Chapter 1 Market Organization and Structure
PRACTICE PROBLEMS FOR CHAPTER 1
1. Akihiko Takabe has designed a sophisticated forecasting model, which predicts the
movements in the overall stock market, in the hope of earning a return in excess of a
fair return for the risk involved. He uses the predictions of the model to decide
whether to buy, hold, or sell the shares of an index fund that aims to replicate the
movements of the stock market. Takabe would best be characterized as a (n):
A. hedger.
B. investor.
C. information-motivated trader.
2. James Beach is young and has substantial wealth. A significant proportion of his
stock portfolio consists of emerging market stocks that offer relatively high expected
returns at the cost of relatively high risk. Beach believes that investment in emerging
market stocks is appropriate for him given his ability and willingness to take risk.
Which of the following labels most appropriately describes Beach?
A. Hedger.
B. Investor.
C. Information-motivated trader.
3. Lisa Smith owns a manufacturing company in the United States. Her company has
sold goods to a customer in Brazil and will be paid in Brazilian real (BRL) in three
months. Smith is concerned about the possibility of the BRL depreciating more than
expected against the U.S. dollar (USD). Therefore, she is planning to sell three-month
futures contracts on the BRL. The seller of such contracts generally gains when the
BRL depreciates against the USD. If Smith were to sell these future contracts, she
would most appropriately be described as a (n):
A. hedger.
B. investor.
C. information-motivated trader.
4. Which of the following is not a function of the financial system?
A. To regulate arbitrageurs鈥?nbsp;profits (excess returns).
B. To help the economy achieve allocational efficiency.
C. To facilitate borrowing by businesses to fund current operations.
5. An investor primarily invests in stocks of publicly traded companies. The investor
wants to increase the diversification of his portfolio. A friend has recommended
investing in real estate properties. The purchase of real estate would best be