Question 1

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Accepted Answer

A) True 
 B)False

Question 2

The compensation for bearing more risk in owning an asset is a higher rate of return for the asset.

Accepted Answer

A) True 
 B)False

Question 3

The average expected rate of return is a

Accepted Answer

A) volume-weighted average. 
B) price-weighted average. 
C) probability-weighted average. 
D) value-weighted average. 
A) volume-weighted average. 
B) price-weighted average. 
C) probability-weighted average. 
D) value-weighted average.

Question 4

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

Accepted Answer

A) $604,000 
B) $624,000 
C) $680,000 
D) $700,000 
A) $604,000 
B) $624,000 
C) $680,000 
D) $700,000

Question 5

Tracy won a $100 million jackpot. She can receive the jackpot as a $5 million payment each year for 20 years, or she can ask to receive the present value of all those payments all at once now. Assume an annual interest rate of 5 percent. If she decides to take the present value payment, about how much will she receive?

Accepted Answer

A) $52.1 million 
B) $62.3 million 
C) $71.4 million 
D) $78.6 million 
A) $52.1 million 
B) $62.3 million 
C) $71.4 million 
D) $78.6 million

Question 6

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Accepted Answer

A) True 
 B)False

Question 7

Actively managed funds consistently outperform index funds.

Accepted Answer

A) True 
 B)False

Question 8

The risk premium is the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 9

Financial investment refers to

Accepted Answer

A) the same idea as economic investment. 
B) earning profits from producing goods and services. 
C) purchasing or building an asset for monetary gain. 
D) making new additions to the capital stock. 
A) the same idea as economic investment. 
B) earning profits from producing goods and services. 
C) purchasing or building an asset for monetary gain. 
D) making new additions to the capital stock.

Question 10

Arbitrage occurs when

Accepted Answer

A) bond and stock rates of return equalize. 
B) investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return. 
C) rates of return across all stocks equalize. 
D) investors move from lower to higher rate of return assets, regardless of the comparability of the assets. 
A) bond and stock rates of return equalize. 
B) investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return. 
C) rates of return across all stocks equalize. 
D) investors move from lower to higher rate of return assets, regardless of the comparability of the assets.

Question 11

Which of the following statements is true?

Accepted Answer

A) Asset prices and average expected rates of return are directly related, but levels of nondiversifiable risk and average expected rates of return are inversely related. 
B) Asset prices and average expected rates of return are inversely related, but levels of nondiversifiable risk and average expected rates of return are directly related. 
C) Asset prices, average expected rates of return, and levels of nondiversifiable risk are all directly related. 
D) Average expected rates of return are inversely related to both asset prices and levels of nondiversifiable risk. 
A) Asset prices and average expected rates of return are directly related, but levels of nondiversifiable risk and average expected rates of return are inversely related. 
B) Asset prices and average expected rates of return are inversely related, but levels of nondiversifiable risk and average expected rates of return are directly related. 
C) Asset prices, average expected rates of return, and levels of nondiversifiable risk are all directly related. 
D) Average expected rates of return are inversely related to both asset prices and levels of nondiversifiable risk.

Question 12

The beta for the market portfolio's level of nondiversifiable risk is

Accepted Answer

A) zero. 
B) 1. 
C) 100. 
D) always fluctuating. 
A) zero. 
B) 1. 
C) 100. 
D) always fluctuating.

Question 13

The concept of time preference in financial investing rests on the belief that people

Accepted Answer

A) are indifferent between present and future consumption. 
B) are patient. 
C) are impatient. 
D) intentionally consume 50 percent of assets in the present and 50 percent in the future. 
A) are indifferent between present and future consumption. 
B) are patient. 
C) are impatient. 
D) intentionally consume 50 percent of assets in the present and 50 percent in the future.

Question 14

Refer to the graph.Each labeled point represents a different asset.For which of these assets would we expect arbitrage to cause movement to a different point?

Accepted Answer

A) D and F 
B) G and H 
C) D, F, G and H 
D) D, E, and F 
A) D and F 
B) G and H 
C) D, F, G and H 
D) D, E, and F

Question 15

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons.His expected rate of return per year on the bond is

Accepted Answer

A) 4 percent. 
B) 7 percent. 
C) 10 percent. 
D) 12 percent. 
A) 4 percent. 
B) 7 percent. 
C) 10 percent. 
D) 12 percent.

Question 16

Refer to the graph. A movement of the Security Market Line from SML2 to SML1 and of the highlighted asset from A2 to A1 would be caused by

Accepted Answer

A) expansionary monetary policy and arbitrage, respectively. 
B) arbitrage and expansionary monetary policy, respectively. 
C) restrictive monetary policy and arbitrage, respectively. 
D) arbitrage and restrictive monetary policy, respectively. 
A) expansionary monetary policy and arbitrage, respectively. 
B) arbitrage and expansionary monetary policy, respectively. 
C) restrictive monetary policy and arbitrage, respectively. 
D) arbitrage and restrictive monetary policy, respectively.

Question 17

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Accepted Answer

A) True 
 B)False

Question 18

Arbitrage causes an equalization of the when assets are identical or nearly identical.

Accepted Answer

A) levels of risk of assets 
B) rates of return of assets 
C) time when payments are made from assets 
D) prices of assets 
A) levels of risk of assets 
B) rates of return of assets 
C) time when payments are made from assets 
D) prices of assets

Question 19

A bond that is currently selling at $1,000 offers to pay $50 annually.What is the percentage rate of return on the bond?

Accepted Answer

A) 5 percent 
B) 10 percent 
C) 20 percent 
D) 50 percent 
A) 5 percent 
B) 10 percent 
C) 20 percent 
D) 50 percent

Question 20

(Consider This) According to critics, growth in the popularity of mutual funds has

Accepted Answer

A) significantly increased market risk for investors. 
B) created more macroeconomic instability. 
C) led corporate management and fund managers to focus more on short-run share prices than long-run investor returns. 
D) discouraged average citizens from investing in stock and bond markets. 
A) significantly increased market risk for investors. 
B) created more macroeconomic instability. 
C) led corporate management and fund managers to focus more on short-run share prices than long-run investor returns. 
D) discouraged average citizens from investing in stock and bond markets.

Exam 17: C: Financial Economics

Bonds issued by the Federal government are riskier than bonds issued by corporations.

The compensation for bearing more risk in owning an asset is a higher rate of return for the asset.

The average expected rate of return is a

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Actively managed funds consistently outperform index funds.

The risk premium is the rate that compensates for risk.

Financial investment refers to

Arbitrage occurs when

Which of the following statements is true?

The beta for the market portfolio's level of nondiversifiable risk is

The concept of time preference in financial investing rests on the belief that people

Refer to the graph.Each labeled point represents a different asset.For which of these assets would we expect arbitrage to cause movement to a different point?

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons.His expected rate of return per year on the bond is

Refer to the graph. A movement of the Security Market Line from SML2 to SML1 and of the highlighted asset from A2 to A1 would be caused by

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Arbitrage causes an equalization of the when assets are identical or nearly identical.

A bond that is currently selling at $1,000 offers to pay $50 annually.What is the percentage rate of return on the bond?

(Consider This) According to critics, growth in the popularity of mutual funds has

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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