Question 1

The Security Market Line depicts the relationship between the

Accepted Answer

A)  average expected rate of return on stocks and the average expected rate of return on bonds. 
B)  average expected rate of return of a ﬁnancial asset and the discount rate. 
C)  risk level of a ﬁnancial asset and the prime interest rate. 
D)  average expected rate of return and risk level of a ﬁnancial asset. 
A)  average expected rate of return on stocks and the average expected rate of return on bonds. 
B)  average expected rate of return of a ﬁnancial asset and the discount rate. 
C)  risk level of a ﬁnancial asset and the prime interest rate. 
D)  average expected rate of return and risk level of a ﬁnancial asset.

Question 2

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 3

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made during the period, after two years the borrower will owe

Accepted Answer

A)  $10,000. 
B)  $10,600. 
C)  $11,236. 
D)  $11,910. 
A)  $10,000. 
B)  $10,600. 
C)  $11,236. 
D)  $11,910.

Question 4

The Security Market Line is a straight line that plots how the average expected rates of return on
assets and portfolios in an economy vary with their respective levels of nondiversiﬁable risk as
measured by beta.

Accepted Answer

A) True 
 B)False

Question 5

Investment returns

Accepted Answer

A)  are always positive. 
B)  are only received when an asset is sold. 
C)  are only received when there is a stream of multiple payments generated by the asset. 
D)  can be received either through the sale of an asset or as a stream of payments. 
A)  are always positive. 
B)  are only received when an asset is sold. 
C)  are only received when there is a stream of multiple payments generated by the asset. 
D)  can be received either through the sale of an asset or as a stream of payments.

Question 6

For most ﬁnancial assets, investors must be compensated for

Accepted Answer

A)  nondiversiﬁable and diversiﬁable risk. 
B)  diversiﬁable risk and time preference. 
C)  nondiversiﬁable risk and time preference. 
D)  nondiversiﬁable and diversiﬁable risk, and time preference. 
A)  nondiversiﬁable and diversiﬁable risk. 
B)  diversiﬁable risk and time preference. 
C)  nondiversiﬁable risk and time preference. 
D)  nondiversiﬁable and diversiﬁable risk, and time preference.

Question 7

Arbitrage occurs when

Accepted Answer

A)  bond and stock rates of return equalize. 
B)  investors try to proﬁt from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return. 
C)  rates of return across all stocks equalize. 
D)  investors move from lower to higher rate of return assets, regardless of the comparability of the assets. 
A)  bond and stock rates of return equalize. 
B)  investors try to proﬁt from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return. 
C)  rates of return across all stocks equalize. 
D)  investors move from lower to higher rate of return assets, regardless of the comparability of the assets.

Question 8

The buying and selling process that leads proﬁt-seeking investors to equalize average expected rates of return from identical assets is known as

Accepted Answer

A)  diversiﬁcation. 
B)  arbitrage. 
C)  hedging. 
D)  securitization. 
A)  diversiﬁcation. 
B)  arbitrage. 
C)  hedging. 
D)  securitization.

Question 9

How do actively managed funds differ from passively managed funds?

Accepted Answer

A)  Managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns. 
B)  Actively managed funds focus on stocks; passively managed funds focus on bonds. 
C)  Actively managed funds necessarily contain a greater variety of stocks or bonds than does a passively managed fund. 
D)  Actively managed funds consistently outperform passively managed funds. 
A)  Managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns. 
B)  Actively managed funds focus on stocks; passively managed funds focus on bonds. 
C)  Actively managed funds necessarily contain a greater variety of stocks or bonds than does a passively managed fund. 
D)  Actively managed funds consistently outperform passively managed funds.

Question 10

Tracy won a $100 million jackpot. She can receive the jackpot as a $5 million payment each year for 20 years, or she can ask to receive the present value of all those payments all at once now. Assume
An annual interest rate of 5 percent. If she decides to take the present value payment, about how
Much will she receive?

Accepted Answer

A)  $52.1 million 
B)  $62.3 million 
C)  $71.4 million 
D)  $78.6 million 
A)  $52.1 million 
B)  $62.3 million 
C)  $71.4 million 
D)  $78.6 million

Question 11

Stocks represent a debt, and buyers of stock expect to earn interest.

Accepted Answer

A) True 
 B)False

Question 12

The fact that people prefer to consume in the present rather than the future is referred to as time
preference.

Accepted Answer

A) True 
 B)False

Question 13

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Accepted Answer

A)  future value of its annual coupons and face value. 
B)  future value of its annual coupons minus its face value. 
C)  present value of its annual coupons and face value. 
D)  present value of its annual coupons minus its face vale. 
A)  future value of its annual coupons and face value. 
B)  future value of its annual coupons minus its face value. 
C)  present value of its annual coupons and face value. 
D)  present value of its annual coupons minus its face vale.

