Essentials of Investments – Chapters 1–3 Questions & Correct Answers for Finance and Investment
Students
Investment - (answer)Trading present resources for future payoff.
Real Assets - (answer)Used to produce goods and services.
Ex. Land, buildings, equipment and knowledge.
Financial Assets - (answer)Claims on real assets.
Ex. Bank loans, stocks, bonds and options.
Represent 60% of total assets of U.S. households.
Consumption Smoothing - (answer)Saving for the rainy days: retirement account, insurance
Allocation of risks - (answer)Diversification over a larger ownership. Repackaging risk to match investor's
risk appetite.
Agency Problem - (answer)Separation of ownership and management
Market Efficiency - (answer)Does not require that the market price be equal to true value at every point
in time. All it requires is that errors in the market price be unbiased.
Active Management - (answer)Inefficient markets
-Finding undervalued securities
-Market timing
Passive Management - (answer)Efficient Markets
-No attempt to find undervalued securities
-No attempt to time
-Holding a diversified portfolio
Students
Investment - (answer)Trading present resources for future payoff.
Real Assets - (answer)Used to produce goods and services.
Ex. Land, buildings, equipment and knowledge.
Financial Assets - (answer)Claims on real assets.
Ex. Bank loans, stocks, bonds and options.
Represent 60% of total assets of U.S. households.
Consumption Smoothing - (answer)Saving for the rainy days: retirement account, insurance
Allocation of risks - (answer)Diversification over a larger ownership. Repackaging risk to match investor's
risk appetite.
Agency Problem - (answer)Separation of ownership and management
Market Efficiency - (answer)Does not require that the market price be equal to true value at every point
in time. All it requires is that errors in the market price be unbiased.
Active Management - (answer)Inefficient markets
-Finding undervalued securities
-Market timing
Passive Management - (answer)Efficient Markets
-No attempt to find undervalued securities
-No attempt to time
-Holding a diversified portfolio
