The Investment Environment Chapter 1 Quiz and Flashcards

What legislation was passed in 2002 in response to ethics scandals such as Enron and HealthSouth?

What is the main focus of the Sarbanes-Oxley Act (SOX)?

Which investment process approach involves asset allocation followed by selecting specific securities within each asset class?

What theory suggests that the prices of securities fully reflect all available information?

In competitive financial markets, what is the risk-return trade-off principle?

What is the main implication of the efficient market hypothesis for investors?

Which type of asset directly contributes to the productive capacity of the economy?

What type of securities promises either a fixed stream of income or a stream of income determined by a specified formula?

In financial markets, what is the role of derivative securities?

What is the primary mechanism used to mitigate potential agency problems in corporations?

Which type of asset represents ownership share in a firm?

What is the main difference between real assets and financial assets?

Investments Overview

The chapter covers the investment environment, including the distinction between "real" and financial assets.

Real Assets vs. Financial Assets

Real assets are used to produce goods and services, examples: land, buildings, machines, and intellectual property.
Financial assets are claims to the income generated by real assets or claims on income from the government, examples: stocks, bonds.

Types of Financial Assets

Fixed-income securities promise a fixed stream of income or a stream determined by a specified formula, example: corporate bond.
Equity represents ownership share in a firm, example: common stock.
Derivative securities' payoff depends on the value of other financial variables, examples: stock prices, interest rates, exchange rates.

Financial Markets and the Economy

Financial markets play an informational role in the economy, helping in consumption timing and allocation of risk.
Separation of ownership and management can lead to agency problems, which can be mitigated by compensation plans, monitoring, and the threat of takeover.

Corporate Governance and Corporate Ethics

Corporate governance and ethics are crucial, as seen in scandals such as Enron, Rite Aid, and HealthSouth.
The Sarbanes-Oxley Act (2002) was passed in response to ethics scandals, focusing on corporate governance.

The Investment Process

A portfolio is a collection of investment assets, and asset allocation is the choice among broad asset classes.
Security selection is the choice of securities within each asset class, involving security analysis and valuation.

Markets Are Competitive

Financial markets are highly competitive, with a risk-return trade-off, where higher-risk assets offer higher expected returns.
The efficient market hypothesis states that security prices fully reflect available information, making it difficult to find underpriced or overpriced securities.

Test your knowledge on 'Real' and financial assets, risk-return trade-off, efficient pricing of financial assets, and the financial crisis of 2008 as covered in Chapter One of the INVESTMENTS book by Bodie, Kane, and Marcus.