Question 1

A change in investors' feelings about risk will change the intercept (and therefore shift) the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 2

What do stocks represent?

Accepted Answer

A) shares of ownership in a corporation and a guaranteed stream of profits 
B) shares of ownership in a corporation and an entitlement to its future profits 
C) debt contracts with a corporation and regular interest payments on the loan 
D) debt contracts with a corporation and variable interest payments on the loan 
A) shares of ownership in a corporation and a guaranteed stream of profits 
B) shares of ownership in a corporation and an entitlement to its future profits 
C) debt contracts with a corporation and regular interest payments on the loan 
D) debt contracts with a corporation and variable interest payments on the loan

Question 3

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Accepted Answer

A) index funds require more buying and selling to generate their returns. 
B) management and trading costs reduce the returns of actively managed funds. 
C) index funds spend more on research and management. 
D) diversification is more important to actively managed funds. 
A) index funds require more buying and selling to generate their returns. 
B) management and trading costs reduce the returns of actively managed funds. 
C) index funds spend more on research and management. 
D) diversification is more important to actively managed funds.

Question 4

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

Accepted Answer

A) pooling. 
B) arbitrage. 
C) diversification. 
D) time preference. 
A) pooling. 
B) arbitrage. 
C) diversification. 
D) time preference.

Question 5

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

Accepted Answer

A) beta. 
B) risk. 
C) arbitrage. 
D) diversification. 
A) beta. 
B) risk. 
C) arbitrage. 
D) diversification.

Question 6

The Security Market Line depicts the inverse relationship between the average expected rates of return and risk levels of financial assets.

Accepted Answer

A) True 
 B)False

Question 7

If a corporation goes bankrupt,

Accepted Answer

A) neither stockholders nor bondholders receive any money. 
B) stockholders get paid from the sale of company assets before bondholders do. 
C) bondholders get paid from the sale of company assets before stockholders do. 
D) stockholders must honor the debts to bondholders out of personal assets if necessary. 
A) neither stockholders nor bondholders receive any money. 
B) stockholders get paid from the sale of company assets before bondholders do. 
C) bondholders get paid from the sale of company assets before stockholders do. 
D) stockholders must honor the debts to bondholders out of personal assets if necessary.

Question 8

The present value model of investment states that an asset's current price should be equal to the

Accepted Answer

A) sum of the present values of all of its future payments or earnings. 
B) sum of all of its future payments or earnings times the number of years of its life. 
C) life of the asset times the present values of all of its future payments or earnings. 
D) present values of all of its future payments or earnings divided by its life in years. 
A) sum of the present values of all of its future payments or earnings. 
B) sum of all of its future payments or earnings times the number of years of its life. 
C) life of the asset times the present values of all of its future payments or earnings. 
D) present values of all of its future payments or earnings divided by its life in years.

Question 9

The risk-free interest rate is determined primarily by the

Accepted Answer

A) largest commercial banks. 
B) Internal Revenue Service. 
C) U.S.Treasury. 
D) Federal Reserve. 
A) largest commercial banks. 
B) Internal Revenue Service. 
C) U.S.Treasury. 
D) Federal Reserve.

Question 10

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?

Accepted Answer

A) $1,250. 
B) $250. 
C) $267.25. 
D) $255.26. 
A) $1,250. 
B) $250. 
C) $267.25. 
D) $255.26.

Question 11

The vertical intercept of the Security Market Line (SML) shows the

Accepted Answer

A) amount of arbitrage. 
B) risk-free interest rate. 
C) beta of the market portfolio. 
D) risk premium for the market portfolio. 
A) amount of arbitrage. 
B) risk-free interest rate. 
C) beta of the market portfolio. 
D) risk premium for the market portfolio.

Question 12

Mutual funds may contain

Accepted Answer

A) stocks only. 
B) bonds only. 
C) either stocks or bonds. 
D) neither stocks nor bonds. 
A) stocks only. 
B) bonds only. 
C) either stocks or bonds. 
D) neither stocks nor bonds.

