Financial Advisor Ethics Quiz

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What is the main concern associated with the remuneration arrangements in the financial advisory sector?

Reducing advisor-client trust

Prioritizing ST profits over LT consequences (correct)

Encouraging unethical behavior among clients

Failing to offer competitive financial products

How does moral hazard manifest in the context of insurance and protection against burglary?

People take excessive risks when they are insured (correct)

People become overly cautious when they have no insurance

Insurance encourages responsible behavior in all situations

Insurance leads people to protect their property effectively

What role do regulators play in mitigating moral hazard in the financial system?

Encouraging lenders to take on more risk

Promoting reckless behavior among borrowers

Providing insurance coverage to borrowers

Imposing penalties or restrictions on risky financial institutions (correct)

How can the system ensure that incentives are appropriately managed?

Through regulatory oversight and enforcement Signup and view all the answers

What is a key aspect of professional bodies' requirements for their members in the financial sector?

Requiring adherence to a code of ethics Signup and view all the answers

Why is it important for financial institutions to have a fiduciary duty to their customers?

To ensure ethical and responsible behavior towards clients Signup and view all the answers

What is one key factor that should be present for fair and efficient decision making in financial systems?

Access to accurate information Signup and view all the answers

Which party plays a crucial role in pooling funds and allocating them to different borrowers or investments?

Banks Signup and view all the answers

What is an example of a reliable financial instrument or service that can increase the efficiency of a financial system?

Electronic payment Signup and view all the answers

Why is pooling funds important for achieving economies of scale?

Allows individuals to buy shares together Signup and view all the answers

What role do new and reliable financial instruments, services, and operating systems play in the competitiveness of financial systems?

Increase efficiency and competitiveness Signup and view all the answers

Which technology increases access to financial services, decreases costs, and provides new investment opportunities?

Mobile payment Signup and view all the answers

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 Signup and view all the answers

What does the 'spread' refer to in the context of the liquidity of shares?

The difference between the bid and offer prices Signup and view all the answers

How does a smaller spread in the bid-ask prices of shares encourage trading of securities?

It reduces transaction costs for investors Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

Which of the following is NOT mentioned in the text as a way to measure risk and risk premiums?

Historical volatility of asset prices Signup and view all the answers

What was the primary contributing factor that caused the financial crisis to become global?

The sharp contraction in the international flow of funds Signup and view all the answers

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 Signup and view all the answers

What do brokers earn a commission on in exchange organised markets?

Completed trades Signup and view all the answers

Which of the following is an example of an incentive problem that contributed to the financial crisis?

All of the above Signup and view all the answers

In order driven markets, what does the term 'limit price' refer to?

Specifies the max buying price Signup and view all the answers

What was the purpose of the Royal Commission established in Australia in December 2017?

To investigate misconduct and malpractice in Australian financial institutions Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

Why have automated trading systems replaced open-outcry in exchange organised markets?

They are cheaper and maintain transaction records Signup and view all the answers

What key factor contributes to the transparency of exchange organised markets?

Electronic trading systems recording every trade Signup and view all the answers

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 Signup and view all the answers

In exchange organised markets, what is the main function of brokers for their clients?

Providing access to the market Signup and view all the answers