Question 1

The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the

Accepted Answer

A) Beta Line. 
B) Security Market Line. 
C) Risk Premium Line. 
D) Risk-Return Line. 
A) Beta Line. 
B) Security Market Line. 
C) Risk Premium Line. 
D) Risk-Return Line.

Question 2

The Security Market Line (SML) is upward-sloping, indicating that the

Accepted Answer

A) beta of an investment increases as its risk level increases. 
B) average expected return on investments decreases as their risk level decreases. 
C) average expected return on the risk-free asset increases as its beta increases. 
D) average expected return of the market portfolio increases as its beta increases. 
A) beta of an investment increases as its risk level increases. 
B) average expected return on investments decreases as their risk level decreases. 
C) average expected return on the risk-free asset increases as its beta increases. 
D) average expected return of the market portfolio increases as its beta increases.

Question 3

Bonds represent

Accepted Answer

A) a claim on company dividends. 
B) ownership of a company. 
C) all financial assets guaranteed to pay interest. 
D) loans to governments and corporations. 
A) a claim on company dividends. 
B) ownership of a company. 
C) all financial assets guaranteed to pay interest. 
D) loans to governments and corporations.

Question 4

Mutual fund managers tend to focus solely on the

Accepted Answer

A) short-term (quarterly) performance of the corporations whose securities they invest in. 
B) long-term performance of the corporations whose securities they invest in. 
C) assets of the corporations whose securities they invest in. 
D) liabilities of the corporations whose securities they invest in. 
A) short-term (quarterly) performance of the corporations whose securities they invest in. 
B) long-term performance of the corporations whose securities they invest in. 
C) assets of the corporations whose securities they invest in. 
D) liabilities of the corporations whose securities they invest in.

Question 5

Short-term U.S.government bonds are considered to be risk-free.

Accepted Answer

A) True 
 B)False

Question 6

The current share price of a corporation's stock is determined by the

Accepted Answer

A) original purchase price multiplied by 1 plus the interest rate. 
B) present value of capital gains and dividends received by stock owners. 
C) expected interest and dividend payments. 
D) expected capital gains and dividends prospective buyers will earn. 
A) original purchase price multiplied by 1 plus the interest rate. 
B) present value of capital gains and dividends received by stock owners. 
C) expected interest and dividend payments. 
D) expected capital gains and dividends prospective buyers will earn.

Question 7

Which of the following is a difference between stocks and bonds?

Accepted Answer

A) Bonds may be issued by corporations or government; stock is only issued by corporations. 
B) Stock may be issued by corporations or government; bonds are only issued by corporations. 
C) Bonds are only issued by government; stock is only issued by corporations. 
D) There is no difference in terms of who issues stocks and bonds. 
A) Bonds may be issued by corporations or government; stock is only issued by corporations. 
B) Stock may be issued by corporations or government; bonds are only issued by corporations. 
C) Bonds are only issued by government; stock is only issued by corporations. 
D) There is no difference in terms of who issues stocks and bonds.

Question 8

Which of the following financial assets is considered to be essentially risk-free?

Accepted Answer

A) gold 
B) stock in Fortune 500 companies 
C) real estate 
D) short-term U.S.government bonds 
A) gold 
B) stock in Fortune 500 companies 
C) real estate 
D) short-term U.S.government bonds

Question 9

If i is the interest rate and X is the number of dollars to be received after t years, the formula to calculate the present value of a future payment is

Accepted Answer

A) (1 + i)tX. 
B) X/(1 + i)t.  
C)  it/(1 + X). 
D) (X/i)t. 
A) (1 + i)tX. 
B) X/(1 + i)t.  
C)  it/(1 + X). 
D) (X/i)t.

Question 10

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S.government bonds, then, as a consequence, asset prices

Accepted Answer

A) increase and the average expected rate of return on assets decreases. 
B) decrease and the average expected rate of return on assets increases. 
C) increase and the average expected rate of return on assets increases. 
D) decrease and the average expected rate of return on assets decreases. 
A) increase and the average expected rate of return on assets decreases. 
B) decrease and the average expected rate of return on assets increases. 
C) increase and the average expected rate of return on assets increases. 
D) decrease and the average expected rate of return on assets decreases.

Question 11

The Federal Reserve changes the risk-free interest rate most directly

Accepted Answer

A) by changing the reserve requirement. 
B) by changing the federal funds rate. 
C) by changing the discount rate. 
D) with open-market operations. 
A) by changing the reserve requirement. 
B) by changing the federal funds rate. 
C) by changing the discount rate. 
D) with open-market operations.

Question 12

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Accepted Answer

A) future value of its annual coupons and face value. 
B) future value of its annual coupons minus its face value. 
C) present value of its annual coupons and face value. 
D) present value of its annual coupons minus its face vale. 
A) future value of its annual coupons and face value. 
B) future value of its annual coupons minus its face value. 
C) present value of its annual coupons and face value. 
D) present value of its annual coupons minus its face vale.

Question 13

Which of the following statements about stocks and bonds is true?

Accepted Answer

A) Stocks pay interest, while bonds pay dividends. 
B) One can lose with stocks but not with bonds. 
C) The U.S.Federal government issues bonds but not stocks. 
D) Bonds are long-term, while stocks are short-term investments. 
A) Stocks pay interest, while bonds pay dividends. 
B) One can lose with stocks but not with bonds. 
C) The U.S.Federal government issues bonds but not stocks. 
D) Bonds are long-term, while stocks are short-term investments.

