Question 1

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.

Question 2

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 3

Stocks represent a debt, and buyers of stock expect to earn interest.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Accepted Answer

A) capital gains; dividends 
B) dividends; capital gains 
C) interest; dividends 
D) interest; capital gains 
A) capital gains; dividends 
B) dividends; capital gains 
C) interest; dividends 
D) interest; capital gains

Question 7

Kelly buys a share of stock for $20 that she sells a year later for $15.Kelly's rate of return is

Accepted Answer

A) positive 33 percent. 
B) negative 33.3 percent. 
C) negative 25 percent. 
D) negative 75 percent. 
A) positive 33 percent. 
B) negative 33.3 percent. 
C) negative 25 percent. 
D) negative 75 percent.

Question 8

If investors are reasonably tolerant of risk, the Security Market Line will be relatively flat.

Accepted Answer

A) True 
 B)False

Question 9

For heavily traded assets like stocks and bonds, arbitrage

Accepted Answer

A) will equalize rates of return across all stocks and bonds. 
B) will drive up rates of return on all assets. 
C) is a lengthy process because of the large volume of transactions. 
D) will often equalize rates of return among similar assets within minutes. 
A) will equalize rates of return across all stocks and bonds. 
B) will drive up rates of return on all assets. 
C) is a lengthy process because of the large volume of transactions. 
D) will often equalize rates of return among similar assets within minutes.

Question 10

Arbitrage will cause a shift in the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 11

The beta for an asset considered to be risk-free

Accepted Answer

A) can be any positive number. 
B) is negative. 
C) equals zero. 
D) equals 1. 
A) can be any positive number. 
B) is negative. 
C) equals zero. 
D) equals 1.

Question 12

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 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

Terri buys a house for $200,000 and expects to sell it in three years for $300,000.Her expected percentage rate of return over that three-year period is

Accepted Answer

A) 25 percent. 
B) 33 percent. 
C) 50 percent. 
D) 67 percent. 
A) 25 percent. 
B) 33 percent. 
C) 50 percent. 
D) 67 percent.

Question 15

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 16

One fundamental concept in financial economics is that an investment's rate of return is

Accepted Answer

A) positively related to the price paid for it. 
B) inversely related to the price paid for it. 
C) inversely related to the riskiness of the investment. 
D) inversely related to the maturity of the investment. 
A) positively related to the price paid for it. 
B) inversely related to the price paid for it. 
C) inversely related to the riskiness of the investment. 
D) inversely related to the maturity of the investment.

Question 17

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

Accepted Answer

A) 5 times the nondiversifiable risk of the market portfolio. 
B) 5 times the nondiversifiable risk of Y. 
C) 2.5 times the nondiversifiable risk of Y. 
D) 2.5 times the diversifiable risk of the market portfolio. 
A) 5 times the nondiversifiable risk of the market portfolio. 
B) 5 times the nondiversifiable risk of Y. 
C) 2.5 times the nondiversifiable risk of Y. 
D) 2.5 times the diversifiable risk of the market portfolio.

Question 18

If an investor owns a well-diversified portfolio, then

Accepted Answer

A) his portfolio does not involve any risk. 
B) the idiosyncratic risk in his portfolio is minimized. 
C) the systemic risk in his portfolio is minimized. 
D) his portfolio will have the highest expected return. 
A) his portfolio does not involve any risk. 
B) the idiosyncratic risk in his portfolio is minimized. 
C) the systemic risk in his portfolio is minimized. 
D) his portfolio will have the highest expected return.

Question 19

A manufacturing firm takes out a $500,000 loan to expand its plant.The loan has an annual interest rate of 7 percent.What would be the total compounded interest on the loan at the end of five years, excluding the principal?

Accepted Answer

A) $175,000 
B) $35,075 
C) $150,750 
D) $201,275 
A) $175,000 
B) $35,075 
C) $150,750 
D) $201,275

Question 20

Les buys a bond for $5,000.Every year that he holds the bond, he will receive interest payments of $250.The interest rate on the bond

Accepted Answer

A) is 2 percent. 
B) is 5 percent. 
C) is 20 percent. 
D) cannot be determined. 
A) is 2 percent. 
B) is 5 percent. 
C) is 20 percent. 
D) cannot be determined.

Exam 37: Financial Economics

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

If a corporation goes bankrupt,

Stocks represent a debt, and buyers of stock expect to earn interest.

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

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

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Kelly buys a share of stock for $20 that she sells a year later for $15.Kelly's rate of return is

If investors are reasonably tolerant of risk, the Security Market Line will be relatively flat.

For heavily traded assets like stocks and bonds, arbitrage

Arbitrage will cause a shift in the Security Market Line.

The beta for an asset considered to be risk-free

What is the difference between economic and financial investments?

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

Terri buys a house for $200,000 and expects to sell it in three years for $300,000.Her expected percentage rate of return over that three-year period is

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

One fundamental concept in financial economics is that an investment's rate of return is

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

If an investor owns a well-diversified portfolio, then

A manufacturing firm takes out a $500,000 loan to expand its plant.The loan has an annual interest rate of 7 percent.What would be the total compounded interest on the loan at the end of five years, excluding the principal?

Les buys a bond for $5,000.Every year that he holds the bond, he will receive interest payments of $250.The interest rate on the bond

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

Elasticity

Utility Maximization

Behavioral Economics

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Technology, Rd, and Efficiency

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

Health Care

Immigration

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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