Question 14

Which one of the following would best describe a mutual fund?

Accepted Answer

A)  an investment that is available at many banks and is FDIC insured 
B)  a company that manages a portfolio that is purchased by pooling the money of its investors 
C)  a debt contract that is issued by a company and offers interest payment on the loan 
D)  ownership of shares in a corporation with no guarantee the company will be proﬁtable 
A)  an investment that is available at many banks and is FDIC insured 
B)  a company that manages a portfolio that is purchased by pooling the money of its investors 
C)  a debt contract that is issued by a company and offers interest payment on the loan 
D)  ownership of shares in a corporation with no guarantee the company will be proﬁtable

Question 15

Actively managed funds consistently outperform index funds.

Accepted Answer

A) True 
 B)False

Question 16

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Accepted Answer

A)  pooling. 
B)  arbitrage. 
C)  diversiﬁcation. 
D)  weighted average. 
A)  pooling. 
B)  arbitrage. 
C)  diversiﬁcation. 
D)  weighted average.

Question 17

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y. As a result of the arbitrage process, the price of Investment

Accepted Answer

A)  X will fall and its rate of return will fall. 
B)  Y will rise and its rate of return will fall. 
C)  X will fall and its rate of return will rise. 
D)  Y will fall and its rate of return will rise. 
A)  X will fall and its rate of return will fall. 
B)  Y will rise and its rate of return will fall. 
C)  X will fall and its rate of return will rise. 
D)  Y will fall and its rate of return will rise.

Question 18

The line that depicts the relationship between the average expected rate of return and the risk level of a ﬁnancial asset is known as the

Accepted Answer

A)  Beta Line. 
B)  Security Market Line. 
C)  Risk Premium Line. 
D)  Risk-Return Line. 
A)  Beta Line. 
B)  Security Market Line. 
C)  Risk Premium Line. 
D)  Risk-Return Line.

Question 19

Nondiversiﬁable risk refers to potential losses from

Accepted Answer

A)  random ﬂuctuations in speciﬁc stocks. 
B)  bad company policies. 
C)  portfolio management fraud. 
D)  events that move all investments in the same direction. 
A)  random ﬂuctuations in speciﬁc stocks. 
B)  bad company policies. 
C)  portfolio management fraud. 
D)  events that move all investments in the same direction.

Question 20

Kelly buys a share of stock for $20 that she sells a year later for $15. Kelly's rate of return is

Accepted Answer

A)  positive 33 percent. 
B)  negative 33.3 percent. 
C)  negative 25 percent. 
D)  negative 75 percent. 
A)  positive 33 percent. 
B)  negative 33.3 percent. 
C)  negative 25 percent. 
D)  negative 75 percent.

The Security Market Line depicts the relationship between the

Bonds represent

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made during the period, after two years the borrower will owe

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversiﬁable risk as measured by beta.

Investment returns

For most ﬁnancial assets, investors must be compensated for

Arbitrage occurs when

The buying and selling process that leads proﬁt-seeking investors to equalize average expected rates of return from identical assets is known as

How do actively managed funds differ from passively managed funds?

Stocks represent a debt, and buyers of stock expect to earn interest.

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Which one of the following would best describe a mutual fund?

Actively managed funds consistently outperform index funds.

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y. As a result of the arbitrage process, the price of Investment

The line that depicts the relationship between the average expected rate of return and the risk level of a ﬁnancial asset is known as the

Nondiversiﬁable risk refers to potential losses from

Kelly buys a share of stock for $20 that she sells a year later for $15. Kelly's rate of return is

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

Exam 17: Financial Economics

The Security Market Line depicts the relationship between the

Bonds represent

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made during the period, after two years the borrower will owe

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversiﬁable risk as measured by beta.

Investment returns

For most ﬁnancial assets, investors must be compensated for

Arbitrage occurs when

The buying and selling process that leads proﬁt-seeking investors to equalize average expected rates of return from identical assets is known as

How do actively managed funds differ from passively managed funds?

Stocks represent a debt, and buyers of stock expect to earn interest.

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Which one of the following would best describe a mutual fund?

Actively managed funds consistently outperform index funds.

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y. As a result of the arbitrage process, the price of Investment

The line that depicts the relationship between the average expected rate of return and the risk level of a ﬁnancial asset is known as the

Nondiversiﬁable risk refers to potential losses from

Kelly buys a share of stock for $20 that she sells a year later for $15. Kelly's rate of return is

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