CHAPTER 14:

1. Customers purchasing nondeposit investment accounts sold by a bank operating in the United States must be told in writing:
A) Investment accounts are not federally insured
B) Investment accounts are not deposits in nor guaranteed by a depository institution
C) Investment accounts could suffer loss of principal D) All of the above. E) None of the above.
2. A trust department's activities often center around establishing:
A) An independent relationship with the customer B) A partnership relationship with the customer
C) A fiduciary relationship with the customer D) A subservient relationship with the customer E) None of the above
3. A bank would offer insurance services in addition to traditional banking services if it believed in the potential the benefits of:
A) Reputation B) Economies of scale C) Economies of scope D) Investment services E) None of the above
4. Which of the following is an example of a nondeposit investment product of the bank?
A) Time deposit B) NOW account C) Passbook savings account D) Proprietary mutual fund E) All of the
above
5. Which of the following trust agreements allows wealth to be passed free of gift and estate tax to heirs?
A) Revocable trust B) Irrevocable trust C) Charitable trust D) Indenture trusts E) None of the above
6. Which of the following trust agreements allows the bank trust officer to act on behalf of a living customer?
A) Revocable trust B) Irrevocable trust C) Charitable trust D) Indenture trusts E) None of the above
7. Which of the following trust agreements is used to back the issue of securities by a corporation?
A) Revocable trust B) Irrevocable trust C) Charitable trust D) Indenture trusts E) None of the above
8. A bank is considering adding life insurance underwriting to the services it offers. It has estimated that the expected return
and standard deviation of its traditional services are 12 percent and 6 percent respectively. It has also estimated that the
expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively. The
correlation between these services has been estimated to be +.10 and the bank estimates that 90 percent of its business will be
from traditional services and 10 percent from the new underwriting services. What is the expected return of the new
combination of services?
A) 17.40% B) 12.60% C) 5.59% D) 15.00 E) None of the above
9. A bank is considering adding life insurance underwriting to the services it offers. It has estimated that the expected return
and standard deviation of its traditional services are 12 percent and 6 percent respectively. It has also estimated that the
expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively. The
correlation between these services has been estimated to be +.10 and the bank estimates that 90 percent of its business will be
from traditional services and 10 percent from the new underwriting services. What is the expected standard deviation of the
new combination of services?
A) 6.40% B) 12.60% C) 5.59% D) 9.08% E) None of the above
10. A bank is considering adding life insurance underwriting to the services it offers. It has estimated that the expected return
and standard deviation of its traditional services are 12 percent and 6 percent respectively. It has also estimated that the
expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively. The
correlation between these services has been estimated to be +.10 and the bank estimates that 90 percent of its business will be
from traditional services and 10 percent from the new underwriting services. If the bank is expecting that the overall risk of the
bank will be reduced from adding the life insurance underwriting to the bank, what type of effect are they expecting?
A) Product Line Diversification Effect B) Economies of Scope Effect C) Economies of Scale Effect
D) Geographic Diversification Effect E) None of the above
11. When a bank is expecting that the overall risk of FHC will be reduced when they combine investment banking services
with the traditional banking services, what type of effect are they expecting?
A) Product Line Diversification Effect B) Economies of Scope Effect C) Economies of Scale Effect
D) Geographic Diversification Effect E) None of the above
12. When a bank is expecting to be able to employ the same managers, employees and physical resources to offer multiple
products and generate costs savings they are expecting which of the following effects?
A) Product Line Diversification Effect B) Economies of Scope Effect C) Economies of Scale Effect
D) Geographic Diversification Effect E) None of the above
13. Trust Department activities include all of the following except:
A) safeguarding B) asset management C) generate large deposits D) lending E) source of new
deposits
14. A financial holding company may include all of the following services except:
A) IPO B) Consumer lending C) Trust services D) Investment banking E) Insurance
15. Historically, what has prevented universal banks from operating in the United States?
A) The Universal Bank Prohibition Act B) The Glass-Stegall Act C) Sarbanes-Oxley Act
D) Universal banks have less risk diversification capabilities than traditional U.S. based banks. E) A and C
16. Among potential advantages of combining various financial services activities in one FHC are all of the following except:
A) Supplementing traditional sources of funds with new funds
B) Supplementing traditional revenue with new revenue sources
C) Lowering the cost of service production through economies of scale and scope
D) Reducing the risk of failure E) Increasing earnings fluctuations
17. If the correlation between revenues from traditional banking and nontraditional services offered by a bank rises, potential
diversification benefits:
A) Will rise B) Will fall C) Will remain the same
D) Will remain the same but only under certain conditions E) Cannot be determined
18. A company that offers shares in a pool of securities and flows through any earnings generated to the shareholders is called:
A) A mutual fund B) An annuity C) The net asset value D) A hedge fund E) None of the
above
19. A savings instrument where the customer makes a lump sum payment to the investment manager who invests the payment
in earning assets and later receives a stream of income from the assets is called:
A) A mutual fund B) An annuity C) The net asset value D) A hedge fund E) None of the
above
20. A customer’s pro rata value of a share in a mutual fund if the assets of the fund were liquidated and liabilities paid off is
called:
A) A mutual fund B) An annuity C) The net asset value D) A hedge fund E) None of the
above
21. A private partnership whose shares are primarily offered to wealthy individuals and large institutions and which often
makes high-stakes bets on the direction of the market is called:
A) A mutual fund B) An annuity C) The net asset value D) A hedge fund E) None of the
above
22. A bank is considering adding security underwriting services to the services it offers. It has estimated that the expected
return and standard deviation of its traditional service are 8% and 10% respectively. It has estimated that the expected return
and standard deviation of its new securities underwriting services are 16% and 20% respectively. The correlation between these
services has been estimated to be -0.3 and the bank estimates that 80% of its business will be from traditional services and 20%
from the new services. What is the expected return of the new combined firm?
A) 8.0% B) 9.6% C) 12.0% D) 14.4% E) 16%
23. A bank is considering adding security underwriting services to the services it offers. It has estimated that the expected
return and standard deviation of its traditional service are 8% and 10% respectively. It has estimated that the expected return
and standard deviation of its new securities underwriting services are 16% and 20% respectively. The correlation between these
services has been estimated to be -.3 and the bank estimates that 80% of its business will be from traditional services and 20%
from the new services. What is the standard deviation of the new combined firm?
A) 7.8% B) 10.0% C) 12.0% D) 15.5% E) 20.0%
24. A bank is considering adding security brokerage services to the services it offers. It has estimated that the expected return
and standard deviation of its traditional service are 6% and 14% respectively. It has estimated that the expected return and
standard deviation of its new securities brokerage services are 14% and 24% respectively. The correlation between these
services has been estimated to be -.4 and the bank estimates that 60% of its business will be from traditional services and 40%
from the new services. What is the expected return of the new combined firm?
A) 14.0% B) 10.8% C) 10.0% D) 9.2% E) 6.0%
25. A bank is considering adding security brokerage services to the services it offers. It has estimated that the expected return
and standard deviation of its traditional service are 6% and 14% respectively. It has estimated that the expected return and
standard deviation of its new securities brokerage services are 14% and 24% respectively. The correlation between these
services has been estimated to be -.4 and the bank estimates that 60% of its business will be from traditional services and 40%
from the new services. What is the standard deviation of the new combined firm?
A) 24.00% B) 18.00% C) 15.07% D) 14.00% E) 9.91%