30 Questions
What is the main concern associated with the remuneration arrangements in the financial advisory sector?
Prioritizing ST profits over LT consequences
How does moral hazard manifest in the context of insurance and protection against burglary?
People take excessive risks when they are insured
What role do regulators play in mitigating moral hazard in the financial system?
Imposing penalties or restrictions on risky financial institutions
How can the system ensure that incentives are appropriately managed?
Through regulatory oversight and enforcement
What is a key aspect of professional bodies' requirements for their members in the financial sector?
Requiring adherence to a code of ethics
Why is it important for financial institutions to have a fiduciary duty to their customers?
To ensure ethical and responsible behavior towards clients
What is one key factor that should be present for fair and efficient decision making in financial systems?
Access to accurate information
Which party plays a crucial role in pooling funds and allocating them to different borrowers or investments?
Banks
What is an example of a reliable financial instrument or service that can increase the efficiency of a financial system?
Electronic payment
Why is pooling funds important for achieving economies of scale?
Allows individuals to buy shares together
What role do new and reliable financial instruments, services, and operating systems play in the competitiveness of financial systems?
Increase efficiency and competitiveness
Which technology increases access to financial services, decreases costs, and provides new investment opportunities?
Mobile payment
What is the primary reason investors require higher compensation in the form of increased expected returns?
To be induced into accepting the risk associated with the investment
What does the 'spread' refer to in the context of the liquidity of shares?
The difference between the bid and offer prices
How does a smaller spread in the bid-ask prices of shares encourage trading of securities?
It reduces transaction costs for investors
What is the relationship between the credit spread and the risk premium for different rated securities?
The credit spread and risk premium are directly related
What is the relationship between the credit worthiness of a bond issuer and the credit spread on their bonds?
As credit worthiness declines, the credit spread increases
Which of the following is NOT mentioned in the text as a way to measure risk and risk premiums?
Historical volatility of asset prices
What was the primary contributing factor that caused the financial crisis to become global?
The sharp contraction in the international flow of funds
Which of the following is an example of asymmetric information in the context of the financial crisis?
Investors being unaware of the high-risk nature of underlying mortgages in MBS/CDOs
What do brokers earn a commission on in exchange organised markets?
Completed trades
Which of the following is an example of an incentive problem that contributed to the financial crisis?
All of the above
In order driven markets, what does the term 'limit price' refer to?
Specifies the max buying price
What was the purpose of the Royal Commission established in Australia in December 2017?
To investigate misconduct and malpractice in Australian financial institutions
What happens to limit orders that have not resulted in a trade in exchange organised markets?
They remain stored in the market's central order book
Which of the following best describes the role of investment advisors during the financial crisis?
They were paid to sell high-risk securities without regard for investors' interests
Why have automated trading systems replaced open-outcry in exchange organised markets?
They are cheaper and maintain transaction records
What key factor contributes to the transparency of exchange organised markets?
Electronic trading systems recording every trade
According to the information provided, which statement about Wall Street banks is true?
They continued to market high-risk securities as low-risk to offload them from their records
In exchange organised markets, what is the main function of brokers for their clients?
Providing access to the market
Test your knowledge on remuneration arrangements, incentives, and moral hazards in the financial advisory industry. Learn about the ethical dilemmas faced by financial advisors and the risks of acting on self-interest instead of client's best interest.
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