Question 1

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. B

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Accepted Answer

A)  Less risky assets will have similar average expected rates of return to more risky assets. 
B)  Less risky assets will have higher average expected rates of return than more risky assets. 
C)  More risky assets will have higher average expected rates of return than less risky assets. 
D)  More risky assets will have lower average expected rates of return than less risky assets. 
A)  Less risky assets will have similar average expected rates of return to more risky assets. 
B)  Less risky assets will have higher average expected rates of return than more risky assets. 
C)  More risky assets will have higher average expected rates of return than less risky assets. 
D)  More risky assets will have lower average expected rates of return than less risky assets. C

Question 4

Refer to the graph. An increase in investor concern about risk would be shown by

Accepted Answer

A)  an increase in the intercept. 
B)  a shift from line C to line B. 
C)  a shift from line A to line B. 
D)  a decrease in the risk-free interest rate. 
A)  an increase in the intercept. 
B)  a shift from line C to line B. 
C)  a shift from line A to line B. 
D)  a decrease in the risk-free interest rate.

Question 5

The idea that money has "time value" refers to the fact that

Accepted Answer

A)  people prefer to receive a given sum of money in the future rather than in the present. 
B)  money can be used to purchase the services of labor, as measured in hourly units. 
C)  a speciﬁc amount of money is more valuable to a person the sooner it is received. 
D)  compound interest converts future dollars into a greater amount of current dollars. 
A)  people prefer to receive a given sum of money in the future rather than in the present. 
B)  money can be used to purchase the services of labor, as measured in hourly units. 
C)  a speciﬁc amount of money is more valuable to a person the sooner it is received. 
D)  compound interest converts future dollars into a greater amount of current dollars.

Question 6

Present value is best deﬁned as the

Accepted Answer

A)  worth or value today of future expected returns or costs. 
B)  worth in the future of a current ﬂow of returns or costs. 
C)  current worth of a ﬁnancial asset purchased in the past. 
D)  expected future value of a ﬁnancial asset purchased today. 
A)  worth or value today of future expected returns or costs. 
B)  worth in the future of a current ﬂow of returns or costs. 
C)  current worth of a ﬁnancial asset purchased in the past. 
D)  expected future value of a ﬁnancial asset purchased today.

Question 7

Index funds

Accepted Answer

A)  are passively managed. 
B)  are actively managed. 
C)  may be either passively or actively managed. 
D)  are neither passively nor actively managed. 
A)  are passively managed. 
B)  are actively managed. 
C)  may be either passively or actively managed. 
D)  are neither passively nor actively managed.

Question 8

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Accepted Answer

A)  believe the rate of return they could ﬁnd in other ﬁnancial assets is less than that implied in the extended payout. 
B)  sacriﬁce free money and are making an economically irrational decision. 
C)  prefer immediate to delayed returns. 
D)  are only making a rational economic decision if there is rapid inﬂation. 
A)  believe the rate of return they could ﬁnd in other ﬁnancial assets is less than that implied in the extended payout. 
B)  sacriﬁce free money and are making an economically irrational decision. 
C)  prefer immediate to delayed returns. 
D)  are only making a rational economic decision if there is rapid inﬂation.

Question 9

The maximum amount of money that company shareholders can lose on their investment in the corporation is

Accepted Answer

A)  whatever percentage of their wealth equals their percentage of ownership. 
B)  whatever they paid for the shares in the company. 
C)  whatever the corporation loses each year times the percentage of ownership in the company. 
D)  zero. 
A)  whatever percentage of their wealth equals their percentage of ownership. 
B)  whatever they paid for the shares in the company. 
C)  whatever the corporation loses each year times the percentage of ownership in the company. 
D)  zero.

Question 10

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 11

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

Accepted Answer

A)  Stocks are issued for a ﬁxed period; bonds are not. 
B)  Stocks pay interest; bonds pay dividends. 
C)  Bond payouts are more predictable than payouts from stocks. 
D)  Bonds represent ownership; stocks represent debt. 
A)  Stocks are issued for a ﬁxed period; bonds are not. 
B)  Stocks pay interest; bonds pay dividends. 
C)  Bond payouts are more predictable than payouts from stocks. 
D)  Bonds represent ownership; stocks represent debt.

Question 12

After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than
a $6,000 investment earning 1 percent annual interest.

Accepted Answer

A) True 
 B)False

Question 13

What do stocks represent?

Accepted Answer

A)  shares of ownership in a corporation and a guaranteed stream of proﬁts 
B)  shares of ownership in a corporation and an entitlement to its future proﬁts 
C)  debt contracts with a corporation and regular interest payments on the loan 
D)  debt contracts with a corporation and variable interest payments on the loan 
A)  shares of ownership in a corporation and a guaranteed stream of proﬁts 
B)  shares of ownership in a corporation and an entitlement to its future proﬁts 
C)  debt contracts with a corporation and regular interest payments on the loan 
D)  debt contracts with a corporation and variable interest payments on the loan

Question 14

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 15

In the accompanying graph, point Y represents the

Accepted Answer

A)  rate of return for the market portfolio. 
B)  rate of return for the risk-free asset. 
C)  risk premium for the market portfolio. 
D)  compensation for time preference for a given asset. 
A)  rate of return for the market portfolio. 
B)  rate of return for the risk-free asset. 
C)  risk premium for the market portfolio. 
D)  compensation for time preference for a given asset.

Question 16

The market portfolio would have a beta of

Accepted Answer

A)  0. 
B)  1.0. 
C)  100. 
D)  any value. 
A)  0. 
B)  1.0. 
C)  100. 
D)  any value.

Question 17

$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 18

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 & 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 & Poor's 500 
D)  the rate of return on short-term U.S. government bonds

Question 19

Meb owns stock in two similar, large, ﬁnancially sound corporations. Company A consistently earns rates of return of 12 percent per year, while company B regularly generates rates of return of 8
Percent per year. If Meb is attempting to arbitrage, he will

Accepted Answer

A)  sell his stock in company B and buy more stock in company A. 
B)  sell his stock in company A and buy more stock in company B. 
C)  keep his portfolio balanced with an equal or nearly equal number of shares of each stock. 
D)  buy stock in other companies in an effort to diversify and minimize risk. 
A)  sell his stock in company B and buy more stock in company A. 
B)  sell his stock in company A and buy more stock in company B. 
C)  keep his portfolio balanced with an equal or nearly equal number of shares of each stock. 
D)  buy stock in other companies in an effort to diversify and minimize risk.

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 17: Financial Economics

If an investor owns a well-diversiﬁed portfolio, then

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

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Refer to the graph. An increase in investor concern about risk would be shown by

The idea that money has "time value" refers to the fact that

Present value is best deﬁned as the

Index funds

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

The maximum amount of money that company shareholders can lose on their investment in the corporation is

Economic investment refers to

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

After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than a $6,000 investment earning 1 percent annual interest.

What do stocks represent?

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

In the accompanying graph, point Y represents the

The market portfolio would have a beta of

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

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

Meb owns stock in two similar, large, ﬁnancially sound corporations. Company A consistently earns rates of return of 12 percent per year, while company B regularly generates rates of return of 8 Percent per year. If Meb is attempting to arbitrage, he will

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

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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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