Question 1

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return
on assets that have substantially different characteristics.

Accepted Answer

A) True 
 B)False

Question 2

Brinley holds stock in large high-tech companies in his portfolio. The best way for Brinley to diversify his risk would be to buy

Accepted Answer

A)  more shares of the stock he already owns. 
B)  shares in other large high-tech companies. 
C)  bonds or stocks of small and medium-sized companies. 
D)  bonds from the large high-tech companies already in his portfolio. 
A)  more shares of the stock he already owns. 
B)  shares in other large high-tech companies. 
C)  bonds or stocks of small and medium-sized companies. 
D)  bonds from the large high-tech companies already in his portfolio.

Question 3

Refer to the graph. The intercept of the three Security Market Lines is determined by

Accepted Answer

A)  the risk-free interest rate. 
B)  the interest rate on ﬁnancial assets with a beta of 1. 
C)  the rate on long-term U.S. government bonds. 
D)  all of these. 
A)  the risk-free interest rate. 
B)  the interest rate on ﬁnancial assets with a beta of 1. 
C)  the rate on long-term U.S. government bonds. 
D)  all of these.

Question 4

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

Accepted Answer

A)  Bonds represent ownership; stocks represent debt. 
B)  Bonds make interest payments; stocks pay dividends. 
C)  Stock payouts are predictable; bond payouts are not. 
D)  All of these are differences between stocks and bonds. 
A)  Bonds represent ownership; stocks represent debt. 
B)  Bonds make interest payments; stocks pay dividends. 
C)  Stock payouts are predictable; bond payouts are not. 
D)  All of these are differences between stocks and bonds.

Question 5

Arbitrage occurs when investors try to proﬁt from situations where

Accepted Answer

A)  stock rates of return exceed bond rates of return. 
B)  bond rates of return exceed stock rates of return. 
C)  two identical assets have different rates of return. 
D)  returns on ﬁnancial assets exceed returns on real assets. 
A)  stock rates of return exceed bond rates of return. 
B)  bond rates of return exceed stock rates of return. 
C)  two identical assets have different rates of return. 
D)  returns on ﬁnancial assets exceed returns on real assets.

Question 6

Which institution is least likely to default on a bond?

Accepted Answer

A)  local government 
B)  small corporation 
C)  U.S. federal government 
D)  large corporation 
A)  local government 
B)  small corporation 
C)  U.S. federal government 
D)  large corporation

Question 7

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after ﬁve years. How much will be required to pay off the loan at the end of the ﬁve
Years?

Accepted Answer

A)  $401.47 
B)  $390 
C)  $393.54 
D)  $408.75 
A)  $401.47 
B)  $390 
C)  $393.54 
D)  $408.75

Question 8

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share. Every year he has received, from company proﬁts, $1 for each share he owns. If Indy sells all his shares at
A price of $30 per share, he will receive a

Accepted Answer

A)  total capital gain of $10. 
B)  dividend of $10 per share. 
C)  total capital gain of $1,000. 
D)  capital gain of $30 per share. 
A)  total capital gain of $10. 
B)  dividend of $10 per share. 
C)  total capital gain of $1,000. 
D)  capital gain of $30 per share.

Question 9

What does the "beta" of an asset measure?

Accepted Answer

A)  how the nondiversiﬁable risk compares with diversiﬁable risk for an asset 
B)  how the expected return compares with the diversiﬁable risk of a given asset 
C)  how the expected return compares with the nondiversiﬁable risk of the market portfolio 
D)  how the nondiversiﬁable risk of a given asset compares with that of the market portfolio 
A)  how the nondiversiﬁable risk compares with diversiﬁable risk for an asset 
B)  how the expected return compares with the diversiﬁable risk of a given asset 
C)  how the expected return compares with the nondiversiﬁable risk of the market portfolio 
D)  how the nondiversiﬁable risk of a given asset compares with that of the market portfolio

Question 10

Refer to the graph. Which of the following would best be explained by an expansionary monetary policy?

