Question 1

The risk premium is the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 2

One asset has a beta of 1.5 and another asset has a beta of 0.75. The difference in beta means that the asset with a beta of 0.75 has

Accepted Answer

A)  75 percent less nondiversiﬁable risk than the asset with a beta of 1.5. 
B)  75 percent more nondiversiﬁable risk than the asset with a beta of 1.5. 
C)  twice as much nondiversiﬁable risk as the asset with a beta of 1.5. 
D)  one-half as much nondiversiﬁable risk as the asset with a beta of 1.5. 
A)  75 percent less nondiversiﬁable risk than the asset with a beta of 1.5. 
B)  75 percent more nondiversiﬁable risk than the asset with a beta of 1.5. 
C)  twice as much nondiversiﬁable risk as the asset with a beta of 1.5. 
D)  one-half as much nondiversiﬁable risk as the asset with a beta of 1.5.

Question 3

Mutual funds may contain

Accepted Answer

A)  stocks only. 
B)  bonds only. 
C)  either stocks or bonds. 
D)  neither stocks nor bonds. 
A)  stocks only. 
B)  bonds only. 
C)  either stocks or bonds. 
D)  neither stocks nor bonds.

Question 4

The so-called risk-free rate essentially measures the investors'

Accepted Answer

A)  risk aversion. 
B)  risk preference. 
C)  time preference. 
D)  expected rate of return. 
A)  risk aversion. 
B)  risk preference. 
C)  time preference. 
D)  expected rate of return.

Question 5

If we observe that many investors are selling Bond A and buying a similar Bond B, this suggests that the expected returns on

Accepted Answer

A)  Bond A will start falling. 
B)  Bond B will start rising. 
C)  Bond A were higher than those of Bond B. 
D)  Bond A will start rising. 
A)  Bond A will start falling. 
B)  Bond B will start rising. 
C)  Bond A were higher than those of Bond B. 
D)  Bond A will start rising.

Question 6

Equal shares of a ﬁrm's proﬁt are paid out to stockholders as

Accepted Answer

A)  interest. 
B)  dividends. 
C)  capital gains. 
D)  net earnings. 
A)  interest. 
B)  dividends. 
C)  capital gains. 
D)  net earnings.

Question 7

An index fund

Accepted Answer

A)  is a passively managed mutual fund. 
B)  has higher trading costs than an actively managed mutual fund. 
C)  has higher trading costs than a passively managed mutual fund. 
D)  is an actively managed mutual fund. 
A)  is a passively managed mutual fund. 
B)  has higher trading costs than an actively managed mutual fund. 
C)  has higher trading costs than a passively managed mutual fund. 
D)  is an actively managed mutual fund.

Question 8

A horizontal Security Market Line would imply that investors

Accepted Answer

A)  are unconcerned about risk and require no additional compensation for risk. 
B)  view all ﬁnancial assets as equally risky. 
C)  greatly dislike risk and must be compensated for it. 
D)  prefer assets with greater risk. 
A)  are unconcerned about risk and require no additional compensation for risk. 
B)  view all ﬁnancial assets as equally risky. 
C)  greatly dislike risk and must be compensated for it. 
D)  prefer assets with greater risk.

Question 9

Deﬁne compound interest.

Accepted Answer

Compound interest is deﬁned as

Question 10

The present value of a stream of lottery payments is less than the size of the stated jackpot.

Accepted Answer

A) True 
 B)False

Question 11

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Accepted Answer

A) True 
 B)False

Question 12

The market portfolio, by deﬁnition, has a beta = 0.

Accepted Answer

A) True 
 B)False

Question 13

Which one of the following is an example of a ﬁnancial investment but not an economic investment?

Accepted Answer

A)  renovating a shopping mall 
B)  constructing an addition to a petroleum reﬁnery 
C)  building a new store 
D)  buying gold to sell later at a higher price 
A)  renovating a shopping mall 
B)  constructing an addition to a petroleum reﬁnery 
C)  building a new store 
D)  buying gold to sell later at a higher price

Question 14

Refer to the graph. Consider an asset represented by point F. The process of arbitrage will draw investors to the higher rates of return,

Accepted Answer

A)  increasing both price and the average expected rate of return. 
B)  changing the intercept of the Security Market Line until it intersects point F. 
C)  changing the slope of the Security Market Line until it intersects point F. 
D)  increasing the asset's price and lowering the average expected rate of return. 
A)  increasing both price and the average expected rate of return. 
B)  changing the intercept of the Security Market Line until it intersects point F. 
C)  changing the slope of the Security Market Line until it intersects point F. 
D)  increasing the asset's price and lowering the average expected rate of return.

