Question 1

The Security Market Line (SML) is upward-sloping, indicating that the

Accepted Answer

A) beta of an investment increases as its risk level increases. 
B) average expected return on investments decreases as their risk level decreases. 
C) average expected return on the risk-free asset increases as its beta increases. 
D) average expected return of the market portfolio increases as its beta increases. 
A) beta of an investment increases as its risk level increases. 
B) average expected return on investments decreases as their risk level decreases. 
C) average expected return on the risk-free asset increases as its beta increases. 
D) average expected return of the market portfolio increases as its beta increases.

Question 2

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 3

Arbitrage is the process by which investors simultaneously sell

Accepted Answer

A) assets with higher rates of return and buy otherwise identical assets with lower rates of return. 
B) assets with lower rates of return and buy otherwise identical assets with higher rates of return. 
C) riskier assets and buy less risky assets. 
D) less risky assets and buy riskier assets. 
A) assets with higher rates of return and buy otherwise identical assets with lower rates of return. 
B) assets with lower rates of return and buy otherwise identical assets with higher rates of return. 
C) riskier assets and buy less risky assets. 
D) less risky assets and buy riskier assets.

Question 4

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S.government bonds.

Accepted Answer

A) True 
 B)False

Question 5

The "time value" of money is based on the fact that prices may increase over time.

Accepted Answer

A) True 
 B)False

Question 6

An asset's price and rate of return are directly related.

Accepted Answer

A) True 
 B)False

Question 7

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 8

An investment's rate of return is positively related to the price paid for it.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following would be the best brief definition of present value?

Accepted Answer

A) assets minus liabilities incurred to acquire the assets 
B) benefits of an investment minus its costs 
C) the sum of all the past values of an asset 
D) the current value of the expected future returns on an asset 
A) assets minus liabilities incurred to acquire the assets 
B) benefits of an investment minus its costs 
C) the sum of all the past values of an asset 
D) the current value of the expected future returns on an asset

Question 10

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Accepted Answer

A) stock A to fall and/or the price of stock B to rise. 
B) stock A to rise and/or the price of stock B to fall. 
C) both stocks to rise or fall together. 
D) neither stock to change. 
A) stock A to fall and/or the price of stock B to rise. 
B) stock A to rise and/or the price of stock B to fall. 
C) both stocks to rise or fall together. 
D) neither stock to change.

Question 11

Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.

Accepted Answer

A) $2,480 
B) $2,524.95 
C) $1,584.19 
D) $1,520 
A) $2,480 
B) $2,524.95 
C) $1,584.19 
D) $1,520

Question 12

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Accepted Answer

A) True 
 B)False

Question 13

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 14

Compound interest refers to the multiple interest rates an investor will be paid in a diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 15

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Accepted Answer

A) True 
 B)False

Question 16

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

Accepted Answer

A) not affect their rates of return. 
B) increase the return on the asset with the higher rate of return as the demand for it increases. 
C) increase the gap between the two rates of return. 
D) eventually equalize their rates of return. 
A) not affect their rates of return. 
B) increase the return on the asset with the higher rate of return as the demand for it increases. 
C) increase the gap between the two rates of return. 
D) eventually equalize their rates of return.

Question 17

Diversifiable risk refers to risk

Accepted Answer

A) faced by a portfolio in general. 
B) that can be reduced with appropriate fiscal and monetary policy. 
C) posed by business cycle fluctuations. 
D) specific to a particular investment. 
A) faced by a portfolio in general. 
B) that can be reduced with appropriate fiscal and monetary policy. 
C) posed by business cycle fluctuations. 
D) specific to a particular investment.

Question 18

According to The International Country Risk Guide, financial assets in

Accepted Answer

A) low-income economies tend to be less risky than in high-income economies. 
B) low-income economies tend to be riskier than in high-income economies. 
C) low-income economies tend to be about the same level of risk as in high-income economies. 
D) all countries carry about the same level of risk. 
A) low-income economies tend to be less risky than in high-income economies. 
B) low-income economies tend to be riskier than in high-income economies. 
C) low-income economies tend to be about the same level of risk as in high-income economies. 
D) all countries carry about the same level of risk.

Question 19

Economic investment refers to

Accepted Answer

A) buying a financial asset for a gain. 
B) selling a financial asset for a gain. 
C) postponing purchases of goods and services. 
D) making new additions to a firm's stock of capital. 
A) buying a financial asset for a gain. 
B) selling a financial asset for a gain. 
C) postponing purchases of goods and services. 
D) making new additions to a firm's stock of capital.

Question 20

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

Accepted Answer

A) True 
 B)False

Exam 37: Financial Economics

The Security Market Line (SML) is upward-sloping, indicating that the

Arbitrage occurs when investors try to profit from situations where

Arbitrage is the process by which investors simultaneously sell

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S.government bonds.

The "time value" of money is based on the fact that prices may increase over time.

An asset's price and rate of return are directly related.

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

An investment's rate of return is positively related to the price paid for it.

Which of the following would be the best brief definition of present value?

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

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

Compound interest refers to the multiple interest rates an investor will be paid in a diversified portfolio.

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

Diversifiable risk refers to risk

According to The International Country Risk Guide, financial assets in

Economic investment refers to

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

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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