Table of Contents
All Weeks Financial Markets Coursera Quiz Answers
Financial Markets Week 01 Quiz Answers
Lesson #1 Quiz Answers
Q1. Which of the following professions has the highest projected employment for
- Truck driver
- Financial Advisor
Q2. Which of the following is NOT a learning objective in this course?
- Applying psychology and sociology to finance
- How to make money
- Regulating financial markets
- How we incentivize people to get things done
Q3.According to Andrew Carnegie, what should somebody do once she is wealthy?
- Throw extravagant parties to help her wealth trickel down
- Pass it on her children
- Retire early and commit to philanthropy while young
- Retire late to accumulate as much wealth as possible, and then give the wealth away
Q4. Why is it relevant that finance tends to attract large amounts of money?
- Money can be used for good or evil
- Finance attracts people from around the globe
- Financial markets are a critical components of economic success
- All of the above
Lesson #2 Quiz Answers
Q1. A stress test: (check all that apply)
- Tries to incorporate all the interconnections between financial institutions.
- Aims to test the behavior of historical returns and their fluctuations during all sorts of potential financial crises.
- Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis ,etc.
- Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises.
Q2. A 5% 3-month Value At Risk (VaR) of $1 million represents:
- A 5% decline in the value of the asset after 3 month, per each $1 million of notional.
- A 5% chance of the asset increasing in value by $1 million during the 3-month time frame.
- A 5% chance of the asset declining in value by $1 million during the 3-month time frame.
- The likelihood of a 5% of $1 million decline in the asset over the next 3- month.
Q3. In the Capital Asset Pricing Model (CAPM), a measure of systematic risk is captured
- The standard deviation of returns
- The variance of returns
- The Beta.
- The Alpha.
Q4. Market (or systematic) risk whereas idiosyncratic risk ___.
- Is the risk for an asset to not be able to be traded in the market at a later time
- Is the risk for an asset to experience losses due to factors that affect the entire stock market
- Is the risk for an asset to experience losses due to factors that affect the entire stock market
- Is the risk which is endemic to a specific asset and therefore not the market as a whole
- Is the risk for an asset to experience losses due to factors that affect the entire stock market
- Is the risk which is endemic to the industry of the asset and therefore not the market as a whole
- Is the risk for an asset to experience losses due factors that solely affect the industry associated with the asset
- Is the risk which is endemic to a specific asset and therefore not the market as a whole
Q5. Why might an investor not normally invest large sums of money into Walmart or
- Both companies have received extensive media coverage
- The stock prices are very stable, making it difficult to gain large sums of money
- Their stock prices are highly volatile, and thus carry a lot of risk
- Their stock prices closely track the S&P500
.Q6. Why is the normal distribution not a good model of some financial data?
- Extreme events occur in it too often
- The standard deviation is too high
- It does not have many outliers
- The standard deviation is too low
Lesson #3 Quiz
Q1. Which of these best describes risk pooling?
- If individual events are not independent, risk can be decreased by averaging across all of the events
- If individual events are independent, risk can be decreased by averaging across all of the events
- Insurance companies must avoid situations whereby customers are incentivized to intentionally cause an incident (e.g. burning their house down)
- Sick people are more likely to sign up for health insurance, and healthy people will not purchase the policy because this will make the premium more expensive
Q2. Which of the following was NOT a factor which led to the proliferation of life
- Insurance salespeople
- Increased life expectancy
- Statistical data on life expectancy
- New sales pitches
Q3. What happens in the United States if your insurance company goes bankrupt?
- There is no protection from the government against insurance company failure
- Consumers are insured from insurance company failure at the state level
- Insurance companies are partially owned by the government, and thus are not allowed to fail.
- Just like the FDIC protects consumers from bank failures, the federal government insures against insurance company failures
Q4. What problem does the US Affordable Care Act (“Obamacare”) attempt to address
and how does it do so?
- It addresses selection bias by forcing everybody to buy health insurance or else face a tax penalty.
- It addresses selection bias by creating a healthcare system which is fully publicly-funded.
- It addresses moral hazard by forcing hospitals to provide emergency services to those who cannot pay for it.
- It addresses moral hazard by allowing hospitals to refuse treatment to those who cannot pay for it.
Q5. One of the main reasons why many homeowners did not have flood insurance
before the advent of Hurricane Katrina in 2005 was:
- Many homeowners were relying on the government instead.
- Many homeowners were not aware that flood insurance existed in the first place.
- Insurance premiums in Louisiana went up by 70% between 1997-2005, causing many people to cancel their insurance.
- Homeowners thought that the likelihood of a flood was too low to justify buying a flood insurance.
Lesson #4 Quiz
Q1. Under the “Don’t put all your eggs in one basket” analogy, the eggs represent
individual investments and the basket represents the overall investment portfolio.
Spreading your “eggs” around allows you to:
- Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio.
- Maximize the possibility that good luck for a single investment positively affects your overall portfolio.
- Maximize the return of your overall portfolio.
- Increase the uncertainty of your overall portfolio so you can try to generate an extra return.
Q2. Risk diversification can be better achieved: (check all that apply)
- With only low risk assets in your portfolio.
- By including in your portfolio all classes of assets traded in the market, independently of their risks.
- With mutual funds or unit investment trusts if you hold a small number of assets.
- With only stocks in your portfolio.
Q3. Short selling, which is defined as the sale of a security that the seller has
borrowed, is motivated by the belief that:
- The price of the security will rise.
- The price of the security will decline.
- Short selling is never prompted by speculation.
- The price of the security will stay the same
Q4. The expected return of a portfolio is computed as and the standard
deviation of a portfolio is .
