Question 1

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 2

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

Accepted Answer

A) Bonds represent ownership; stocks represent debt. 
B) Bonds make interest payments; stocks pay dividends. 
C) Stock payouts are predictable; bond payouts are not. 
D) All of these are differences between stocks and bonds. 
A) Bonds represent ownership; stocks represent debt. 
B) Bonds make interest payments; stocks pay dividends. 
C) Stock payouts are predictable; bond payouts are not. 
D) All of these are differences between stocks and bonds.

Question 3

Brinley holds stock in large high-tech companies in his portfolio.The best way for Brinley to diversify his risk would be to buy

Accepted Answer

A) more shares of the stock he already owns. 
B) shares in other large high-tech companies. 
C) bonds or stocks of small and medium-sized companies. 
D) bonds from the large high-tech companies already in his portfolio. 
A) more shares of the stock he already owns. 
B) shares in other large high-tech companies. 
C) bonds or stocks of small and medium-sized companies. 
D) bonds from the large high-tech companies already in his portfolio.

Question 4

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Accepted Answer

A) pooling. 
B) arbitrage. 
C) diversification. 
D) weighted average. 
A) pooling. 
B) arbitrage. 
C) diversification. 
D) weighted average.

Question 5

Arbitrage equalizes rates of return across assets of a given beta.

Accepted Answer

A) True 
 B)False

Question 6

A bank account pays 4 percent interest per year.If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Accepted Answer

A) $3,122 
B) $3,246 
C) $3,600 
D) $4,206 
A) $3,122 
B) $3,246 
C) $3,600 
D) $4,206

Question 7

Risk in finance means that an asset

Accepted Answer

A) does not pay dividends. 
B) does not pay capital gains. 
C) has a present value that is negative. 
D) has future payments that are uncertain. 
A) does not pay dividends. 
B) does not pay capital gains. 
C) has a present value that is negative. 
D) has future payments that are uncertain.

Question 8

If an asset has a risk-return combination that is above the Security Market Line (SML), then arbitrage will make that asset's

Accepted Answer

A) beta increase. 
B) beta decrease. 
C) average expected return increase. 
D) average expected return decrease. 
A) beta increase. 
B) beta decrease. 
C) average expected return increase. 
D) average expected return decrease.

Question 9

Actively managed funds consistently outperform index funds.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years.How much will be required to pay off the loan at the end of the five years?

Accepted Answer

A) $401.47 
B) $390 
C) $393.54 
D) $408.75 
A) $401.47 
B) $390 
C) $393.54 
D) $408.75

Question 14

Xavier is a baseball player negotiating a contract to play for a team for one year.He is usually paid $10 million a year for playing, but the salary cap for his team means that he will have to be paid $5 million this year and the remainder next year.If the interest rate is 8 percent, how much should that remaining amount be next year?

Accepted Answer

A) $5.0 million 
B) $5.1 million 
C) $5.4 million 
D) $6.1 million 
A) $5.0 million 
B) $5.1 million 
C) $5.4 million 
D) $6.1 million

Question 15

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 16

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 17

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Accepted Answer

A) future value 
B) present value 
C) time preference 
D) market portfolio 
A) future value 
B) present value 
C) time preference 
D) market portfolio

Question 18

Which of the following is an economic investment?

Accepted Answer

A) shares of corporate stock 
B) U.S.savings bonds 
C) newly built houses 
D) bonds issued by private corporations 
A) shares of corporate stock 
B) U.S.savings bonds 
C) newly built houses 
D) bonds issued by private corporations

Question 19

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 20

For any given financial asset, risk levels and average expected rates of return are

Accepted Answer

A) independent of each other. 
B) negatively related because assets with higher average expected rates of return sell for higher prices, which are inversely related to risk. 
C) positively related because both are inversely related to the rate of inflation. 
D) positively related because investors must be compensated for taking greater risks. 
A) independent of each other. 
B) negatively related because assets with higher average expected rates of return sell for higher prices, which are inversely related to risk. 
C) positively related because both are inversely related to the rate of inflation. 
D) positively related because investors must be compensated for taking greater risks.

Exam 37: Financial Economics

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

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

Brinley holds stock in large high-tech companies in his portfolio.The best way for Brinley to diversify his risk would be to buy

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Arbitrage equalizes rates of return across assets of a given beta.

A bank account pays 4 percent interest per year.If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Risk in finance means that an asset

If an asset has a risk-return combination that is above the Security Market Line (SML), then arbitrage will make that asset's

Actively managed funds consistently outperform index funds.

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

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

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

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years.How much will be required to pay off the loan at the end of the five years?

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

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

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Which of the following is an economic investment?

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

For any given financial asset, risk levels and average expected rates of return are

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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