Question 15

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By
Buying several companies to reduce risk, the investor is seeking to reduce

Accepted Answer

A)  systemic risk. 
B)  the risk premium. 
C)  idiosyncratic risk. 
D)  nondiversiﬁable risk. 
A)  systemic risk. 
B)  the risk premium. 
C)  idiosyncratic risk. 
D)  nondiversiﬁable risk.

Question 16

The Security Market Line (SML) is upward-sloping, indicating that the

Accepted Answer

A)  beta of an investment increases as its risk level increases. 
B)  average expected return on investments decreases as their risk level decreases. 
C)  average expected return on the risk-free asset increases as its beta increases. 
D)  average expected return of the market portfolio increases as its beta increases. 
A)  beta of an investment increases as its risk level increases. 
B)  average expected return on investments decreases as their risk level decreases. 
C)  average expected return on the risk-free asset increases as its beta increases. 
D)  average expected return of the market portfolio increases as its beta increases.

Question 17

Alyssa is saving money for a vacation she wants to take ﬁve years from now. If the trip will cost $1,000 and she puts her money into a savings account paying 4 percent interest, compounded
Annually, how much would Alyssa need to deposit today to reach her goal without making further
Deposits?

Accepted Answer

A)  $961.54 
B)  $923.75 
C)  $867.81 
D)  $821.93 
A)  $961.54 
B)  $923.75 
C)  $867.81 
D)  $821.93

Question 18

For any given ﬁnancial asset, risk levels and average expected rates of return are

Accepted Answer

A)  independent of each other. 
B)  negatively related because assets with higher average expected rates of return sell for higher prices, which are inversely related to risk. 
C)  positively related because both are inversely related to the rate of inﬂation. 
D)  positively related because investors must be compensated for taking greater risks. 
A)  independent of each other. 
B)  negatively related because assets with higher average expected rates of return sell for higher prices, which are inversely related to risk. 
C)  positively related because both are inversely related to the rate of inﬂation. 
D)  positively related because investors must be compensated for taking greater risks.

Question 19

Arbitrage causes an equalization of the _________ when assets are identical or nearly identical.

Accepted Answer

A)  levels of risk of assets 
B)  rates of return of assets 
C)  time when payments are made from assets 
D)  prices of assets 
A)  levels of risk of assets 
B)  rates of return of assets 
C)  time when payments are made from assets 
D)  prices of assets

Question 20

Arbitrage equalizes rates of return across similar investments because

Accepted Answer

A)  arbitrage also equalizes the prices of the assets. 
B)  investors prefer diversity. 
C)  investors will want to replace lower rate of return assets with those generating higher rates of return. 
D)  investors will want to replace higher rate of return assets with those generating lower rates of return. 
A)  arbitrage also equalizes the prices of the assets. 
B)  investors prefer diversity. 
C)  investors will want to replace lower rate of return assets with those generating higher rates of return. 
D)  investors will want to replace higher rate of return assets with those generating lower rates of return.

Exam 17: Financial Economics

The risk premium is the rate that compensates for risk.

One asset has a beta of 1.5 and another asset has a beta of 0.75. The difference in beta means that the asset with a beta of 0.75 has

Mutual funds may contain

The so-called risk-free rate essentially measures the investors'

If we observe that many investors are selling Bond A and buying a similar Bond B, this suggests that the expected returns on

Equal shares of a ﬁrm's proﬁt are paid out to stockholders as

An index fund

A horizontal Security Market Line would imply that investors

Deﬁne compound interest.

The present value of a stream of lottery payments is less than the size of the stated jackpot.

Bonds issued by the Federal government are riskier than bonds issued by corporations.

The market portfolio, by deﬁnition, has a beta = 0.

Which one of the following is an example of a ﬁnancial investment but not an economic investment?

Refer to the graph. Consider an asset represented by point F. The process of arbitrage will draw investors to the higher rates of return,

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By Buying several companies to reduce risk, the investor is seeking to reduce

The Security Market Line (SML) is upward-sloping, indicating that the

Alyssa is saving money for a vacation she wants to take ﬁve years from now. If the trip will cost $1,000 and she puts her money into a savings account paying 4 percent interest, compounded Annually, how much would Alyssa need to deposit today to reach her goal without making further Deposits?

For any given ﬁnancial asset, risk levels and average expected rates of return are

Arbitrage causes an equalization of the _________ when assets are identical or nearly identical.

Arbitrage equalizes rates of return across similar investments because

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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