- the simple average of the expected returns of each asset in the portfolio
- NOT the weighted average of the standard deviations of each individual asset
- the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset
- NOT the weighted average of the standard deviations of each individual asset the weighted average of the expected returns of each asset in the portfolio, weighted by the investment in each asset
- the weighted average of the standard deviations of each individual asset
- the simple average of the expected returns of each asset in the portfolio
- the weighted average of the standard deviations of each individual asset
Q5. An efficient portfolio is a combination of assets which:
- Achieves the highest return for a given risk.
- Minimizes risk by ensuring only diversifiable risk remains.
- Offers a risk free rate of return by minimizing the risk of the portfolio.
- Achieves the highest possible covariance among its assets.
Module 1 Honors Quiz
Q1. Which of the following are new advancements and changes in finance?
- Information technology
- Behavioral finance
Q2. What did Andrew Carnegie believe some people succeed in business and others
The business world selects for people with natural talent
The business world selects for people who work hard
The business world selects for people with a good education
The business world selects for people who get lucky opportunities
Q3. The main difference between Value at Risk and Stress Testing is:
- Value at Risk takes a non-statistical approach with, as opposed to stress testing
- Stress Testing takes a non-statistical approach with its scenarios analysis.
- Value at Risk is not a quantitative approach.
- There are no differences between the two approaches.
Q4. According to the Capital Asset Pricing Model (CAPM), a security with:
- An alpha of zero is able to generate a return which greater than the market return.
- A positive alpha is considered overpriced, since the security outperforms the market.
- An alpha of zero is able to generate a return which is inferior to the market return.
- A positive alpha is considered underpriced, since the security outperforms the market.
Q5. Which of the following are true about fat tail distributions?
- They are a good model for some financial data
- The mean is a good representation of the distribution
- They are the best choice for most types of data
- We must rely on the central limit theorem to gather useful information about them.
Q6. If an insurance company has 10000 policies, and each has 0.1 probability of
making a claim, what is the standard deviation of the fraction of policies which result
in a claim?
Q7. . Why was the National Association of Insurance Commissioners created?
- To suggest laws that would prevent insurance corporations from becoming “too big to fail”
- To suggest laws that would decentralize the insurance industry
- To suggest laws that would decrease the complexity of insurance regulation
- To suggest laws that would strengthen the insurance industry
Q8. Insurance is managed by employers, so if an employee is sick and loses her job,
her insurance will be expensive due to preexisting conditions; by contrast, a healthy
person who loses his job may not be incentivized to purchase health insurance. This
is an example of
- Moral hazard
- Selection bias
- Pooled risk
Q9. In addition to earthquake, hurricane and terrorism, which of the following could
be categorized as a “disaster” risk?
- Market liquidity risk
- A World War
- Bankruptcy Risk
- Currency Risk
Q10. One of the mentioned assumptions of portfolio management theory is that
investors are rational. A rational investor:
- Invests only in fully diversified portfolios.
- Is always averse to risk.
- Prefers a higher return for a given risk and prefers a lower risk for a given return
- Invests in passive funds rather than active funds
Q11. The market portfolio, which includes all traded assets available in the market,
must have a beta which is:
- Equal to 1
- Above 1
- Equal to 0
Q12. Among the risks associated with short selling a stock are: (check all that apply)
- Default risk: potential unlimited losses when buying back the stock.
- Regulatory risk: a ban on short sales can create a surge in the stock price.
- Dividend risk: the short seller must provide dividend payments on the shorted stock to the entity from whom the stock has been borrowed.
- Systematic risk: the uncertainty inherent to the market as a whole and which cannot be diversified.
Q13. Leveraging your portfolio: (check all that apply)
- Allows you increase your return on equity, magnifying positive (or negative) returns by borrowing money.
- Increases your default risk by magnifying the standard deviation (risk) of your portfolio.
- Does not increase the standard deviation of your portfolio, since the borrowed money is risk free and therefore has a standard deviation of zero.
- Increases systematic risk within your portfolio, that is the uncertainty inherent to the market as a whole and which cannot be diversified.
Q14. You are an investor who wants to form a portfolio that lies to the right of the
“optimal” minimum standard deviation portfolio on the efficient frontier. You must:
- Invest only in risky securities.
- Borrow money at the risk-free rate, invest in the minimum standard deviation portfolio and, in addition, only in risky securities.
- Borrow money at the risk-free rate and invest everything in the minimum standard deviation portfolio.
- Invest only in risk-free securities.
Financial Markets Week 02 Quiz Answers
Lesson #5 Quiz
Q1. While discussing what the future of financial markets will look like, the following
arguments were mentioned (check all that apply):
- It is hard to predict the nature of future financial markets, this evolution will depend on the involvement of young generations within the financial community.
- Financial markets will evolve following simple ideas and ideals, such as the ones historically mentioned by Karl Marx or Robert Owen.
- It is hard to predict the nature of future financial markets, since human species is the product of a complex evolution.
- Financial markets are likely to stay the way they are now for the next three decades.
Q2. In his work, David Moss describes how investors’ psychology favored limited
liability after the early 19th century New York experiment. In fact, the comparison
between investors’ psychologies in the context of unlimited liability and lottery
- Symmetrical. Unlimited liability and lottery tickets investors tend to overestimate the minimum probability of loss.
- Asymmetrical. Unlimited liability investors tend to overestimate the minimum probability of loss, whereas in lottery tickets, they overestimate the minimum probability of win.
- Symmetrical depending on the amount of money involved. For large amounts, both unlimited liability and lottery tickets investors tend to overestimate the minimum probability of loss.
- There is no such comparison between lottery tickets and unlimited liability investors.
Q3. The introduction of inflation indexed debt was motivated by: (check all that apply)
- An incentive to hedge from inflation volatility.
- The idea to generate profits when inflation is equal to 0.