Question 14

Investors diversify portfolios

Accepted Answer

A) because diversified portfolios pay the highest rates of return. 
B) because diversified portfolios are guaranteed not to lose money. 
C) to reduce the risk of losing their investment. 
D) to guarantee minimum returns on their investment. 
A) because diversified portfolios pay the highest rates of return. 
B) because diversified portfolios are guaranteed not to lose money. 
C) to reduce the risk of losing their investment. 
D) to guarantee minimum returns on their investment.

Question 15

The present value of a future amount of money will be greater the

Accepted Answer

A) greater the interest rate. 
B) greater the amount of time before the future payment is received. 
C) lower the interest rate. 
D) greater the rate of the expected rate of inflation. 
A) greater the interest rate. 
B) greater the amount of time before the future payment is received. 
C) lower the interest rate. 
D) greater the rate of the expected rate of inflation.

Question 16

Matt, a star basketball player, is looking to join a new NBA team. The Bulls are offering him $24 million for one year. The Heat is offering him $10 million this year and $7.0 million in each of the next two years. The market interest rate is 5 percent.What is the present value of the offer from The Heat  in millions (rounded to the nearest one hundred thousand dollars)?

Accepted Answer

A) $22.5 million 
B) $23.0 million 
C) $24.0 million 
D) $25.2 million 
A) $22.5 million 
B) $23.0 million 
C) $24.0 million 
D) $25.2 million

Question 17

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.Indy should necessarily sell his stock if

Accepted Answer

A) the price falls below $20 per share. 
B) he expects the sum of future capital gains and dividends to be negative. 
C) the company stops paying dividends. 
D) any of these circumstances occur. 
A) the price falls below $20 per share. 
B) he expects the sum of future capital gains and dividends to be negative. 
C) the company stops paying dividends. 
D) any of these circumstances occur.

Question 18

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

Accepted Answer

A) 10 percent. 
B) 20 percent. 
C) 25 percent. 
D) 30 percent. 
A) 10 percent. 
B) 20 percent. 
C) 25 percent. 
D) 30 percent.

Question 19

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Accepted Answer

A) stock A to fall and/or the price of stock B to rise. 
B) stock A to rise and/or the price of stock B to fall. 
C) both stocks to rise or fall together. 
D) neither stock to change. 
A) stock A to fall and/or the price of stock B to rise. 
B) stock A to rise and/or the price of stock B to fall. 
C) both stocks to rise or fall together. 
D) neither stock to change.

Question 20

Refer to the graph.Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a financial asset?

Accepted Answer

A) line A 
B) line B 
C) line C 
D) none of these 
A) line A 
B) line B 
C) line C 
D) none of these

Exam 17: C: Financial Economics

The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the

The Security Market Line (SML) is upward-sloping, indicating that the

Bonds represent

Mutual fund managers tend to focus solely on the

Short-term U.S.government bonds are considered to be risk-free.

The current share price of a corporation's stock is determined by the

Which of the following is a difference between stocks and bonds?

Which of the following financial assets is considered to be essentially risk-free?

If i is the interest rate and X is the number of dollars to be received after t years, the formula to calculate the present value of a future payment is

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S.government bonds, then, as a consequence, asset prices

The Federal Reserve changes the risk-free interest rate most directly

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Which of the following statements about stocks and bonds is true?

Investors diversify portfolios

The present value of a future amount of money will be greater the

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.Indy should necessarily sell his stock if

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Refer to the graph.Which of the three Security Market Lines would represent a situation where investors do not care about the risk level of a financial asset?

B: Limits, Alternatives, and Choices

A: - Limits, Alternatives, and Choices

B: The Market System and the Circular Flow

A: - The Market System and the Circular Flow

B: Demand, Supply, and Market Equilibrium

A: - Demand, Supply, and Market Equilibrium

B: Market Failures: Public Goods and Externalities

A: - Market Failures: Public Goods and Externalities

B: Governments Role and Government Failure

A: Governments Role and Government Failure

B: an Introduction to Macroeconomics

A: an Introduction to Macroeconomics

B: Measuring the Economys Output

A: Measuring the Economys Output

B: Economic Growth

A: Economic Growth

B: Business Cycles, Unemployment, and Inflation

A: Business Cycles, Unemployment, and Inflation

B: Basic Macroeconomic Relationships

A: Basic Macroeconomic Relationships

B: The Aggregate Expenditures Model

A: The Aggregate Expenditures Model

B: Aggregate Demand and Aggregate Supply

A: Aggregate Demand and Aggregate Supply

B: Fiscal Policy, Deficits, Surpluses, and Debt

A: Fiscal Policy, Deficits, Surpluses, and Debt

B: Money, Banking, and Money Creation

A: Money, Banking, and Money Creation

B: Interest Rates and Monetary Policy

A: Interest Rates and Monetary Policy

A: Long-Run Macroeconomic Adjustments

B: Long-Run Macroeconomic Adjustments

A: International Trade

B: International Trade

A: The Balance of Payments and Exchange Rates

B: The Balance of Payments and Exchange Rates

The Economics of Developing Countries

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