Homework 1
Chapter 1
<1> What are the differences between real asset and financial asset?
<2> What are the differences between investment banking and commercial banking?
<3> Please discuss the advantages and disadvantages of the following forms of managerial
compensation in terms of mitigating agency problems, that is, potential conflicts of interest
between managers and shareholders.
a. A fixed salary.
b. A salary linked to the firms’ profit
c. Stock in the firm that must be held for five years (i.e., Stock-based
Compensation).
<4>
__________ calls for holding diversified portfolios without spending effort or resources
attempting to improve investment performance through security analysis.
A) Active portfolio management
B) Momentum investment
C) Passive portfolio management
D) Contrarian investment.
<5>
After considering current market conditions, an investor decides to place 60% of her funds
in equities and the rest in bonds. This is an example of _____.
A) asset allocation
B) security selection
C) top-down portfolio management
D) Passive investment.
<6>
In a very efficient market, the best investment strategy is probably _____.
A) an active investment strategy (e.g., timing the market, finding undervalued stocks)
B) a passive investment strategy
<7>
A major cause of mortgage market meltdown in 2007 and 2008 (i.e., so-called “subprime
mortgage crisis” or “credit crunch”) was linked to ________.
A) private equity investments
B) securitization
C) high-frequency trading
D) Unbundling cash flow (a example of financial engineering).
<8>
In recent years the greatest dollar amount of securitization occurred for which type of loan?
A) Home mortgages
B) Credit card debt
C) Automobile loans
Chapter 2
<1> A tax-exempt municipal bond carries a coupon rate of 6.5% and is trading at par. What
would be the equivalent taxable yield of this bond to a taxpayer in a 35% tax bracket? What
would be the equivalent taxable yield of this bond to a taxpayer in a 40% tax bracket?
<2> Use the following information for the next problems:
Price
Stock
Number of Shares
Day T
Day T+1
Q
5,000,000
80
95
R
8,000,000
60
55
S
15,000,000
20
24
(a) Refer to the table above. Calculate a price weighted average index for Day T.
(b) Refer to the table above. Calculate a value weighted average index for Day T + 1. Assume a
base index value of 100 on Day T.