Ch 01 Key Terms

Question 1

Active Management

Answer 1

Attempts to achieve portfolio returns more than commensurate with risk, either by forecasting broad market trends or by identifying particular mispriced sectors of a market or securities in a market.

Question 2

Agency Problem

Answer 2

Conflicts of interest among stockholders, bondholders, and managers.

Question 3

Asset Allocation

Answer 3

Choosing among broad asset classes such
as stocks versus bonds

Question 4

Derivative Securities

Answer 4

A security whose payoff depends on the value of other financial variables such as stock prices, interest rates, or exchange rates.

Question 5

Equity

Answer 5

Ownership in a firm. Also, the net worth of a
margin account.

Question 6

Financial Assets

Answer 6

Financial assets such as stocks and bonds are claims to the income generated by real assets or claims on income from the government.

Question 7

Financial Intermediaries

Answer 7

An institution such as a bank, mutual fund, investment company, or insurance company that serves to connect the household and business sectors so households can invest and businesses can finance production.

Question 8

Fixed-Income (debt) Securities

Answer 8

A security such as a bond that pays a specified cash flow over a specific period.

Question 9

Investment

Answer 9

Commitment of current resources in the expectation of deriving greater resources in the future.

Question 10

Investment Bankers

Answer 10

Firms specializing in the sale of new securities to the public, typically by underwriting the issue.

Question 11

Investment Companies

Answer 11

Firm managing funds for investors. An investment company may manage several mutual funds.

Question 12

Passive Management

Answer 12

Buying a well-diversified portfolio to represent a broad-based market index without attempting to search out mispriced securities.

Question 13

Primary Market

Answer 13

New issues of securities are offered to the public here

Question 14

Private Equity

Answer 14

Investment in a company that is not traded on a stock exchange.

Question 15

Real Assets

Answer 15

Real assets are land, buildings, and equipment that are used to produce goods and services.

Question 16

Risk-Return Trade-off

Answer 16

Investors must take on greater risk if they want higher expected returns.

Question 17

Secondary Market

Answer 17

Already existing securities are bought and sold on the exchanges or in the OTC market.

Question 18

Securitization

Answer 18

Pooling loans for various purposes into standardized securities backed by those loans, which can then be traded like any other security.

Question 19

Security Analysis

Answer 19

Determining correct value of a security in the marketplace.

Question 20

Security Selection

Answer 20

Choosing the particular
securities to include in a portfolio.

Question 21

Systemic Risk

Answer 21

Risk of breakdown in the financial system, particularly due to spillover effects from one market into others.

Question 22

Venture Capital

Answer 22

Money invested to finance a new, not yet publicly-traded firm.