Question 13

Which of the following is both an economic and a financial investment?

Accepted Answer

A) government building a new road 
B) Boeing Corporation building a new factory 
C) a private citizen buying corporate stock 
D) the Federal Reserve buying bonds from commercial banks 
A) government building a new road 
B) Boeing Corporation building a new factory 
C) a private citizen buying corporate stock 
D) the Federal Reserve buying bonds from commercial banks

Question 14

Bond payments are generally more predictable than stocks because

Accepted Answer

A) interest on bonds is not taxable. 
B) stock prices and dividends exhibit little volatility. 
C) bonds generate higher average rates of return. 
D) bond owners know the size and timing of payments they will receive. 
A) interest on bonds is not taxable. 
B) stock prices and dividends exhibit little volatility. 
C) bonds generate higher average rates of return. 
D) bond owners know the size and timing of payments they will receive.

Question 15

What is considered to be the best measure of the risk-free interest rate?

Accepted Answer

A) the rate of return on a corporate bond index fund 
B) the rate of return on a corporate stock index fund 
C) the rate of return on the Standard and Poor's 500 
D) the rate of return on short-term U.S.government bonds 
A) the rate of return on a corporate bond index fund 
B) the rate of return on a corporate stock index fund 
C) the rate of return on the Standard and Poor's 500 
D) the rate of return on short-term U.S.government bonds

Question 16

The Standard & Poor's 500 Index measures prices of the 500

Accepted Answer

A) most purchased consumer goods in the United States. 
B) stocks of the largest companies in the United States. 
C) largest bonds trading in the United States. 
D) largest index funds trading in the United States. 
A) most purchased consumer goods in the United States. 
B) stocks of the largest companies in the United States. 
C) largest bonds trading in the United States. 
D) largest index funds trading in the United States.

Question 17

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Accepted Answer

A) 5.2 
B) 6.8 
C) 8.3 
D) 10 
A) 5.2 
B) 6.8 
C) 8.3 
D) 10

Question 18

Refer to the graph.Which of the three Security Market Lines depicts the situation where investors most dislike risk?

Accepted Answer

A) line A 
B) line B 
C) line C 
D) It cannot be determined from the graph. 
A) line A 
B) line B 
C) line C 
D) It cannot be determined from the graph.

Question 19

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

Accepted Answer

A) Stocks are issued for a fixed period; bonds are not. 
B) Stocks pay interest; bonds pay dividends. 
C) Bond payouts are more predictable than payouts from stocks. 
D) Bonds represent ownership; stocks represent debt. 
A) Stocks are issued for a fixed period; bonds are not. 
B) Stocks pay interest; bonds pay dividends. 
C) Bond payouts are more predictable than payouts from stocks. 
D) Bonds represent ownership; stocks represent debt.

Question 20

Investors face the risk that the economy could go into another recession.This risk is

Accepted Answer

A) idiosyncratic. 
B) diversifiable. 
C) systemic. 
D) time preference. 
A) idiosyncratic. 
B) diversifiable. 
C) systemic. 
D) time preference.

Exam 17: C: Financial Economics

A change in investors' feelings about risk will change the intercept (and therefore shift) the Security Market Line.

What do stocks represent?

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

The Security Market Line depicts the inverse relationship between the average expected rates of return and risk levels of financial assets.

If a corporation goes bankrupt,

The present value model of investment states that an asset's current price should be equal to the

The risk-free interest rate is determined primarily by the

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?

The vertical intercept of the Security Market Line (SML) shows the

Mutual funds may contain

Which of the following is both an economic and a financial investment?

Bond payments are generally more predictable than stocks because

What is considered to be the best measure of the risk-free interest rate?

The Standard & Poor's 500 Index measures prices of the 500

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Refer to the graph.Which of the three Security Market Lines depicts the situation where investors most dislike risk?

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

Investors face the risk that the economy could go into another recession.This risk is

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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