MGF 402 Investment Management All Answers Correct
Risk Aversion ️an individual who is rational will attempt to maximize their expected utility, rather
than the expected value of their wealth
Risk Seeking ️person enjoys taking risk and making more money rather than maximizing their utility...
Risk Aversion ✔️an individual who is rational will attempt to maximize their expected utility, rather
than the expected value of their wealth
Risk Seeking ✔️person enjoys taking risk and making more money rather than maximizing their utility
Real assets ✔️determines the productive capacity and net income of the economy (land, workers,
knowledge, buildings, tech)
Financial Assets ✔️claims on real assets, don't directly contribute to economic production (stocks,
bonds)
Fixed income or debt ✔️promise either a fixed stream of income or a stream of income determined by
a specified formula
Common stock or equity ✔️represent an ownership in a corporation or project
Derivative Securities ✔️provide payoffs that are determined by the prices of other assets
Financial Markets: create value by ✔️1.) Playing an information role- capital flows to companies with
the best prospects
2.) Consumption timing- securities can be used to store wealth and transfer consumption to future
3.) Allocation of risk- pick securities with the level of risk you're comfortable with
Agency problems ✔️Arise when managers start pursuing their own interests instead of maximizing
firms value
Portfolio ✔️collection of investment assets
, Asset allocation ✔️choice among asset classes. What percent of wealth does an investor want in bonds
vs stocks
Security Selection ✔️choice of securities within each asset class. Which stocks does the investor want
in their portfolio
Top Down investment process ✔️asset allocation is determined first, followed by security analysis to
evaluate which particular securities should be included in each part of the portfolio
Bottom up Investment process ✔️investments based solely on the price attractiveness, which may
result in unintended heavy weight of a portfolio in only one or another sector of the economy
Risk Return Trade-off ✔️higher risk assets are priced to offer higher expected returns than lower risk
assets
Efficient markets ✔️prices quickly adjust to all relevant information. There shouldn't be over or under
priced securities in a perfectly efficient market. 3
Passive management ✔️highly diversified portfolio, no attempt to time the market or to find
undervalued securities
Active management ✔️finding mispriced securities and timing the market
Investment banking ✔️underwrite new securities issues. Sell newly issued securities to public in the
primary market. Investors trade previously issued securities among themselves in the secondary market.
Commercial banking ✔️take deposits and make loans
Primary Stock market ✔️brand new stocks, sold to special investors, not open to everybody
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