Financial Markets and the Economy: Separation of Ownership and Management

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What can individuals choose between when it comes to their wealth?

Consuming their wealth today or investing for the future (correct)

Spending all their wealth today

Hiding their wealth or losing it

Investing without any future plans

Which assets are used to produce goods and services?

Financial assets like land

Equipment and financial claims

Buildings and equipment (correct)

Real assets such as stocks

What is the main goal of an investment?

To outlay capital with no expectation of payoff

To generate income or appreciation (correct)

To distribute resources without commitment

To acquire real assets

What do financial assets help individuals participate in?

Income generation Signup and view all the answers

How must financial assets and liabilities balance according to the text?

They must balance Signup and view all the answers

Why are financial markets important in investments?

To provide a platform for trading financial assets Signup and view all the answers

What are the major participants in financial markets?

Individuals and corporations Signup and view all the answers

What happens when we cancel out financial assets on an aggregated balance sheet?

Only real assets remain Signup and view all the answers

Which event is discussed in relation to the causes and consequences of the financial crisis in 2008-2009?

Housing market crash Signup and view all the answers

What is considered as a liability based on the text's explanation?

Toyota Bond you own Signup and view all the answers

What is the main distinction apparent when looking at the balance sheet of US households?

Real and financial assets Signup and view all the answers

What defines a financial asset?

Claims on real assets or generated income Signup and view all the answers

According to modern portfolio theory, what is the effect of diversification on the risk of the entire portfolio?

Decreases the risk Signup and view all the answers

In an efficient market, what happens when new information about a security becomes available?

The price adjusts instantly to reflect the new information Signup and view all the answers

What is the primary strategy used in passive management?

Buying and holding a diversified portfolio Signup and view all the answers

What is the main goal of active management?

Forecasting market trends and events Signup and view all the answers

Who typically purchases securities issued by business firms in financial markets?

Households Signup and view all the answers

What role do business firms usually play in financial markets?

Issue securities to raise capital for investments Signup and view all the answers

What is a key mitigating factor for agency problems between managers and shareholders?

Performance-based compensation Signup and view all the answers

In the context of corporate governance and ethics, what is necessary for security markets to fulfill their capital allocation role?

Accurate and transparent information Signup and view all the answers

What action can boards of directors take in dealing with underperforming managers?

Fire managers Signup and view all the answers

Why is the separation of ownership and management essential for large corporations?

Owner-operated firms are not feasible at that scale Signup and view all the answers

What do governance and ethics failures ultimately impact?

The economy Signup and view all the answers

How do security markets contribute to capital allocation according to the text?

By sending accurate and transparent signals Signup and view all the answers

Who are the major players in channeling household savings to the business sector?

Financial Intermediaries Signup and view all the answers

Which entity specializes in primary market transactions like IPOs?

Investment Bankers Signup and view all the answers

What do investment bankers do in the underwriting process of an IPO?

Evaluate risks and agree to purchase shares at a set price Signup and view all the answers

Which group holds about half of all stocks and serves as connectors between borrowers and lenders?

Pension funds Signup and view all the answers

Among the following, which one is NOT considered a financial intermediary according to the text?

Governments Signup and view all the answers

Which market involves traders exchanging preexisting securities among themselves?

Secondary market Signup and view all the answers