- Historical examples of nominal debt being wiped out in real terms by high inflation.
- An incentive to have a debt contract fixed in real terms.
Q4. Why did Chile introduce the Unidad de Fomento ?
- To provide stimulus to the economy.
- To create a unit of account indexed to inflation, in order to counteract the impact of hyperinflation.
- To bolster international trade.
- To replace the peso as the official currency because of hyperinflation.
Q5. The concept of equity-protected mortgages consists in:
- Mortgages that include fire insurance.
- Mortgages that include casualty insurance.
- Mortgages that include house price insurance.
- Mortgages that include accident insurance.
Lesson #6 Quiz
Q1. In the S&P 500 forecasting exercise, many subjects seemed to be subject to the representativeness heuristic. This concept of behavioral finance posits that:
- Most people don’t behave like forecasters, they tend to be affected by their recurring thoughts at the time.
- Most people don’t behave like forecasters, they tend to interpret new evidence as a confirmation of their existing beliefs or theories.
- Most people don’t behave like forecasters, what they saw in the past is representative of the future.
- Most people don’t behave like forecasters, they tend to rely too heavily on the first piece of new information offered when making decisions
Q2. An efficient market is defined as one in which:
- All participants have the same opportunity to generate the same returns.
- Asset prices quickly and fully reflect all available information.
- Asset prices are often in line with the intrinsic value.
- Transactions are ultimately costless.
Q3. The Dividend Discount Model (or Gordon Growth Model) can be stated as follows.
Let the investor’s discount rate be equal to r .If earnings equal dividends, and if dividends grow at the long-run rate g, then the price of the stock P can be written as follows:
- P = E/(r+g)
- P = (Eg)/(r)
- P = E/(r-g)
- P = (Er)/(g)
Q4. Human judgment and experience can play a role in the advent of stock market crash because:
- Investors with an experience of financial crises are better at staying out of the market in turbulent times.
- A lot of people who have lived through financial crises have reported that, as a consequence of these crises and their narratives, their faiths in the market have diminished.
- Investors with an experience of financial crises are better at diversifying their portfolios.
- Investors with an experience of financial crises are better at exploiting profit opportunities
Lesson #7 Quiz
Q1. Which of the following best describes the “invisible hand”?
- Subtle government economic interventions can lead to the inefficient allocation of resources.
- The free market, guided by self-interest, is mislead to inefficiently allocate resources.
- Subtle government economic interventions can ensure the sufficient production of goods to meet society’s demands.
- The free market, guided by self-interest, ensures the sufficient production of goods to meet society’s demands.
Q2. What problems does prospect theory solve? (check all that apply)
- People can underestimate high probabilities and overestimate low probabilities
- People do not treat gambles as equivalent to their expected utility
- People will make big gambles to avoid losses
- People will often make purchases impulsively
Q3. What is the wishful thinking bias?
- People think that, if they hope for something strongly enough, it will be more likely to happen.
- People over-estimate probabilities of things they would like to be true.
- People do not consider the probability of the things they want most.
- People hope that their sports team or political candidate will win
Q4. Ricardo thinks that, since society seems similar to what it was in the late 1920s, a
second Great Depression is coming soon. To which cognitive bias is Ricardo falling
- Representativeness heuristic
- The framing effect
- The disjunction effect
- Attention anomalies
Q5. What is Newcomb’s paradox?
- People behave irrationally when faced with decisions which involve large sums of money
- People will behave differently if playing games against a computer compared to playing them with a human opponent.
- People sometimes change their behavior when they learn about a prediction which has been made about the future.
- People prefer a small chance at winning $1 million than a high chance of winning $1000.
Q6. Which of the following is NOT a common trait of somebody with Antisocial
- Lack of empathy
- Lack of desire to interact with others
- Heightened self-esteem
Module 2 Honors Quiz
Q1. A limited liability corporation in which you are a shareholder has just gone bankrupt. The company has a large debt, that is its liabilities are far in excess of its assets. Hence, you will be called on to pay:
- A proportion of the total debt, which is decided at the discretion of the bankruptcy judge.
- An amount that could, at most, equal what you originally paid for the shares of common stock in the corporation.
- A proportional share of all creditor claims based on the number of common shares that you own.
Q2. The inflation risk, which inflation indexation aims to mitigate (check all that apply)
- Is not the risk that there will be inflation, it is the risk that inflation will significantly fluctuate over time.
- Is the risk that the nominal rate of return of an investment will exceed the rate of inflation.
- Is the risk that the cash flow from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation.
- Is associated with any investment that involves cash flows over time.
- The concept of human capital risk (check all that apply):
- is a risk associated with the present value of all your future wages.
- Is not correlated with professional competency.
- Is not correlated with the stock market.
- Can also be considered as a protection against inflation.
Q4. The random walk hypothesis of the Efficient Market Theory posits that:
- Historical stock prices follow a random walk.
- Stock price volatility follows a random walk.
- Historical stock returns follow a random walk.
- Short-term investment returns are inherently unpredictable.
Q5. Suppose a market is inefficient. As new information is received about an asset:
- There will be a lag in the adjustment of the stock price.
- Nothing will happen.
- The volatility (standard deviation) of the stock price will increase.
- Investors will short the stock
Q6. Investors mainly use the price-to-earnings (P/E) ratio in order to:
- Decide how much profit a company is likely to make in the future.
- Decide whether a company’s shares are overpriced or underpriced.
- Determine the optimal risk-return ratio.
- Determine the optimal price for the company’s products.
Q7. What is the shape of the value function in prospect theory?
- Gains: concave up; Losses: concave up
- Gains: concave up, Losses: concave down
- Gains: concave down; Losses: concave up
- Gains: concave down; Losses: concave down
Q8. Which of the following provide evidence that investors experience cognitive dissonance?
