FIN 420 - Quiz - Lesson M1L1.docx - FIN 420 – Lesson M1L1 Quiz Q What is the difference between a primary asset and a derivative asset A The primary

FIN 420 - Quiz - Lesson M1L1.docx - FIN 420 – Lesson M1L1...

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FIN 420 – Lesson M1L1 Quiz Q: What is the difference between a primary asset and a derivative asset? A: The primary asset has a claim on the real assets of a firm, whereas a derivative asset provides a payof that depends on the prices of a primary asset but not the claim on real assets. Q: What is the difference between asset allocation and security selection? A: Asset allocation is the allocation of an investment portfolio across broad asset classes. Security selection is the choice of specific securities within each asset class. Q: Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems between managers and shareholders. 1. A fixed salary 2. Stock in the firm that must be held for five years (restricted stock) 3. A salary linked to the firm’s profits 1. A: A fixed salary means compensation is (at least in the short run) independent of the firm's success. This salary structure does not tie the manager’s immediate compensation to the success of the firm, and thus allows the manager to envision and seek the sustainable operation of the company. However, since the compensation is secured and not tied to the performance of the firm, the manager might not be motivated to take any risk to maximize the value of the company.
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  • Fall '09
  • JOHNSON,KAY

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