Question 1

If stockholders sell their shares for more than they paid for those shares, the stockholders

Accepted Answer

A) realize a share of equal profits. 
B) receive a dividend. 
C) realize a capital gain. 
D) obtain a mutual fund. 
A) realize a share of equal profits. 
B) receive a dividend. 
C) realize a capital gain. 
D) obtain a mutual fund.

Question 2

A promised amount $FV n years into the future is worth how much today, if the interest rate is i percent per year?

Accepted Answer

A) $FVn/(1 + i)n 
B) ($FV/n) (i percent) 
C) (1 + i)n/$FV  
D)  [$FV/(1 + i)]n 
A) $FVn/(1 + i)n 
B) ($FV/n) (i percent) 
C) (1 + i)n/$FV  
D)  [$FV/(1 + i)]n

Question 3

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

Accepted Answer

A) X will fall and its rate of return will fall. 
B) Y will rise and its rate of return will fall. 
C) X will fall and its rate of return will rise. 
D) Y will fall and its rate of return will rise. 
A) X will fall and its rate of return will fall. 
B) Y will rise and its rate of return will fall. 
C) X will fall and its rate of return will rise. 
D) Y will fall and its rate of return will rise.

Question 4

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Accepted Answer

A) True 
 B)False

Question 5

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

Accepted Answer

A) practically zero percent 
B) 1 percent 
C) 50 percent 
D) $1 
A) practically zero percent 
B) 1 percent 
C) 50 percent 
D) $1

Question 6

An investment's rate of return is positively related to the price paid for it.

Accepted Answer

A) True 
 B)False

Question 7

A horizontal Security Market Line would imply that investors

Accepted Answer

A) are unconcerned about risk and require no additional compensation for risk. 
B) view all financial assets as equally risky. 
C) greatly dislike risk and must be compensated for it. 
D) prefer assets with greater risk. 
A) are unconcerned about risk and require no additional compensation for risk. 
B) view all financial assets as equally risky. 
C) greatly dislike risk and must be compensated for it. 
D) prefer assets with greater risk.

Question 8

The underlying cause of risk in finance is

Accepted Answer

A) danger. 
B) uncertainty. 
C) fear. 
D) complexity. 
A) danger. 
B) uncertainty. 
C) fear. 
D) complexity.

Question 9

Professional athletes attempting only to maximize income will defer larger salaries if

Accepted Answer

A) deferred payouts are adjusted upward to compensate for forgone interest. 
B) it increases the team's chance to win. 
C) there is no chance of inflation. 
D) it allows them to stay in a city and not to have to move their family. 
A) deferred payouts are adjusted upward to compensate for forgone interest. 
B) it increases the team's chance to win. 
C) there is no chance of inflation. 
D) it allows them to stay in a city and not to have to move their family.

Question 10

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years.How much will be required to pay off the loan at the end of 10 years?

Accepted Answer

A) $900 
B) $962.85 
C) $1,079.46 
D) $1,123.21 
A) $900 
B) $962.85 
C) $1,079.46 
D) $1,123.21

Question 11

What is the difference between economic and financial investments?

Accepted Answer

A) Financial investments are sensitive to interest rates; economic investments are not. 
B) Economic investments add to the capital stock of an economy; financial investments do not. 
C) Economic investments are expressed in real (inflation-adjusted) terms; financial investments are expressed in nominal terms. 
D) Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods. 
A) Financial investments are sensitive to interest rates; economic investments are not. 
B) Economic investments add to the capital stock of an economy; financial investments do not. 
C) Economic investments are expressed in real (inflation-adjusted) terms; financial investments are expressed in nominal terms. 
D) Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods.

Question 12

Because of arbitrage, any given financial asset will be expected to return to the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 13

An asset with a beta of 0.5 has

Accepted Answer

A) 5 percent more risk than a risk-free asset. 
B) 50 percent more risk than a risk-free asset. 
C) half the nondiversifiable risk as a market portfolio. 
D) 5 times the nondiversifiable risk as a market portfolio. 
A) 5 percent more risk than a risk-free asset. 
B) 50 percent more risk than a risk-free asset. 
C) half the nondiversifiable risk as a market portfolio. 
D) 5 times the nondiversifiable risk as a market portfolio.

Question 14

The steeper the Security Market Line,

Accepted Answer

A) the lower the risk premium. 
B) the more investors dislike risk. 
C) the less investors are concerned about risk. 
D) the greater the risk-free interest rate. 
A) the lower the risk premium. 
B) the more investors dislike risk. 
C) the less investors are concerned about risk. 
D) the greater the risk-free interest rate.

Question 15

An asset's price and rate of return are directly related.

Accepted Answer

A) True 
 B)False

Question 16

Arbitrage equates rates of return across assets of all risk levels.

Accepted Answer

A) True 
 B)False

Question 17

(Last Word) Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about percent per year.

Accepted Answer

A) 5 
B) 1 
C) zero 
D) 3 
A) 5 
B) 1 
C) zero 
D) 3

Question 18

According to economists, the two factors most important to personal investment decisions are

Accepted Answer

A) rates of return and the rate of interest. 
B) rates of return and the rate of inflation. 
C) returns and diversifiable risk. 
D) returns and nondiversifiable risk. 
A) rates of return and the rate of interest. 
B) rates of return and the rate of inflation. 
C) returns and diversifiable risk. 
D) returns and nondiversifiable risk.

Question 19

The "time value" of money is based on the fact that prices may increase over time.

Accepted Answer

A) True 
 B)False

Question 20

The rise of mutual funds has radically changed the way corporations are controlled in that

Accepted Answer

A) it shifted ownership away from individual investors toward "institutional" investors like mutual funds. 
B) mutual funds increased the percentage of corporate shares owned by individual investors. 
C) corporate ownership became restricted to a select few. 
D) it reduced the share of private ownership and increased the share of public (government) ownership. 
A) it shifted ownership away from individual investors toward "institutional" investors like mutual funds. 
B) mutual funds increased the percentage of corporate shares owned by individual investors. 
C) corporate ownership became restricted to a select few. 
D) it reduced the share of private ownership and increased the share of public (government) ownership.

Exam 17: C: Financial Economics

If stockholders sell their shares for more than they paid for those shares, the stockholders

A promised amount $FV n years into the future is worth how much today, if the interest rate is i percent per year?

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

An investment's rate of return is positively related to the price paid for it.

A horizontal Security Market Line would imply that investors

The underlying cause of risk in finance is

Professional athletes attempting only to maximize income will defer larger salaries if

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years.How much will be required to pay off the loan at the end of 10 years?

What is the difference between economic and financial investments?

Because of arbitrage, any given financial asset will be expected to return to the Security Market Line.

An asset with a beta of 0.5 has

The steeper the Security Market Line,

An asset's price and rate of return are directly related.

Arbitrage equates rates of return across assets of all risk levels.

(Last Word) Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about percent per year.

According to economists, the two factors most important to personal investment decisions are

The "time value" of money is based on the fact that prices may increase over time.

The rise of mutual funds has radically changed the way corporations are controlled in that

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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