- Investors buy and sell stocks very rapidly
- Investors choose investments which already have many other investors
- Investors do not remember the negative performance of their investments.
- Investors hold onto funds that are doing poorly
Q9. Which of the following situations are examples of the framing effect? (check all that apply)
- An elevator lists a maximum capacity of 2000 lbs, even though it can safely carry up to 5000 lbs.
- A mattress which costs $1000 is advertised as $4000 with a “75% off” sticker on it
- A gold coin is sold for $1000, even though it is only worth $300.
- A stock splits from $60 to $30 and investors are given twice as many shares
Q10. Which of the following defines the relationship of doctors to patients, but generally does not apply to the relationship of financial advisors to their clients?
- Patients can do their own background research on medical concepts to help them better understand their health, but finance is too complicated for clients to do this.
- Doctors use both data and experience/intuition when advising patients, but financial advisors must use either one or the other.
- Doctors have made an oath of loyalty to their patients, but financial advisors have not.
- Patients may seek second opinions from other doctors, but not from financial advisors.
Q11. Which describes the concept of social contagion?
- Mathematical models of disease spread can be applied to the spread of ideas
- When an idea gains cultural momentum, it is more likely to be propagated throughout generations
- Contagious diseases tend to spread in social situations.
- Ideas can evolve and develop in a similar way to genes, and we can use the principles of evolutionary biology to understand this development.
Financial Markets Week 03 Quiz Answers
Lesson #8 Quiz
Q1. Which of the following describes current short term interest rates?
- They are approximately zero
- They are very high
- They are strongly negative
- They are changing for the first time in the last 100 years
Q2. What is the Federal Funds Rate and how long does it take to mature?
- The longest term interest rate in the federal government, which takes one year to mature.
- The shortest term interest rate in the federal government, which takes one hour to mature.
- The shortest term interest rate in the federal government, which takes one month to mature.
- The shortest term interest rate in the federal government, which takes one day to mature.
Q3. If you put $1000 into an account with a 20% interest rate, how much money will
you have at the end of the year if interest is compounded ONCE per year?
Q4. How do coupon bonds work?
- You purchase a bond for the same price you eventually sell it for, but if you have a “coupon”, you may buy it for less money.
- You purchase a bond for the same price you eventually sell it for, but while it reaches maturity, you may clip “coupons” off the bond and exchange them for money.
- You purchase a bond for the same price you eventually sell it for, but bond owners are eligible for special offers from the federal government, also known as “coupons”, which incentivize the purchase of the bonds.
- You purchase a bond for one price, but the final price you may sell it for depends on the type of “coupons” that are released to account for inflation.
Q5. What is the main difference between a consol and an annuity ?
- The consol has a fixed price of $1 at inception whereas the annuity price is given by the market.
- A consol pays a constant quantity (coupon) forever, whereas the annuity also pays a constant quantity but only until a fixed time T called the maturity date
- An annuity pays a constant quantity (coupon) forever, whereas the consol also pays a constant quantity but only until a fixed time T called the maturity date.
- A consol is not subject to market risk.
Q6. The forward rate is:
- The expected rate (yield) on a bond several months or years from now.
- The (inflation-adjusted) rate on a bond.
- Equal to the yield to maturity of the bond.
- Equal to the nominal rate of the bond.
Q7. The real interest rate is calculated by:
- Subtracting the inflation rate from the nominal interest rate.
- Adding the inflation rate and the nominal interest rate.
- Subtracting the nominal interest rate from the inflation rate.
- Adding the nominal interest rate and the yield to maturity.
Q8. Irving Fisher’s Debt Deflation Theory starts from the observation that:
- Deflation redistributed real wealth from creditors to debtors.
- Deflation has no impact on the real wealth of debtors.
- Deflation redistributed real wealth from debtors to creditors.
- Deflation has no impact on the real wealth of creditors
Lesson #9 Quiz
Q1. Market capitalization is calculated by using:
- The total number of employee of a company.
- The earnings of a company.
- The price per share and the total number of outstanding shares.
- The dividends of a company.
Q2. The greater an investor’s ownership in a corporation is, the greater:
- is the amount of taxes to be paid by the company.
- is the total number of shares he/she owns with respect to the total number of shares outstanding.
- is the profitability of the company.
- is the total number of shares he/she owns.
Q3. A firm must make its dividend payments to _ before it makes any dividend payments to its __.
- preferred shareholders common shareholders
- its Chief Executive Officer preferred shareholders
- the members of the board bondholders
- bondholders preferred shareholders
Q4. The basic corporate charter: (check all that apply)
- does not say that the firm ever has to raise debt. The board decides.
- says that the firm must pay dividends during its lifetime.
- says that the firm must repurchase some of its shares beyond a certain threshold of issuance.
- does not say that the firm ever has to issue warrants, convertible debt or any other debt securities.
Q5. In the Pecking Order Theory, the companies prioritize their sources of financing in the following order:
- (1) Debt, (2) Internal financing, (3) Equity.
- (1) Internal financing, (2) debt issuance, (3) Equity.
- (1) Equity, (2) Debt issuance, (3) Internal financing.
- (1) Equity, (2) Internal financing, (3) Debt.
Q6. A dilution is:
- The issuance of new debt by a company.
- A sale of an investor’s shares.
- A reduction in the ownership percentage of a share of stock caused by the issuance of new shares.
- An increase in the ownership percentage of a share of stock caused by the issuance of new shares.
Q7. A share repurchase is: (check all that apply)
- An alternative to paying dividends in order to return cash to investors.
- The reverse of a dilution.
- A program by which investors buy back their previously sold shares of a given company.