Accepted Answer

A)  a shift from SML $\mathrm { SML } _ { 1 } \text { to } \mathrm { SML } { } _ { 2 }$ 
B)  a shift from SML $\mathrm { SML } _ { 2 } \text { to } \mathrm { SML } _ { 1 }$ 
C)  a move from $A _ { 1 } \text { to } A _ { 2 }$ 
D)  a move from $A _ { 2 } \text { to } A _ { 3 }$ 
A)  a shift from SML $\mathrm { SML } _ { 1 } \text { to } \mathrm { SML } { } _ { 2 }$ 
B)  a shift from SML $\mathrm { SML } _ { 2 } \text { to } \mathrm { SML } _ { 1 }$ 
C)  a move from $A _ { 1 } \text { to } A _ { 2 }$ 
D)  a move from $A _ { 2 } \text { to } A _ { 3 }$

Question 11

A bond pays a coupon (or interest) rate of 5 percent each year for ﬁve years, with a future (face) value of $200. If the bond were sold today, what would be the present value of the bond?

Accepted Answer

A)  $200 
B)  $157 
C)  $150 
D)  $145 
A)  $200 
B)  $157 
C)  $150 
D)  $145

Question 12

Refer to the graph. Which of the three Security Market Lines depicts the situation where investors most dislike risk?

Accepted Answer

A)  line A 
B)  line B 
C)  line C 
D)  It cannot be determined from the graph. 
A)  line A 
B)  line B 
C)  line C 
D)  It cannot be determined from the graph.

Question 13

Future value measures the present-day value of returns or costs expected to arrive in the future.

Accepted Answer

A) True 
 B)False

Question 14

"An investment's rate of return is inversely related to its price." Explain.

Accepted Answer

This statement is a fundamental concept

Question 15

"There is no such thing as risk-free return." Evaluate.

Accepted Answer

This statement is not correct. There is

Question 16

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

Accepted Answer

A) True 
 B)False

Question 17

Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate of return on the table is

Accepted Answer

A)  10 percent. 
B)  20 percent. 
C)  25 percent. 
D)  30 percent. 
A)  10 percent. 
B)  20 percent. 
C)  25 percent. 
D)  30 percent.

Question 18

The average expected rate of return is a

Accepted Answer

A)  volume-weighted average. 
B)  price-weighted average. 
C)  probability-weighted average. 
D)  value-weighted average. 
A)  volume-weighted average. 
B)  price-weighted average. 
C)  probability-weighted average. 
D)  value-weighted average.

Question 19

Denny buys a rare coin for $200 and sells the coin one year later for $220. Denny's rate of return is

Accepted Answer

A)  10 percent. 
B)  20 percent. 
C)  91 percent. 
D)  110 percent. 
A)  10 percent. 
B)  20 percent. 
C)  91 percent. 
D)  110 percent.

Question 20

Payments to shareholders from corporate proﬁts are known as

Accepted Answer

A)  dividends. 
B)  capital gains. 
C)  interest. 
D)  appreciation. 
A)  dividends. 
B)  capital gains. 
C)  interest. 
D)  appreciation.

Exam 17: Financial Economics

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Brinley holds stock in large high-tech companies in his portfolio. The best way for Brinley to diversify his risk would be to buy

Refer to the graph. The intercept of the three Security Market Lines is determined by

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

Arbitrage occurs when investors try to proﬁt from situations where

Which institution is least likely to default on a bond?

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after ﬁve years. How much will be required to pay off the loan at the end of the ﬁve Years?

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share. Every year he has received, from company proﬁts, $1 for each share he owns. If Indy sells all his shares at A price of $30 per share, he will receive a

What does the "beta" of an asset measure?

Refer to the graph. Which of the following would best be explained by an expansionary monetary policy?

A bond pays a coupon (or interest) rate of 5 percent each year for ﬁve years, with a future (face) value of $200. If the bond were sold today, what would be the present value of the bond?

Refer to the graph. Which of the three Security Market Lines depicts the situation where investors most dislike risk?

Future value measures the present-day value of returns or costs expected to arrive in the future.

"An investment's rate of return is inversely related to its price." Explain.

"There is no such thing as risk-free return." Evaluate.

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate of return on the table is

The average expected rate of return is a

Denny buys a rare coin for $200 and sells the coin one year later for $220. Denny's rate of return is

Payments to shareholders from corporate proﬁts are known as

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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