Question 1

The so-called market portfolio used as a benchmark in financial economics is

Accepted Answer

A) the lowest risk portfolio. 
B) the most diversified portfolio. 
C) the portfolio with the highest expected return. 
D) the portfolio with zero systemic risk. 
A) the lowest risk portfolio. 
B) the most diversified portfolio. 
C) the portfolio with the highest expected return. 
D) the portfolio with zero systemic risk.

Question 2

A recession in an economy would be an example of a diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 3

In the accompanying graph, point Y represents the

Accepted Answer

A) rate of return for the market portfolio. 
B) rate of return for the risk-free asset. 
C) risk premium for the market portfolio. 
D) compensation for time preference for a given asset. 
A) rate of return for the market portfolio. 
B) rate of return for the risk-free asset. 
C) risk premium for the market portfolio. 
D) compensation for time preference for a given asset.

Question 4

Arbitrage will cause a shift in the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 5

Stockholders of a company can benefit from either capital gains or dividends when the company is profitable.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is true about buying an old factory?

Accepted Answer

A) It is a financial investment but not an economic investment. 
B) It is an economic investment but not a financial investment. 
C) It is both an economic and a financial investment. 
D) It is neither an economic nor a financial investment. 
A) It is a financial investment but not an economic investment. 
B) It is an economic investment but not a financial investment. 
C) It is both an economic and a financial investment. 
D) It is neither an economic nor a financial investment.

Question 7

Nondiversifiable risk refers to potential losses from

Accepted Answer

A) random fluctuations in specific stocks. 
B) bad company policies. 
C) portfolio management fraud. 
D) events that move all investments in the same direction. 
A) random fluctuations in specific stocks. 
B) bad company policies. 
C) portfolio management fraud. 
D) events that move all investments in the same direction.

Question 8

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Accepted Answer

A) believe the rate of return they could find in other financial assets is less than that implied in the extended payout. 
B) sacrifice free money and are making an economically irrational decision. 
C) prefer immediate to delayed returns. 
D) are only making a rational economic decision if there is rapid inflation. 
A) believe the rate of return they could find in other financial assets is less than that implied in the extended payout. 
B) sacrifice free money and are making an economically irrational decision. 
C) prefer immediate to delayed returns. 
D) are only making a rational economic decision if there is rapid inflation.

Question 9

(Last Word) Before being adjusted for costs,

Accepted Answer

A) actively managed funds outperform index funds. 
B) actively managed funds and index funds perform about the same. 
C) index funds outperform actively managed funds. 
D) arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds. 
A) actively managed funds outperform index funds. 
B) actively managed funds and index funds perform about the same. 
C) index funds outperform actively managed funds. 
D) arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds.

Question 10

An index fund

Accepted Answer

A) is a passively managed mutual fund. 
B) has higher trading costs than an actively managed mutual fund. 
C) has higher trading costs than a passively managed mutual fund. 
D) is an actively managed mutual fund. 
A) is a passively managed mutual fund. 
B) has higher trading costs than an actively managed mutual fund. 
C) has higher trading costs than a passively managed mutual fund. 
D) is an actively managed mutual fund.

Question 11

If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's

Accepted Answer

A) expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio. 
B) expected rate of return is higher than could be had from some combination of the risk-free asset and the market portfolio. 
C) price will rise as arbitrage proceeds in the market. 
D) risk will rise as arbitrage proceeds in the market. 
A) expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio. 
B) expected rate of return is higher than could be had from some combination of the risk-free asset and the market portfolio. 
C) price will rise as arbitrage proceeds in the market. 
D) risk will rise as arbitrage proceeds in the market.

Question 12

The expected rate of return from an investment is

Accepted Answer

A) the rate that compensates for time preference only. 
B) the rate that compensates for risk only. 
C) the rate that compensates for time preference plus the rate that compensates for risk. 
D) the rate that compensates for time preference minus the rate that compensates for risk. 
A) the rate that compensates for time preference only. 
B) the rate that compensates for risk only. 
C) the rate that compensates for time preference plus the rate that compensates for risk. 
D) the rate that compensates for time preference minus the rate that compensates for risk.

Question 13

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Accepted Answer

A) 8 percent. 
B) 10.4 percent. 
C) 12.2 percent. 
D) 24 percent. 
A) 8 percent. 
B) 10.4 percent. 
C) 12.2 percent. 
D) 24 percent.

Question 14

Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return

Accepted Answer

A) is 0.5 percent. 
B) is 5 percent. 
C) is 6 percent. 
D) cannot be determined until she sells the house. 
A) is 0.5 percent. 
B) is 5 percent. 
C) is 6 percent. 
D) cannot be determined until she sells the house.

Question 15

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

Accepted Answer

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

Question 16

The vertical intercept of the Security Market Line is determined by the

Accepted Answer

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

Question 17

A stockholder owning 5 percent of a company's stock

Accepted Answer

A) is guaranteed to receive 5 percent of the company's yearly profits. 
B) is personally responsible for 5 percent of the debts if the company goes bankrupt. 
C) has 5 percent of her personal assets vulnerable if the company goes bankrupt. 
D) gets 5 percent of the votes at the shareholders' meetings. 
A) is guaranteed to receive 5 percent of the company's yearly profits. 
B) is personally responsible for 5 percent of the debts if the company goes bankrupt. 
C) has 5 percent of her personal assets vulnerable if the company goes bankrupt. 
D) gets 5 percent of the votes at the shareholders' meetings.

Question 18

The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as

Accepted Answer

A) hedging the market. 
B) passive fund management. 
C) arbitrage. 
D) portfolio balancing. 
A) hedging the market. 
B) passive fund management. 
C) arbitrage. 
D) portfolio balancing.

Question 19

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

Accepted Answer

A) Issuers of stocks can default on their stock obligations. 
B) Investing in stocks involves less risk because the future payments are less uncertain. 
C) In case of bankruptcy, bondholders get paid first ahead of stockholders. 
D) Bankruptcy occurs when the issuing firm is unable to fulfill its stock obligations. 
A) Issuers of stocks can default on their stock obligations. 
B) Investing in stocks involves less risk because the future payments are less uncertain. 
C) In case of bankruptcy, bondholders get paid first ahead of stockholders. 
D) Bankruptcy occurs when the issuing firm is unable to fulfill its stock obligations.

Question 20

Index funds are an example of passively managed funds.

Accepted Answer

A) True 
 B)False

Exam 17: C: Financial Economics

The so-called market portfolio used as a benchmark in financial economics is

A recession in an economy would be an example of a diversifiable risk.

In the accompanying graph, point Y represents the

Arbitrage will cause a shift in the Security Market Line.

Stockholders of a company can benefit from either capital gains or dividends when the company is profitable.

Which of the following statements is true about buying an old factory?

Nondiversifiable risk refers to potential losses from

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

(Last Word) Before being adjusted for costs,

An index fund

If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's

The expected rate of return from an investment is

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return

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

The vertical intercept of the Security Market Line is determined by the

A stockholder owning 5 percent of a company's stock

The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as

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

Index funds are an example of passively managed funds.

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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