- A program by which a company buys backs its own shares from
Q8. The price-to-earnings ratio: (check all that apply)
- Indicates the percentage of profit that is paid out as dividends.
- Shows how much an investor is willing to pay for the stock of the company for each dollar of the company’s earnings.
- Effectively shows the number of years of earnings at which the company is valued given the current level of the share price.
- Measures the funds provided by creditors versus the funds provided by owners.
Q9. Generally, a reduction in dividend is interpreted by investors as:
- A non-event.
- Good news, with often an increase of the stock price.
- Bad news, with often a drop in the stock price.
- A sign of future increase in profitability.
Module 3 Honors Quiz
Q1. Which of the following did Eugen von Böhm-Bawerk NOT believe caused the interest rate to be a small positive number?
- People value money more today than they do in a year.
- This is approximately the rate of technological progress.
- There are advantages to roundaboutness.
- Financial knowledge and expertise accumulates at a societal level at approximately this rate.
Q2. If you put $1000 into an account with a 20% interest rate, how much money will you have at the end of the year if interest is compounded CONTINUOUSLY?
(When inputting your answer, enter your rounded answer without decimal precision
and do not type in the $ dollar sign) Enter answer here
Q3. Suppose that a consol has a promised payment of 6 pounds per 100 pounds notional. This consol is now traded at 150 pounds. What is the current yield to maturity of the consol
Q4. You observe that on today’s yield curve, the one year rate is R1=6% and the two year rate is R2=6.5%. What is the one year forward rate one year from now ?
Q5. A tech company can make a 3% real return on an investment. It can borrow funds
to finance the investment at a nominal rate of 6% and the inflation rate is 1%.
- The real rate of interest is 3%.
- The investment will be unprofitable.
- The investment will be profitable.
- The real rate of interest is 2%.
Q6. If expected inflation is less than actual inflation, then wealth will be redistributed from:
- Lenders to borrowers.
- The government to consumers.
- The consumers to the government.
- Borrowers to lenders.
Q7. The market capitalization of a company provides information on:
- The value of a company.
- The pension benefits provided by the company.
- The capital expenditures of the company.
- The industry the company operates in.
Q8. Which of the following are true for stock splits ? (check all that apply)
- Market price per share is reduced after the split.
- The total number of outstanding shares increases.
- Proportional ownership is unchanged.
- Retained earnings are changed.
Q9. A rationale for preferred stock:
- It lowers the cost of financing, as compared with debt issuance.
- The dividends associated with it are tax-deductible.
- It expands the capital base without diluting common equity.
- Its holder benefits from an increased ownership in the company.
Q10. The Pecking Order Theory indicates that firms prefer_____ financing to_____ financing.
- stock; debt
- internal; external
- stock; retained earning
- flexible; risky
Q11. If the company I invest in issues a stock dividend at 5%, the value of my original shares are by a factor . I am since I have an additional of value in the new shares.
- raised, 1.05/1, worse off, 0.05/1.05
- lowered, 1/1.05, worse off, 0.05/1.05
- lowered, 1/1.05, better off, 0.05/1.05
- raised, 1.05/1, better off, 0.05/1.05
Q12. Which one of the following statements is correct?
- A cash dividend has no effect on the market value per share.
- A stock repurchase increases the market value per share.
- Stock repurchases are more tax advantageous than are cash dividends.
- Stock repurchases provide more income to shareholders compared to dividends.
Q13. A company whose stock is selling at a price-to-earnings (P/E) ratio that is greater than the P/E ratio of the market most likely has:An anticipated earnings growth rate which is less than that of the average traded firm within the market.
- An unpredictable future stream of earnings.
- A larger dividend yield compared to the dividend yield of an average traded firm within the market.
- A dividend yield which is smaller than that of an average traded firm within the market.
Q14. What are the main implications of John Lintner’s dividend model?
- A firm should always pay a dividend equal to its EPS (earnings per share).
- A firm has to strike a balance. It should pay a dividend to share some of its earnings with shareholders but its dividend should not be too high, because that might lead to a cut in the dividend in a following year, which leads to a negative reaction among shareholders.
- If the company’s EPS is smaller than last year’s dividend, the company should engage in share repurchases.
- A firm should never pay any dividends.
Week 4 Quiz Answers
Lesson #10 Quiz
Q1. Which of the following is FALSE of Direct Participation Programs (DPPs)?
- They may skip corporate profits tax.
- A major example of a DPP is a real estate partnerships.
- They must operate for at least some minimum amount of time.
- They are for accredited investors only
Q2. If Sabine is “under water”, what can we say about her situation?
- She has sent her keys to the bank and abandoned her house.
- The value of her home is less than the value of her mortgage.
- She has no choice but to declare bankruptcy.
- She does not have enough money to make payments on her home.
Q3. Why does the 30 year mortgage rate so closely match the 10 year treasury bond YTM?
- People could choose to finance their home with 10 year treasury bonds instead of with 30 year mortgages.
- Banks intentionally track the 10 year treasury bond YTM.
- The interest rate of 30 year mortgages and the price of 10 year treasury bonds are set by the same organization.
- There are similar psychological causes which influence both the 30 year mortgage rate and the 10 year treasury YTM.
Q4. Who pays for private mortgage insurance on a mortgage?
- The US government
- The homeowner
- Thank banks
- Fannie Mae and Freddie Mac
Q5. Before the recession in 2007, why were banks giving out mortgages to people who could not afford them?
- Banks would resell to mortgages to CMOs, and thus they were not incentivized to make sure their mortgages were unlikely to default.
- CMOs were incentivized to buy mortgages which were likely to default, since these would only affect their lowest tranche.
- Many people faked documents in order to get a mortgage, known as a “liar loan”
- Banks had no way to verify whether people would be able to pay.
