Module 4 Honors Quiz :Honors Assignments (Financial Markets) Answers 2025

Question 1

Why must we consider psychological factors when speaking about housing prices?

❌ Applying certain psychological factors can increase a portfolio’s risk.
❌ Psychologists have developed mathematical formulas to accurately forecast housing prices.
✅ Without psychological factors, a larger percentage of real estate prices would be determined by construction costs.
❌ People behave in very predictable ways, so it is possible to make a lot of money by investing in real estate.

Explanation:
Housing prices are influenced by expectations, beliefs, and narratives. Ignoring psychology would imply prices track costs more closely, which they do not.

Question 2

Select TWO important actions of the Federal Housing Administration.

❌ Require loans to be at least 15 years.
❌ Impose a sharp tax on real estate.
✅ Insure lenders against losses
❌ Guarantee employment for home-owners.

Explanation:
The FHA’s key role is insuring mortgage lenders, reducing lender risk and encouraging home ownership.

Question 3

Which of the following definitions are correct? (check all that apply)

✅ Fixed rate mortgages have interest rates that do not change over time.
❌ Adjustable rate mortgages increase gradually over time.
✅ Shared Appreciation Mortgages (SAMs) require paying part of the home’s appreciation.
✅ Price Level Adjusted Mortgages (PLAMs) are adjusted for inflation.

Explanation:
ARMs can move up or down, not just upward. The other definitions are correct.

Question 4

Which of the following started happening to CDOs in 2007?

❌ AAA tranches were immediately re-rated as lowest tranche.
❌ CDOs replaced CMOs.
✅ Defaults started to affect the highest tranche.
❌ CDOs were directly bailed out by the government.

Explanation:
In 2007, losses spread so widely that even senior (AAA) tranches were affected.

Question 5

Why are banks incentivized to offer Qualifying Residential Mortgages (QRMs)?

❌ QRMs simply avoid losses from defaults.
❌ Government forces banks to offer them.
❌ QRMs allow all mortgages to be sold to CMOs.
✅ Banks usually sell mortgages, but QRMs are high-quality enough that banks are willing to keep them.

Explanation:
Regulation requires banks to retain risk for non-QRMs, so QRMs are more attractive.

Question 6

Which of the following is NOT in practice a problem with regulation?

❌ Firms avoid growing to escape regulation.
❌ Bribing corrupt regulators is possible.
❌ Regulation may create monopolies due to high compliance costs.
✅ A lot of money is lost on paperwork for complying with regulations.

Explanation:
Paperwork costs are real but relatively minor compared to the other systemic issues.

Question 7

Which correctly describes a type of hedge fund? (check all that apply)

❌ 3c1 hedge funds can take no more than 99 investors with $200k income or $1M assets.
❌ 3c3 hedge funds can take up to 999 investors with extremely high net worth.
✅ 3c7 hedge funds can take up to 500 investors with very high net-worth requirements.
❌ 3c8 hedge funds can take no more than 50 investors.

Explanation:
Only the 3c7 hedge fund description matches actual regulatory rules.

Question 8

Which is NOT true about GAAP?

❌ Used for EDGAR.
✅ GAAP invented EBITDA.
❌ Maintains official definitions of net income and operating income.
❌ Defined by FASB.

Explanation:
EBITDA is not a GAAP measure; it is a non-GAAP metric.

Question 9

What is rating shopping?

❌ Banks ignore ratings entirely.
✅ Banks ask multiple rating agencies and select the most favorable rating.
❌ Banks only use corrupt agencies.
❌ Banks dictate ratings in advance.

Explanation:
Rating shopping occurs when issuers seek the best possible rating, undermining objectivity.

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