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Quiz AFM 121 sec 05 with answers

Quiz AFM 121 sec 05 with answers - Quiz#1 January 19th 2012...

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Quiz #1 January 19 th , 2012 AFM 121 Section 5 Andrew Ecclestone, CFA Name:_____________________ Student #:__________________ Question Score 1 2 3 Total Question 1 (5 marks) a) List two roles of Financial Intermediaries. 1. Liquidity Provision and Economies of Scale Expertise and size of intermediaries allows them to complete transactions at a lower cost Provide liquidity services such as providing chequing accounts for ease of paying bills or credit cards for ease of purchase 2. Mitigation of Adverse Selection Costs Information asymmetries arise between borrowers and lenders, managers of the firm know more about the firm’s prospects than investors A firm’s prospects is communicated to investors via financial statements, media releases and other commentary Ability to interpret and evaluate firm communications varies across investors
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Uniformed investors may elect not to invest due to adverse selection costs or may misallocate savings at an inappropriate price 3.
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