Q6. Select TWO key causes of the housing bubble which crashed in 2007:
- Fraudulent mortgage lending
- Over-optimistic mortgage lending
- Corruption within the government
Q7. During the housing bubble of 2007, which of the following tended to fluctuate with home price index?
- The percentage of new homeowners who regretted their decision.
- The percentage of new homeowners who think that investing in real estate is a good long term investment.
- The percentage of new homeowners who have been evicted from their home.
- The percentage of new homeowners who think investing in real estate is a bad long term investment.
Q8. What in 2005 indicated the housing market might be a bubble?
- The expected 10 year home price appreciation dropped below the 30 year mortgage rate.
- Media was discussing a home-buying mania in the American public.
- Media was discussing how people were no longer purchasing houses.
- Time magazine predicted that the housing market was a bubble.
Lesson #11 Quiz
Q1. Why might companies like the idea of regulation?
- It helps them ensure they are representing the interests of their customers.
- Regulation could be used to give them a legal monopoly over a particular sector.
- Companies have enough money to bribe government officials to create regulation that favors them.
- It allows them to compete on a level at which they do not have to use (potentially unethical or unfair) special tricks to avoid letting their competitors gain a competitive advantage.
Q2. What is tunneling?
- When management of a company transfers cash from a corporate account to a personal account.
- When a member of the board of directors fires a high ranking employee so that a family member can take their place.
- When a small group of majority shareholders in a company allow the company to be bought out for a very low price by another company in which the small group are also majority shareholders.
- Any trick that somebody in the company uses to steal money from the company.
Q3. Ideally, who must the board of directors be loyal to?
- The government
- The shareholders
- The general public
- The CEO
Q4. What is a fixed commission?
- The opposite of dividends, i.e. fixed per-share prices charged by companies to shareholders.
- The rate charged in order to join a trade groups.
- Fixed taxes imposed on brokerages if they wished to operate in the stock market.
- A fixed rate charged by all brokerages to buy or sell shares on the stock market.
Q5. Which of the following describes the contrast of federal vs state regulation in the US?
- Securities regulation and corporate regulation are both primarily controlled by the state governments.
- Securities regulation and corporate regulation are both primarily controlled by the federal government.
- Securities are primarily regulated by federal government but corporate regulation is primarily by the state governments.
- Securities are primarily regulated by state governments but corporate regulation is primarily by the federal government.
Q6. What is the US Securities and Exchange Commission (SEC) NOT responsible for doing?
- To authorize companies to be traded publicly on the stock market.
- To provide reliable and timely information on the performance of securities.
- To force organizations to maintain financial transparency.
- To manage the EDGAR database.
Q7. Which of the following is NOT an example of insider trading?
- Mohammed is a secretary for a large corporation and overhears that they are about to take over a smaller corporation. He tells his wife, who purchases a large number of shares in the company immediately before the acquisition is announced.
- Leah is a short sells shares for a company she used to work for and then creates a fake press release with bad news from the company.
- Martha receives private information about a company from her stock broker. As a result, she sells all of her shares in this company, which fall substantially in price the next day.
- Chenxiang, the CEO of a company, directs the purchase and company-wide deployment of software written by his brother.
Q8. What happened when Goodbody and Company failed?
- People began to distrust brokerages and pulled their money out of stocks.
- None of the retail investors lost any money.
- Goodbody and Company had to mail everybody their stocks before they failed.
- Because Goodbody and Company held the shares for their clients, people lost most or all of their stocks.
Q9. Which of the following describes the Bank for International Settlements (BIS)?
- A bank for citizens of any country which allows them to deal in other currencies.
- A former financial institution which was replaced by the G20.
- The English name for the national bank of Switzerland, which strategically fosters relationships between banks internationally.
- A bank for central banks which provides an intermediary for the central banks to deal with each other.
Peer Graded Assignment: Financialization Of Housing:
Project Title *
Give your project a descriptive title
|Financialization of Housing|
How did the learner perform on this assignment?
|Financialization of housing, the incident happens when housing is treated as a ware a vehicle for riches and investment rather than a social decent. Inhabitants are regularly delivered destitute, supplanted by extravagance lodging that frequently stands empty|
Financial Markets Week 05 Quiz Answers
Lesson #12 Quiz
Q1. What is the effect of traders storing grain to wait for higher prices?
- It is essential in preventing grain shortages.
- Most shortages could have been prevented if traders had not speculated on grain prices.
- Most grain ends up getting moldy in storage.
- Traders are able to monopolize the market.
Q2. In commodities trading, what is the role of forwards and futures?
- Farmers and warehouses sell exclusively in futures.
- Farmers sell in forwards and warehouses sell in futures.
- Warehouses buy from the farmer in forwards, and then hedge on futures.
- Farmers and warehouses sell crops in both forwards and futures.
Q3. When an investor uses margin to buy or sell securities, how are the securities paid for?
- A combination of an investor’s own funds and futures
- On money borrowed from a broker only
- On money borrowed from a broker whereby the broker may tell the investor at any time to sell securities or contribute money.
- A combination of an investor’s own funds and money borrowed from a broker.
Q4. What is the primary purpose of purchasing futures if they are rarely delivered?
- To purchase the industry standard of a commodity, such as those put out by the Chicago Board of Trade (CBOT)
- To protect against price fluctuations.
- To allow a corporation to buy and sell commodities, which would be impossible without futures.
- To negotiate the best price on a commodity with a farmer.
Q5. What often happens to futures at the time of the crop for commodities with a specific well-defined harvest window?
- They tend to be traded above the expected spot price at the contract’s maturity.
- Due to defaults, investors could lose a lot of money.
- They tend to be traded below the expected spot price at the contract’s maturity.
- They tend to be traded exactly at the expected spot price at the contract’s maturity, making it difficult to profit as an investor.
