Question

Which situation below would you be considered a principal in an agency relationship?

Question 1 options:

	As a mechanic, you provide maintenance on a car.
	As a manager you present an update on the company at the annual shareholders’ meeting.
	As a mutual fund manager, you buy and sell securities for the fund.
	You meet with an architect to see the design of your new house.

Answer 1

Correct answer D

A. Imagine that your car breaks down, so you take it to a mechanic. The mechanic inspects the car and says you need a number of repairs. The mechanic knows far more about cars than you do, so you trust her judgment to make repair decisions on your behalf. Whether you sign a contract or not, you've made the mechanic your agent by agreeing to pay for the repairs she recommends.

B. The manager's objective is usually to make decisions that increase the shareholders' wealth. The managers are expected to act in the best interest of shareholders by earning profits that are returned to the shareholders as dividends, rather than pursue their own self-interest – such as awarding themselves a private jet

C. Whenever you buy into an index fund, you are the principal, and the fund manager becomes your agent. It's the fund manager's job to make buy and sell decisions and manage the fund in a way that will maximize the return on your investment for the level of risk specified in the fund's prospectus.

Because this is a principal-agent relationship, the manager is expected to act in your best interest, and those of other investors, rather than pursue his own objectives, such as seeking the biggest commission.

D. Her we are theprinicipal and the architect will be agent.