Question 1

The largest mutual fund, as of April 2016, held approximately billion in assets under management.

Accepted Answer

A) $70 
B) $90 
C) $147 
D) $170 
A) $70 
B) $90 
C) $147 
D) $170

Question 2

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Accepted Answer

A) index funds require more buying and selling to generate their returns. 
B) management and trading costs reduce the returns of actively managed funds. 
C) index funds spend more on research and management. 
D) diversification is more important to actively managed funds. 
A) index funds require more buying and selling to generate their returns. 
B) management and trading costs reduce the returns of actively managed funds. 
C) index funds spend more on research and management. 
D) diversification is more important to actively managed funds.

Question 3

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Accepted Answer

A) True 
 B)False

Question 4

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Accepted Answer

A) 8.75 percent 
B) 9.1 percent 
C) 10 percent 
D) 10.4 percent 
A) 8.75 percent 
B) 9.1 percent 
C) 10 percent 
D) 10.4 percent

Question 5

Arbitrage equates rates of return across assets of all risk levels.

Accepted Answer

A) True 
 B)False

Question 6

Short-term U.S.government bonds are considered to be risk-free.

Accepted Answer

A) True 
 B)False

Question 7

Short-term U.S.government securities are practically risk-free, and thus their rates of return are payments solely for

Accepted Answer

A) diversifiable risk. 
B) time preference. 
C) idiosyncratic risk. 
D) pure profit. 
A) diversifiable risk. 
B) time preference. 
C) idiosyncratic risk. 
D) pure profit.

Question 8

The risk-free interest rate is determined primarily by the

Accepted Answer

A) largest commercial banks. 
B) Internal Revenue Service. 
C) U.S.Treasury. 
D) Federal Reserve. 
A) largest commercial banks. 
B) Internal Revenue Service. 
C) U.S.Treasury. 
D) Federal Reserve.

Question 9

(Last Word) Before being adjusted for costs,

Accepted Answer

A) actively managed funds outperform index funds. 
B) actively managed funds and index funds perform about the same. 
C) index funds outperform actively managed funds. 
D) arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds. 
A) actively managed funds outperform index funds. 
B) actively managed funds and index funds perform about the same. 
C) index funds outperform actively managed funds. 
D) arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds.

Question 10

You deposit $5,000 in a 5-year bank CD that pays 3 percent interest per year.How much will you get from this deposit at maturity?

Accepted Answer

A) $5,155 
B) $5,751 
C) $5,796 
D) $6,500 
A) $5,155 
B) $5,751 
C) $5,796 
D) $6,500

Question 11

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

Accepted Answer

A) $604,000 
B) $624,000 
C) $680,000 
D) $700,000 
A) $604,000 
B) $624,000 
C) $680,000 
D) $700,000

Question 12

Augi buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately

Accepted Answer

A) 4 percent. 
B) 8 percent. 
C) 12.5 percent. 
D) 25 percent. 
A) 4 percent. 
B) 8 percent. 
C) 12.5 percent. 
D) 25 percent.

Question 13

During the financial crisis of 2007-2008, investors demanded much higher risk premiums in their investments.This caused the SML to

Accepted Answer

A) shift up. 
B) shift down. 
C) become steeper. 
D) become flatter. 
A) shift up. 
B) shift down. 
C) become steeper. 
D) become flatter.

Question 14

An investment with a beta of 4.0 means that the investment has four times the

Accepted Answer

A) average expected rate of return of the market portfolio. 
B) risk of all similar investments. 
C) level of nondiversifiable risk as the market portfolio. 
D) level of diversifiable risk as the market portfolio. 
A) average expected rate of return of the market portfolio. 
B) risk of all similar investments. 
C) level of nondiversifiable risk as the market portfolio. 
D) level of diversifiable risk as the market portfolio.

Question 15

Bonds represent

Accepted Answer

A) a claim on company dividends. 
B) ownership of a company. 
C) all financial assets guaranteed to pay interest. 
D) loans to governments and corporations. 
A) a claim on company dividends. 
B) ownership of a company. 
C) all financial assets guaranteed to pay interest. 
D) loans to governments and corporations.

Question 16

The type of risk that pushes the returns from all investment in the same direction at the same time is

Accepted Answer

A) idiosyncratic. 
B) diversifiable. 
C) systemic. 
D) time preference. 
A) idiosyncratic. 
B) diversifiable. 
C) systemic. 
D) time preference.

Question 17

Assume that two firms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock.Arbitrage will occur as investors

Accepted Answer

A) sell Firm A's stock and buy Firm B's stock. 
B) buy Firm A's stock and buy Firm B's stock also. 
C) sell Firm A's stock and sell Firm B's stock also. 
D) buy Firm A's stock and sell Firm B's stock. 
A) sell Firm A's stock and buy Firm B's stock. 
B) buy Firm A's stock and buy Firm B's stock also. 
C) sell Firm A's stock and sell Firm B's stock also. 
D) buy Firm A's stock and sell Firm B's stock.

Question 18

A stockholder owning 5 percent of a company's stock

Accepted Answer

A) is guaranteed to receive 5 percent of the company's yearly profits. 
B) is personally responsible for 5 percent of the debts if the company goes bankrupt. 
C) has 5 percent of her personal assets vulnerable if the company goes bankrupt. 
D) gets 5 percent of the votes at the shareholders' meetings. 
A) is guaranteed to receive 5 percent of the company's yearly profits. 
B) is personally responsible for 5 percent of the debts if the company goes bankrupt. 
C) has 5 percent of her personal assets vulnerable if the company goes bankrupt. 
D) gets 5 percent of the votes at the shareholders' meetings.

Question 19

If stockholders sell their shares for more than they paid for those shares, the stockholders

Accepted Answer

A) realize a share of equal profits. 
B) receive a dividend. 
C) realize a capital gain. 
D) obtain a mutual fund. 
A) realize a share of equal profits. 
B) receive a dividend. 
C) realize a capital gain. 
D) obtain a mutual fund.

Question 20

Economic investment refers to the buying or selling of any asset in expectation of a financial gain.

Accepted Answer

A) True 
 B)False

Exam 37: Financial Economics

The largest mutual fund, as of April 2016, held approximately billion in assets under management.

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Arbitrage equates rates of return across assets of all risk levels.

Short-term U.S.government bonds are considered to be risk-free.

Short-term U.S.government securities are practically risk-free, and thus their rates of return are payments solely for

The risk-free interest rate is determined primarily by the

(Last Word) Before being adjusted for costs,

You deposit $5,000 in a 5-year bank CD that pays 3 percent interest per year.How much will you get from this deposit at maturity?

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

Augi buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately

During the financial crisis of 2007-2008, investors demanded much higher risk premiums in their investments.This caused the SML to

An investment with a beta of 4.0 means that the investment has four times the

Bonds represent

The type of risk that pushes the returns from all investment in the same direction at the same time is

Assume that two firms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock.Arbitrage will occur as investors

A stockholder owning 5 percent of a company's stock

If stockholders sell their shares for more than they paid for those shares, the stockholders

Economic investment refers to the buying or selling of any asset in expectation of a financial gain.

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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