Question 1

Another name for nondiversiﬁable risk is

Accepted Answer

A)  inﬂation risk. 
B)  systemic risk. 
C)  cyclical risk. 
D)  idiosyncratic risk. 
A)  inﬂation risk. 
B)  systemic risk. 
C)  cyclical risk. 
D)  idiosyncratic risk.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Suppose that Clint wins a lottery jackpot of $300 million. He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately.
Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

Accepted Answer

A)  Yes, but only if rapid inﬂation is expected over the next 30 years. 
B)  Yes, but only if deﬂation is expected over the next 30 years. 
C)  No, the rate of return will always be higher with the 30 annual payments. 
D)  Yes, if he can invest in ﬁnancial assets that will yield greater returns than the interest rate implicit in the annual payments. 
A)  Yes, but only if rapid inﬂation is expected over the next 30 years. 
B)  Yes, but only if deﬂation is expected over the next 30 years. 
C)  No, the rate of return will always be higher with the 30 annual payments. 
D)  Yes, if he can invest in ﬁnancial assets that will yield greater returns than the interest rate implicit in the annual payments.

Question 5

What is the difference between an economic investment and a ﬁnancial investment?

Accepted Answer

Economic investment refers either to pay

Question 6

Bankruptcy of a ﬁrm means that it

Accepted Answer

A)  earned less revenues than its total costs. 
B)  cannot meet its contractual obligations to its stockholders. 
C)  has a lot of debt owed to its bondholders. 
D)  is unable to make timely promised payments on its debt. 
A)  earned less revenues than its total costs. 
B)  cannot meet its contractual obligations to its stockholders. 
C)  has a lot of debt owed to its bondholders. 
D)  is unable to make timely promised payments on its debt.

Question 7

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 8

The correct formula that relates present value (PV) to future value (FV), if interest rate is i percent per year over n years is

Accepted Answer

A)  $\mathrm { PV } = \mathrm { FV } ( 1 + i ) ^ { n }$ 
B)  $\mathrm { FV } = \mathrm { PV } ( i) ^ { n }$ 
C)  $\mathrm { PV } = \mathrm { FV } _ { \mathrm { n } } / ( 1 + i ) ^ { n }$ 
D)  $\mathrm { FV } = \mathrm { PV } ( 1 + i ) ( n )$ 
A)  $\mathrm { PV } = \mathrm { FV } ( 1 + i ) ^ { n }$ 
B)  $\mathrm { FV } = \mathrm { PV } ( i) ^ { n }$ 
C)  $\mathrm { PV } = \mathrm { FV } _ { \mathrm { n } } / ( 1 + i ) ^ { n }$ 
D)  $\mathrm { FV } = \mathrm { PV } ( 1 + i ) ( n )$

Question 9

The Security Market Line shows the positive relationship between the average expected rates of
return and levels of diversiﬁable risk of ﬁnancial assets.

Accepted Answer

A) True 
 B)False

Question 10

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P 500 are called

Accepted Answer

A)  index funds. 
B)  dividend funds. 
C)  portfolio funds. 
D)  capital gain funds. 
A)  index funds. 
B)  dividend funds. 
C)  portfolio funds. 
D)  capital gain funds.

Question 11

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 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 beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

Accepted Answer

A)  $( 1 + i ) ^ { t } X$ 
B)  $X / ( 1 + i) t$ 
C)  $( 1 + X ) i ^ { t }$ 
D)  $( X + i ) ^ { t }$ 
A)  $( 1 + i ) ^ { t } X$ 
B)  $X / ( 1 + i) t$ 
C)  $( 1 + X ) i ^ { t }$ 
D)  $( X + i ) ^ { t }$

Question 15

An investor with a diversiﬁed portfolio is generally less concerned about

Accepted Answer

A)  the diversiﬁable risk of potential new investments. 
B)  rates of return of potential new investments. 
C)  the nondiversiﬁable risk of potential new investments. 
D)  recessions. 
A)  the diversiﬁable risk of potential new investments. 
B)  rates of return of potential new investments. 
C)  the nondiversiﬁable risk of potential new investments. 
D)  recessions.

Question 16

Which one of the following is an example of an economic investment?

Accepted Answer

A)  putting money in a bank CD 
B)  buying a corporate bond or stock 
C)  purchasing shares of a mutual fund 
D)  building a new bank oﬃce 
A)  putting money in a bank CD 
B)  buying a corporate bond or stock 
C)  purchasing shares of a mutual fund 
D)  building a new bank oﬃce

Question 17

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 18

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 19

The compound interest formula states that if X dollars are invested today at an interest rate i and
allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Accepted Answer

A) True 
 B)False

Question 20

The interest rate on the bond

Accepted Answer

A)  is 2 percent. 
B)  is 5 percent. 
C)  is 20 percent. 
D)  cannot be determined. 
A)  is 2 percent. 
B)  is 5 percent. 
C)  is 20 percent. 
D)  cannot be determined.

Another name for nondiversiﬁable risk is

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

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

Suppose that Clint wins a lottery jackpot of $300 million. He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately. Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

What is the difference between an economic investment and a ﬁnancial investment?

Bankruptcy of a ﬁrm means that it

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.

The correct formula that relates present value (PV) to future value (FV), if interest rate is i percent per year over n years is

The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversiﬁable risk of ﬁnancial assets.

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P 500 are called

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

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

An investor with a diversiﬁed portfolio is generally less concerned about

Which one of the following is an example of an economic investment?

An asset with a beta of 0.5 has

Risk in ﬁnance means that an asset

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

The interest rate on the bond

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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Exam 17: Financial Economics

Another name for nondiversiﬁable risk is

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

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

Suppose that Clint wins a lottery jackpot of $300 million. He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately. Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?

What is the difference between an economic investment and a ﬁnancial investment?

Bankruptcy of a ﬁrm means that it

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.

The correct formula that relates present value (PV) to future value (FV), if interest rate is i percent per year over n years is

The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversiﬁable risk of ﬁnancial assets.

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P 500 are called

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

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

An investor with a diversiﬁed portfolio is generally less concerned about

Which one of the following is an example of an economic investment?

An asset with a beta of 0.5 has

Risk in ﬁnance means that an asset

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

The interest rate on the bond

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

Filters