Question 1

George buys an antique car for $20,000 and sells it ﬁve years later for just over $24,000. George's per-year rate of return is

Accepted Answer

A)  20 percent. 
B)  12 percent. 
C)  10 percent. 
D)  4 percent. 
A)  20 percent. 
B)  12 percent. 
C)  10 percent. 
D)  4 percent.

Question 2

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 3

Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500. If the price of the bond were to fall to $9,000,

Accepted Answer

A)  the bond's rate of return would rise from 5 percent to 5.6 percent. 
B)  the bond payments would fall to $450 per year. 
C)  Pavel should deﬁnitely buy the bond because the price is lower. 
D)  Pavel should deﬁnitely not buy the bond because the lower price means it is worth less. 
A)  the bond's rate of return would rise from 5 percent to 5.6 percent. 
B)  the bond payments would fall to $450 per year. 
C)  Pavel should deﬁnitely buy the bond because the price is lower. 
D)  Pavel should deﬁnitely not buy the bond because the lower price means it is worth less.

Question 4

Other factors constant, the present value will be larger,

Accepted Answer

A)  the smaller is the future value. 
B)  the higher is the interest rate. 
C)  the larger is the number of periods t. 
D)  the shorter is the time period t. 
A)  the smaller is the future value. 
B)  the higher is the interest rate. 
C)  the larger is the number of periods t. 
D)  the shorter is the time period t.

Question 5

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

Accepted Answer

A)  10.5 percent. 
B)  11.0 percent. 
C)  11.5 percent. 
D)  12.5 percent. 
A)  10.5 percent. 
B)  11.0 percent. 
C)  11.5 percent. 
D)  12.5 percent.

Question 6

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 7

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 8

A recession in an economy would be an example of a diversiﬁable risk.

Accepted Answer

A) True 
 B)False

Question 9

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 10

The rate of return on short-term U.S. government bonds is often referred to as the

Accepted Answer

A)  federal funds rate. 
B)  discount rate. 
C)  risk-free interest rate. 
D)  yield rate. 
A)  federal funds rate. 
B)  discount rate. 
C)  risk-free interest rate. 
D)  yield rate.

Question 11

The two most important investor preferences are a desire for high rates of return and a dislike of
inﬂation.

Accepted Answer

A) True 
 B)False

Question 12

If investors started to prefer investing in more ethical companies, then it would be expected that the stock prices for those companies would

Accepted Answer

A)  increase, and the rates of return would decrease relative to other companies. 
B)  increase, and the rates of return would increase relative to other companies. 
C)  increase, but the rates of return would stay the same relative to other companies. 
D)  decrease, and the rates of return would decrease relative to other companies. 
A)  increase, and the rates of return would decrease relative to other companies. 
B)  increase, and the rates of return would increase relative to other companies. 
C)  increase, but the rates of return would stay the same relative to other companies. 
D)  decrease, and the rates of return would decrease relative to other companies.

Question 13

Which one of the following is a feature of all investments?

Accepted Answer

A)  The future payments are typically risky. 
B)  The periodic payments they provide are regular. 
C)  They typically are short term. 
D)  They give the investor a stream of future payments, not just one payment. 
A)  The future payments are typically risky. 
B)  The periodic payments they provide are regular. 
C)  They typically are short term. 
D)  They give the investor a stream of future payments, not just one payment.

Question 14

Which three countries rank as the lowest risk countries and which three countries rank as the
highest risk countries according to the International Country Risk Guide? What types of risks are
included in this measure?

Accepted Answer

The three lowest risk countries to inves

Question 15

The vertical intercept of the Security Market Line (SML) shows the

Accepted Answer

A)  amount of arbitrage. 
B)  risk-free interest rate. 
C)  beta of the market portfolio. 
D)  risk premium for the market portfolio. 
A)  amount of arbitrage. 
B)  risk-free interest rate. 
C)  beta of the market portfolio. 
D)  risk premium for the market portfolio.

Question 16

Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at the end of the year for $390,000. Lucian's rate of return

Accepted Answer

A)  is 2 percent. 
B)  is 4.5 percent. 
C)  is negative 2.5 percent. 
D)  cannot be determined. 
A)  is 2 percent. 
B)  is 4.5 percent. 
C)  is negative 2.5 percent. 
D)  cannot be determined.

Question 17

(Last Word) Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about ______ percent per year.

Accepted Answer

A)  5 
B)  1 
C)  zero 
D)  3 
A)  5 
B)  1 
C)  zero 
D)  3

Question 18

Rick recently purchased a convenience store for $500,000. He expects monthly proﬁts to be $10,000 in the next year. If a recession had struck, Rick had instead paid $300,000, and his monthly
Proﬁts were reduced to $6,000, his expected rate of return would have

Accepted Answer

A)  increased by 2 percentage points. 
B)  increased by 3 percentage points. 
C)  decreased by 2 percentage points. 
D)  remained the same. 
A)  increased by 2 percentage points. 
B)  increased by 3 percentage points. 
C)  decreased by 2 percentage points. 
D)  remained the same.

Question 19

At the end of 2017, U.S. households held approximately __________ in mutual funds.

Accepted Answer

A)  $5.3 billion 
B)  $6 trillion 
C)  $16.9 trillion 
D)  $70 trillion 
A)  $5.3 billion 
B)  $6 trillion 
C)  $16.9 trillion 
D)  $70 trillion

Question 20

Which of the following ﬁnancial assets is considered to be essentially risk-free?

Accepted Answer

A)  gold 
B)  stock in Fortune 500 companies 
C)  real estate 
D)  short-term U.S. government bonds 
A)  gold 
B)  stock in Fortune 500 companies 
C)  real estate 
D)  short-term U.S. government bonds

Exam 17: Financial Economics

George buys an antique car for $20,000 and sells it ﬁve years later for just over $24,000. George's per-year rate of return is

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

Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500. If the price of the bond were to fall to $9,000,

Other factors constant, the present value will be larger,

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

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

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

A recession in an economy would be an example of a diversiﬁable risk.

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.

The rate of return on short-term U.S. government bonds is often referred to as the

The two most important investor preferences are a desire for high rates of return and a dislike of inﬂation.

If investors started to prefer investing in more ethical companies, then it would be expected that the stock prices for those companies would

Which one of the following is a feature of all investments?

Which three countries rank as the lowest risk countries and which three countries rank as the highest risk countries according to the International Country Risk Guide? What types of risks are included in this measure?

The vertical intercept of the Security Market Line (SML) shows the

Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at the end of the year for $390,000. Lucian's rate of return

(Last Word) Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about ______ percent per year.

Rick recently purchased a convenience store for $500,000. He expects monthly proﬁts to be $10,000 in the next year. If a recession had struck, Rick had instead paid $300,000, and his monthly Proﬁts were reduced to $6,000, his expected rate of return would have

At the end of 2017, U.S. households held approximately __________ in mutual funds.

Which of the following ﬁnancial assets is considered to be essentially risk-free?

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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