QCM : Introduction to Investment Strategies — 12 questions

Explication

The correct answer reflects the key definition of investment as a resource commitment today to produce future income, balancing risk and return, as described in the context.

Explication

Harry Markowitz is best known for developing Modern Portfolio Theory (MPT), which emphasizes the importance of diversification and the trade-off between risk and return in asset allocation.

Explication

The primary role of the security selection process is to choose specific securities within an asset class to meet investment objectives, which is a key step following asset allocation in portfolio management.

Explication

Passive management, particularly index investing, was established and gained widespread recognition in the 1970s, notably with the founding of Vanguard and the launch of the first index fund in 1975. This marked a significant development in investment strategies, differentiating it from the traditional active management approach.

Explication

Real assets are physical, tangible assets used directly in production, such as land or machinery, whereas financial assets are claims or rights to income or ownership, such as stocks or bonds. This fundamental difference defines their roles in the economy.

Explication

Adam Smith is widely credited with foundational ideas about markets playing a crucial role in resource allocation, risk transfer, and economic efficiency, making him the correct answer.

Explication

An increase in the activity of financial intermediaries enhances the transfer of funds from savers to borrowers, which generally lowers borrowing costs and promotes investment, thereby positively affecting economic growth.

Explication

The correct approach is to diversify investments across various major asset classes such as stocks, bonds, and money market instruments to balance risk and return, which aligns with sound portfolio management principles discussed in the course.

Explication

Money market instruments are characterized by their short-term maturity, high liquidity, and low risk. They include securities like Treasury bills, certificates of deposit, and commercial paper, which are issued by governments, banks, and corporations for short-term funding needs.

Explication

Capital market instruments are financial claims such as stocks and bonds that are used by entities to raise funds for long-term investments. They are distinct from money market instruments, which are short-term. The correct answer correctly identifies these securities as tools for long-term financing.

Explication

The fixed interest rate paid by a bond is called the coupon rate, which determines the periodic interest payments to bondholders.

Explication

Different stock types serve to allocate various rights and privileges to investors, such as voting rights in common stock and fixed dividends in preferred stock, enabling companies to raise capital while catering to different investor preferences.