Question 1

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Accepted Answer

A) True 
 B)False

Question 2

The rate of return on short-term U.S.government bonds is often referred to as the

Accepted Answer

A) federal funds rate. 
B) discount rate. 
C) risk-free interest rate. 
D) yield rate. 
A) federal funds rate. 
B) discount rate. 
C) risk-free interest rate. 
D) yield rate.

Question 3

The market portfolio, by definition, has a beta = 0.

Accepted Answer

A) True 
 B)False

Question 4

For most financial assets, investors must be compensated for

Accepted Answer

A) nondiversifiable and diversifiable risk. 
B) diversifiable risk and time preference. 
C) nondiversifiable risk and time preference. 
D) nondiversifiable and diversifiable risk, and time preference. 
A) nondiversifiable and diversifiable risk. 
B) diversifiable risk and time preference. 
C) nondiversifiable risk and time preference. 
D) nondiversifiable and diversifiable risk, and time preference.

Question 5

Another name for nondiversifiable risk is

Accepted Answer

A) inflation risk. 
B) systemic risk. 
C) cyclical risk. 
D) idiosyncratic risk. 
A) inflation risk. 
B) systemic risk. 
C) cyclical risk. 
D) idiosyncratic risk.

Question 6

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

Accepted Answer

A) 10.5 percent. 
B) 11.0 percent. 
C) 11.5 percent. 
D) 12.5 percent. 
A) 10.5 percent. 
B) 11.0 percent. 
C) 11.5 percent. 
D) 12.5 percent.

Question 7

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Accepted Answer

A) increase, and the rates of return would decrease relative to other companies. 
B) decrease, and the rates of return would increase relative to other companies. 
C) decrease, but the rates of return would stay the same relative to other companies. 
D) decrease, and the rates of return would decrease relative to other companies. 
A) increase, and the rates of return would decrease relative to other companies. 
B) decrease, and the rates of return would increase relative to other companies. 
C) decrease, but the rates of return would stay the same relative to other companies. 
D) decrease, and the rates of return would decrease relative to other companies.

Question 8

"Default" occurs when

Accepted Answer

A) bond issuers fail to make promised payments. 
B) corporations go bankrupt and stock becomes worthless. 
C) bond purchasers fail to pay full price for a bond. 
D) stocks are not federally insured. 
A) bond issuers fail to make promised payments. 
B) corporations go bankrupt and stock becomes worthless. 
C) bond purchasers fail to pay full price for a bond. 
D) stocks are not federally insured.

Question 9

Which one of the following is an example of a financial investment but not an economic investment?

Accepted Answer

A) renovating a shopping mall 
B) constructing an addition to a petroleum refinery 
C) building a new store 
D) buying gold to sell later at a higher price 
A) renovating a shopping mall 
B) constructing an addition to a petroleum refinery 
C) building a new store 
D) buying gold to sell later at a higher price

Question 10

(Last Word) Actively managed funds

Accepted Answer

A) generate lower costs than passively managed funds. 
B) generally outperform passively managed funds. 
C) generally perform the same as passively managed funds. 
D) are generally outperformed by passively managed funds. 
A) generate lower costs than passively managed funds. 
B) generally outperform passively managed funds. 
C) generally perform the same as passively managed funds. 
D) are generally outperformed by passively managed funds.

Question 11

After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than a $6,000 investment earning 1 percent annual interest.

Accepted Answer

A) True 
 B)False

Question 12

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Accepted Answer

A) $38,050 
B) $39,516 
C) $40,323 
D) $42,108 
A) $38,050 
B) $39,516 
C) $40,323 
D) $42,108

Question 13

An investment's average expected rate of return is the

Accepted Answer

A) probability-weighted average of the investment's possible future rates of return. 
B) simple average of the investment's possible future rates of return. 
C) probability-weighted average of all past rates of return. 
D) simple average of the rates of return of all similar investments. 
A) probability-weighted average of the investment's possible future rates of return. 
B) simple average of the investment's possible future rates of return. 
C) probability-weighted average of all past rates of return. 
D) simple average of the rates of return of all similar investments.

Question 14

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

Accepted Answer

A) $300 
B) $338.42 
C) $700 
D) $738.72 
A) $300 
B) $338.42 
C) $700 
D) $738.72

Question 15

Future value measures the present-day value of returns or costs expected to arrive in the future.

Accepted Answer

A) True 
 B)False

Question 16

Denny buys a rare coin for $200 and sells the coin one year later for $220.Denny's rate of return is

Accepted Answer

A) 10 percent. 
B) 20 percent. 
C) 91 percent. 
D) 110 percent. 
A) 10 percent. 
B) 20 percent. 
C) 91 percent. 
D) 110 percent.

Question 17

Arbitrage occurs when investors try to profit from situations where

Accepted Answer

A) stock rates of return exceed bond rates of return. 
B) bond rates of return exceed stock rates of return. 
C) two identical assets have different rates of return. 
D) returns on financial assets exceed returns on real assets. 
A) stock rates of return exceed bond rates of return. 
B) bond rates of return exceed stock rates of return. 
C) two identical assets have different rates of return. 
D) returns on financial assets exceed returns on real assets.

Question 18

Portfolio diversification eliminates all of the from a portfolio.

Accepted Answer

A) risk 
B) diversifiable risk 
C) nondiversifiable risk 
D) risk from business cycle fluctuations 
A) risk 
B) diversifiable risk 
C) nondiversifiable risk 
D) risk from business cycle fluctuations

Question 19

People tend to be impatient, and they typically prefer to

Accepted Answer

A) save for later rather than spend now. 
B) be paid to consume now rather than in the future. 
C) be paid to consume in the future rather than now. 
D) pay in order to consume in the future rather than now. 
A) save for later rather than spend now. 
B) be paid to consume now rather than in the future. 
C) be paid to consume in the future rather than now. 
D) pay in order to consume in the future rather than now.

Question 20

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

Accepted Answer

A) True 
 B)False

Exam 17: C: Financial Economics

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

The rate of return on short-term U.S.government bonds is often referred to as the

The market portfolio, by definition, has a beta = 0.

For most financial assets, investors must be compensated for

Another name for nondiversifiable risk is

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

"Default" occurs when

Which one of the following is an example of a financial investment but not an economic investment?

(Last Word) Actively managed funds

After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than a $6,000 investment earning 1 percent annual interest.

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

An investment's average expected rate of return is the

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

Future value measures the present-day value of returns or costs expected to arrive in the future.

Denny buys a rare coin for $200 and sells the coin one year later for $220.Denny's rate of return is

Arbitrage occurs when investors try to profit from situations where

Portfolio diversification eliminates all of the from a portfolio.

People tend to be impatient, and they typically prefer to

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

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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