Q6. How is it possible to have a future based on the S&P500?
- On the last day, there is a final settlement of a combination of the other commodities on the futures market.
- There is a large fine on anyone who still holds the security on the final day.
- Anyone still holding the security on the final day will receive a proportionate number of shares in an S&P500 index fund.
- On the last day there is a final settlement of the difference between the futures price and the actual index.
Q7. What is the fair value of a futures contract with a storage cost of 3%, an interest rate of 5%, and a spot price of $1000 over a 1 year time period?
Q8. How can you determine whether a future is in backwardation or contango?
- If the price is rising at an increasingly fast rate (has a positive second derivative), it is backwardation, but if it is falling at an increasingly fast rate (has a negative second derivative), it is contango.
- If the price is falling at an increasingly fast rate (has a negative second derivative), it is backwardation, but if it is rising at an increasingly fast rate (has a positive second derivative), it is contango.
- If the price rises over time (has a positive derivative), it is backwardation, but if it falls (a negative derivative), it is contango.
- If the price falls over time (has a negative derivative), it is backwardation, but if it rises (a positive derivative), it is contango.
Q9. What is the Federal Funds Futures Market?
- Futures contracts created by the government which are settled at the end of each year for 100 minus the federal funds rate averaged over the month.
- Futures contracts created by an exchange board which are settled at the end of each month for 100 minus the federal funds rate averaged over the month.
- Futures contracts created by an exchange board which are settled at the end of each year for 100 minus the federal funds rate averaged over the month.
- Futures contracts created by the government which are settled at the end of each month for 100 minus the federal funds rate averaged over the month.
Lesson #13 Quiz
Q1. What are the two types of options?
- A “call” option is the right to buy and a “put” option is the right to sell.
- A “put” option is the right to buy and a “call” option is the right to sell.
- A “get” option is the right to buy and a “push” option is the right to sell.
- A “push” option is the right to buy and a “get” option is the right to sell.
Q2. Why do some stock options have an exercise price which is more than the cost of the stock?
- New investors often mistake “put” and “call” options, leading to an easy profit for the dealer.
- For “call” options, this provides the option to buy at this price if the stock goes up before the exercise date.
- These options are “put” options, giving you the option to sell at a higher price.
- The stock options sell for negative prices, because the investor will lose money if the stock price does not fluctuate.
Q3. Which of the following is NOT a behavioral reason why people buy options?
- Portfolio managers will usually buy options for clients without them knowing so that if the stock price goes down, the manager will come across as thinking ahead and watching out for their clients.
- People will feel better about themselves if their stocks go down if they have purchased a put option on them, regardless of whether or not they gained or lost overall.
- They are fooled by salespeople.
- People will pay attention to specific aspects of their portfolio more so than others, so they will buy options when they hear about volatility in the market to protect certain components of their portfolio.
Q4. Are mortgages in the US similar to options from the perspective of the homeowner?
- No, because defaulting does not eliminate liability.
- Yes, because people always have the option to default.
- Yes, because they can be sold by banks to Fannie Mae and Freddie Mac.
- No in recourse states, yes in non-recourse states.
Q5. What is the put-call parity relationship?
- A relationship between the put price, the call price, and the stock price for European-style stock options.
- A method of arbitrage for options exchanges.
- Another name for the Black-Scholes model.
- A mathematical formula specifying that the put price of an option minus the call price of an option equals the price of the stock
Q6. What is a stop-loss order?
- An instruction to your broker indicating that they should sell your shares once it drops below some price.
- A type of stock that will protect you against losses.
- The same thing as a put option, except you do not have to pay for it.
- An instruction to your broker indicating that they should sell your shares once they get above a certain price.
Financial Markets Week 06 Quiz Answers
Lesson #14 Quiz
Q1. Which of the following two options are deals that underwriters make with corporations?
- Best efforts: the underwriters tries to sell shares at some price, and the deal collapses if they don’t.
- Short cut: the underwriters will cut the price of the shares if some of them remain unsold.
- Loss safe: the underwriter will pay a penalty to the company if not all of the shares sell.
- Bought deal: the underwriter will purchase all unsold shares.
Q2. Why do underwriters usually underprice IPOs?
- They don’t know how much the company is really worth
- They want to create public excitement
- They do not want the company to make as much money as it could.
- They want their favorite customers to be able to buy shares for cheaper
Q3. Which of the following was NOT a feature that Charles Ellis believed made Goldman Sachs successful?
- Becoming prestigious
- Making money
- Absolute loyalty to the firm
- Personal anonymity
Q4. What is a rating agency?
- Any agency which refuses to take money from corporations for rating their securities.
- An agency which assigns credit scores to individuals.
- An agency which rates the business practices of corporations.
- An agency which publishes its ratings on the reliability of securities.
Q5. Why was the Glass-Steagall Act of 1933 repealed in 1999?
- American banks claimed that it made it hard to compete with European banks, which offered both investment and commercial banking services.
- Investment banking was too costly for some companies, which could not manage both investment and commercial banking services.
- Investors felt inconvenienced that a single bank could not function as both an investment and a commercial bank.
- It was ruled unconstitutional by the supreme court.
Q6. What were the two biggest assets of the average (not median) US household in 2015?
- Real estate and mutual funds
- Real estate and corporate equities
- Mutual funds and corporate equities
- Real estate and pension funds
Q7. Which best describes the “prudent person” rule?
- A new rule for fund managers which is starting to apply to newer regulations.
- A law which mandates that investment managers must do what another educated, experienced investment manager might do in a similar circumstance.
- A law which limits the amount of risk with which funds managers may invest money
- A guideline that individuals should look for funds managers who show prudence.
Q8. Which of the following is NOT true of mutual funds?
