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MaxMark_Ch01_Questions_Only - MenuItem1 cfw_Topic 1 A...

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MenuItem1: {Topic 1} A modern financial system: An overview Question 1: Any asset may be regarded as a package of attributes. Which of the following contains the greatest number of such attributes? A: return, risk, time pattern of cash flows B: yield, liquidity, tax effectiveness, time pattern of cash flows C: return, risk, liquidity, time pattern of cash flows D: consumption, return, flexibility, risk, liquidity Feedback: Assets can be regarded as having four main characteristics that are important to the owner or to a potential buyer. These are: return (or yield), risk, liquidity and the time-pattern of the cash flows (or returns) that the asset is expected to provide. Only C contains all four of these characteristics, making it the correct answer. More: Financial Institutions, Instruments and Markets 5/e, Section 1.1, p. 7 It is useful to think of every asset that is purchased, whether it is a real asset such as an investment property or a financial asset such a bank term deposit, as being a package of four attributes: return or yield risk liquidity time-pattern of the cash flows Question 2: The typical person is assumed to: A: like return, liquidity and risk B: like return and liquidity but refuse to accept risk C: like return, dislike risk and have no concern about liquidity D: like return and liquidity but dislike risk Feedback: Return and liquidity are both asset characteristics that will generally be preferred by investors who are also assumed to be risk averse. Risk aversion does not mean that a person will refuse to accept risk. It does mean that a person will take on risk only if it is accompanied by compensation, usually in the form of a higher expected return. Only D is consistent with these assumptions. More: Financial Institutions, Instruments and Markets 5/e , Section 1.1, p. 7 It is reasonable to assume that the typical person likes return and liquidity, dislikes risk, and prefers reliable cash flows through time rather than an unpredictable time-pattern. Question 3: Which of the following is not an important function of an efficient financial system? A: providing a wide range of financial instruments with characteristics that suit the needs of investors MaxMark t/a Financial Institutions, Instruments and Markets 5e by Viney 1
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B: providing economic and financial information to market participants C: facilitating economic growth by encouraging savings D: allowing companies to produce goods and services regardless of the demand for these goods and services Feedback: When a company provides goods or services that are in high demand, its profits and therefore its share price will be higher than otherwise. The higher share price and positive outlook will make it easier for the company to raise more capital and invest to increase its output. Thus the statement in D is not applicable to an efficient financial system, making it the correct answer.
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