
Asset Allocation - Answers -Is the allocation of an investment portfolio across broad
asset classes.
Security Selection - Answers -Is the choice of specific securities within each asset
class.
Role of Financial Intermediaries - Answers -These groups pool investor funds and
invest them. Their services are in demand because small investors can't efficiently
gather information, diversify, and monitor portfolios. They can act as a large investor
that can take advantage of scale economies.
Investment Banks - Answers -Are firms specializing in the sale of new securities to the
public, typically by underwriting the issue.
Commerical Banks - Answers -Accept deposits and lend the money to other borrowers.
Mutual Funds - Answers -Accept funds from small investors and invest on behalf of
these investors, in the national and international securities market.
Pension Funds - Answers -Accept funds and then invest, on behalf of current and
future retirees. Thereby channeling funds from one sector of the economy to another.
Venture Capital Funds - Answers -Pool funds of private investors and invest in start-up
firms.
Risk - Return Tradeoff - Answers -Assets with greater expected returns entail greater
risk.
There should be a tradeoff in the securities market, with higher risk assets priced to
offer higher expected returns than lower risk assets.
Characteristics of Money Market Securities - Answers -1) Short - Term
2) Relatively low risk
3) Highly Liquid
4) Their value almost never changes
, Money Market Securities "Cash Equivalents" - Answers -Because of their great liquidity
and stability. They can be converted into cash on short notice.
What is the most marketable money market security? - Answers -Treasury Bills are the
most marketable of all money market securities.
Price - weighted average (Index Example) - Answers -An index average computed by
adding the prices of the stocks and dividing by a "divisor" (Dow Jones).
Example of Price - weighted index: - Answers -Dow Jones Industrial Average
Value - weighted averages (Index Example) - Answers -Index return equals the
weighted average of all security returns, with weights proportional to their outstanding
market value (S&P 500)
Example of Value - weighted index - Answers -S&P 500
Equally weighted average - Answers -Index computed from a simple average of returns
Characteristics of Common Stock ownership - Answers -Is an ownership share in a
publicly held corporation. Shareholders have voting rights and may receive dividends
(not contractually obligated to do so).
The two most important characteristics: Residual Claim and Limited Liability.
Residual Claim - Answers -Stockholders are the last in line to receive or make a claim
on the assets and income of a corporation.
Limited Liability - Answers -The most shareholders can lose in the event of failure (of a
corporation), is their original investment.
Preferred Stock - Answers -Represents nonvoting shares in a corporation, usually
paying a fixed stream of dividends (not contractually obligated to do so). Corporations
may exclude 50% of dividends received from domestic corporations in the computation
of their taxable income.
Corporate Bonds - Answers -Are long-term debt issued by corporations, the bonds pay
semi-annual coupons (contractually obligated to pay) and return the face value of the
bond at maturity date.
Municipal Bond Tax Exemption - Answers -Coupons paid by municipal bonds are
exempt from federal income tax and from many state taxes. Therefore, the higher the
tax bracket that the investor is in, the more valuable tax-exempt municipal bonds are.
What is the best investment strategy in an efficient market? - Answers -Passive
investment strategy
