Question

In portfolio delegation, an investor hires an investment manager to manage his/her money. Does this exist a potential principal agent problem? Who is the principal? Who is the agent?

		No. Both the investor and investment manager are the principal.
		No. Both the investor and investment manager  are the agent.
		Yes. The investor is the agent, and the investment manager is the principal.
		Yes. The investoris the principal, and the investment manager is the agent.

Which of the following are characteristics of preferred stock?

I) It pays its holder a fixed amount of income each year at the discretion of its managers.

II) It gives its holder voting power in the firm.

III) Its dividends are usually cumulative.

IV) Failure to pay dividends may result in bankruptcy proceedings.

		I, II, and III
		I, III, and IV
		I and III
		I, II, and IV
		I, II, III, and IV

Answer 1

(i) The relationship of principal & agent can be defined as an arrangement in which one person legally appoints another to act on its behalf. This relationship is often defined in formal terms which are enlisted in the contract.

When it comes to delegation of portfolio, An investor who hires an investment manager to manage his/her money is considered as Principal and the investment manager is considered as an agent.

Thus, the correct answer will be – Yes. The investor is the principal, and the investment manager is the agent

(ii) Preferred stock is an equity security that has the properties of both an equity and debt instrument and is higher ranking than common stock.

In regard to the characteristics of preferred stocks, the following options are correct.

I. It pays its holder a fixed amount of income each year at the discretion of its managers.

III. Its dividends are usually cumulative.