- Mutual funds are closed end funds.
- They are defined and regulated by the SEC.
- You join the fund at 4:00 PM on the day you decide to invest.
- Massachusetts Investment Trust was an early model for mutual funds in the US.
Lesson #15 Quiz
Q1. The difference between dealers and brokers is:
- Dealers make, on average, more profits than brokers.
- Brokers do not serve as a principal in transactions and dealers do.
- Brokers are market makers and dealers are not.
- Dealers do not serve as a principal in transactions and brokers do.
Q2. Stock exchanges did not flourish until the 19th century in the U.S. because:
- Basic information technology was not yet available.
- The cost of creating such an exchange was perceived to be too high.
- There was no demand for such a stock exchange.
- The number of potentially listed companies was too small.
Q3. Consider a hypothetical NASDAQ level II screen for the shares of a corporation. Suppose the displayed ask is $20.05 for 100 shares and the displayed bid is $20 for 150 shares. What happens if another dealer places a limit order to buy 50 shares for $20.02?
- There will be a transaction of 50 shares at $20.
- There will be a transaction of 100 shares at $20.05.
- There will be a transaction of 50 shares at $20.05.
- No transaction will occur.
Q4. Investment firms which specialize in high frequency trading try to locate their servers close to the exchanges where they execute their transactions because they want to:
- Take advantage of the maintenance services provided by the exchanges if any of their servers fails.
- Minimize the time to transmit orders to the exchange.
- Benefit from the highest possible demand for trades.
- Receive price discounts on transactions from exchanges that come with co-location.
Q5. A payment for order flow is:
- Equal to the bid-ask spread.
- A transaction cost which is only associated with stop-loss orders.
- A transaction cost which is only associated with limit orders.
- The compensation and benefit a brokerage receives by directing orders to different parties to be executed.
Lesson #16 Quiz
Q1. Some of Carmen Reinhart’s historical findings on sovereign defaults include: (check all that apply)
- Governments who cannot repay their creditors often tend to repudiate their sovereign debt contracts.
- Sovereign defaults historically tend to occur in waves.
- It is common for governments to solve their debt problems by inflating their currencies.
- Governments have rarely repudiated their sovereign debt contracts
Q2. Which of the following are justifications given for the existence of a corporate profits tax? (check all that apply)
- Governments may be forced to bail companies out or assist companies during bankruptcy proceedings, as exemplified by General Motors in the aftermath of the financial crisis from 2007-2008.
- Governments may have to step in for environmental damages beyond the limited liability of the company that has caused the damages, as exemplified by TEPCO in Japan following the earthquake from 2011.
- Corporations participate, through the existence of a corporate profits tax, to the investment and maintenance of public infrastructures.
- A specific share of nationalized companies in the profit-sector is a necessary ingredient for an efficient antitrust law.
Q3. How do local governments typically make use of the money generated by municipal bond issues?
- Municipalities use the money to finance public works projects.
- Municipalities use the money to finance purchase of equipment such as fire trucks.
- Municipalities use the money to finance the salaries of public works employees.
- Municipalities use the money to finance local events.
Q4. The social insurance system in the U.S. is commonly referred to as the OASDI. What kinds of insurance does this abbreviation encompass? (check all that apply)
- Asset Insurance.
- Survivors insurance.
- Disability Insurance.
- Old age insurance.
Financial Markets Week 07 Quiz Answers
Lesson #17 Quiz
Q1. The percentage of the workforce in nonprofit organizations is:
- Very small if advanced economies.
- Higher in advanced economies.
- Higher in emerging economies.
- About the same in both emerging and advanced economies.
Q2. Which of the following are examples for nonprofit organizations? (check all that apply)
- Robert Shiller’s Case Shiller Weiss Incorporated
- Peter Tufano’s Doorways to Dreams.
- Dean Karlan’s Innovations for Poverty Action.
- Wendy Kopp’s Teach for America.
Q3. The main differences between cooperatives and nonprofit organizations are: (check all that apply)
- Cooperatives have a specific voting system for its members.
- Cooperatives may distribute profits.
- Cooperatives do not have the maximization of profits as the very first objective.
- There are no fundamental differences between cooperatives and nonprofit organizations, the unique difference is their different legal treatment.
Q4. Which of the following tend to be true for cooperatives? (check all that apply)
- Cooperatives are rarely successful.
- Cooperatives tend to charge higher prices or lower wages to their employees.
- Cooperatives aim to maximize the welfare of the group.
- Cooperatives aim to maximize the profits for the group.
Q5. A benefit corporation is halfway between:
- For-profit and not-for-profit organizations.
- For-profit organizations and cooperatives.
- None of the above.
- Not-or-profit organizations and cooperatives.
Lesson #18 Quiz
Q1. What does the term “democratization of finance” mean?
- It should benefit real people; everyone, not just the rich.
- It should benefit the youngest people; not the old.
- It should benefit the oldest people; not the young.
- It should benefit rich people; not the poor.
Q2. What is ‘odious’ debt?
- standard debt raised by corporations, to create new products.
- illegitimate debt raised by corporations
- Illegitimate debt raised by government, used for ill purposes against the will of the people.
- standard debt raised by government
Q3. Malthus contended that:
- Poverty causes resource depletion rather than the reverse.
- All of the above.
- By providing additional workers human population growth enhanced economic development.
- Human population can grow faster than humans can produce commensurate amounts of food.
Q4. Malthus contended that population, when unchecked, increased in a ______ ratio; and subsistence for man in an _______ ratio.
- linear; geometrical
- geometrical; arithmetical
- arithmetical; linear
- arithmetical; geometrical
Q5. What are some reasons that inequality exists? (check all that apply)
- Unmanaged risks
- Political power
- failure to democratize finance.