Question 1

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

Accepted Answer

A) True 
 B)False

Question 2

$800 invested at an annually compounded interest rate of 6 percent will be worth how much at the end of 10 years?

Accepted Answer

A) $1,280 
B) $1,433 
C) $1,417 
D) $1,369 
A) $1,280 
B) $1,433 
C) $1,417 
D) $1,369

Question 3

Which of the following is common to all investments?

Accepted Answer

A) The investment pays interest. 
B) Some price must be paid to acquire them. 
C) Owners are guaranteed future payments. 
D) Government insurance backs them. 
A) The investment pays interest. 
B) Some price must be paid to acquire them. 
C) Owners are guaranteed future payments. 
D) Government insurance backs them.

Question 4

The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as

Accepted Answer

A) hedging the market. 
B) passive fund management. 
C) arbitrage. 
D) portfolio balancing. 
A) hedging the market. 
B) passive fund management. 
C) arbitrage. 
D) portfolio balancing.

Question 5

The risk premium is the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 6

If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

Accepted Answer

A) True 
 B)False

Question 7

At the end of 2015, U.S.households and nonprofit organizations held approximately in mutual funds.

Accepted Answer

A) $5.3 billion 
B) $6 trillion 
C) $8.1 trillion 
D) $70 trillion 
A) $5.3 billion 
B) $6 trillion 
C) $8.1 trillion 
D) $70 trillion

Question 8

When the Security Market Line shifts up, the average expected rate of return on investment assets with given risk levels is increasing.

Accepted Answer

A) True 
 B)False

Question 9

Because of arbitrage, any given financial asset will be expected to return to the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 10

What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?

Accepted Answer

A) $1,927.72 
B) $500 
C) $4,545.45 
D) $12,968.71 
A) $1,927.72 
B) $500 
C) $4,545.45 
D) $12,968.71

Question 11

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 12

Roger has the opportunity to invest $100,000 in two different assets.The investment in Asset #1 will have a present value of $120,000.The investment in Asset #2 is expected to have a future value of $140,000 in four years.If the market interest rate is 5 percent a year, which one would be the better investment?

Accepted Answer

A) Asset #2, because its future value is greater than the present value of Asset #1 
B) Asset #1, because its present value is greater than the future value of Asset #2 
C) Asset #2, because its present value is greater than the present value of Asset #1 
D) Asset #1, because its present value is greater than the present value of Asset #2 
A) Asset #2, because its future value is greater than the present value of Asset #1 
B) Asset #1, because its present value is greater than the future value of Asset #2 
C) Asset #2, because its present value is greater than the present value of Asset #1 
D) Asset #1, because its present value is greater than the present value of Asset #2

Question 13

The present value of a future amount of money will be greater the

Accepted Answer

A) greater the interest rate. 
B) greater the amount of time before the future payment is received. 
C) lower the interest rate. 
D) greater the rate of the expected rate of inflation. 
A) greater the interest rate. 
B) greater the amount of time before the future payment is received. 
C) lower the interest rate. 
D) greater the rate of the expected rate of inflation.

Question 14

When shares of stock are sold for more than the price at which they were purchased, the difference received by the seller is referred to as

Accepted Answer

A) a dividend. 
B) a capital gain. 
C) interest. 
D) economic profit. 
A) a dividend. 
B) a capital gain. 
C) interest. 
D) economic profit.

Question 15

The expected rate of return from an investment is

Accepted Answer

A) the rate that compensates for time preference only. 
B) the rate that compensates for risk only. 
C) the rate that compensates for time preference plus the rate that compensates for risk. 
D) the rate that compensates for time preference minus the rate that compensates for risk. 
A) the rate that compensates for time preference only. 
B) the rate that compensates for risk only. 
C) the rate that compensates for time preference plus the rate that compensates for risk. 
D) the rate that compensates for time preference minus the rate that compensates for risk.

Question 16

An asset with a beta of 0.5 has

Accepted Answer

A) 5 percent more risk than a risk-free asset. 
B) 50 percent more risk than a risk-free asset. 
C) half the nondiversifiable risk as a market portfolio. 
D) 5 times the nondiversifiable risk as a market portfolio. 
A) 5 percent more risk than a risk-free asset. 
B) 50 percent more risk than a risk-free asset. 
C) half the nondiversifiable risk as a market portfolio. 
D) 5 times the nondiversifiable risk as a market portfolio.

Question 17

Bond payments are generally more predictable than stocks because

Accepted Answer

A) interest on bonds is not taxable. 
B) stock prices and dividends exhibit little volatility. 
C) bonds generate higher average rates of return. 
D) bond owners know the size and timing of payments they will receive. 
A) interest on bonds is not taxable. 
B) stock prices and dividends exhibit little volatility. 
C) bonds generate higher average rates of return. 
D) bond owners know the size and timing of payments they will receive.

Question 18

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return.As a result, the investor buys shares in several oil companies.By buying several companies to reduce risk, the investor is seeking to reduce

Accepted Answer

A) systemic risk. 
B) the risk premium. 
C) idiosyncratic risk. 
D) nondiversifiable risk. 
A) systemic risk. 
B) the risk premium. 
C) idiosyncratic risk. 
D) nondiversifiable risk.

Question 19

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Accepted Answer

A) remain unchanged, as the house price and the rate of return are independent of each other. 
B) be 13.6 percent. 
C) fall from 9 percent to 8 percent. 
D) fall from 10.9 percent to 9.6 percent. 
A) remain unchanged, as the house price and the rate of return are independent of each other. 
B) be 13.6 percent. 
C) fall from 9 percent to 8 percent. 
D) fall from 10.9 percent to 9.6 percent.

Question 20

A stock investor may expect returns in the form of

Accepted Answer

A) present and future values. 
B) interest and dividends. 
C) interest and capital gains. 
D) dividends and capital gains. 
A) present and future values. 
B) interest and dividends. 
C) interest and capital gains. 
D) dividends and capital gains.

Exam 37: Financial Economics

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

$800 invested at an annually compounded interest rate of 6 percent will be worth how much at the end of 10 years?

Which of the following is common to all investments?

The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as

The risk premium is the rate that compensates for risk.

If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

At the end of 2015, U.S.households and nonprofit organizations held approximately in mutual funds.

When the Security Market Line shifts up, the average expected rate of return on investment assets with given risk levels is increasing.

Because of arbitrage, any given financial asset will be expected to return to the Security Market Line.

What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?

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

The present value of a future amount of money will be greater the

When shares of stock are sold for more than the price at which they were purchased, the difference received by the seller is referred to as

The expected rate of return from an investment is

An asset with a beta of 0.5 has

Bond payments are generally more predictable than stocks because

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return.As a result, the investor buys shares in several oil companies.By buying several companies to reduce risk, the investor is seeking to reduce

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

A stock investor may expect returns in the form of

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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