Question 1

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Accepted Answer

A)  index funds require more buying and selling to generate their returns. 
B)  management and trading costs reduce the returns of actively managed funds. 
C)  index funds spend more on research and management. 
D)  diversiﬁcation is more important to actively managed funds. 
A)  index funds require more buying and selling to generate their returns. 
B)  management and trading costs reduce the returns of actively managed funds. 
C)  index funds spend more on research and management. 
D)  diversiﬁcation is more important to actively managed funds.

Question 2

Augi buys a bond for $10,000 and receives interest payments of $400 every six months. The interest rate on the bond is approximately

Accepted Answer

A)  4 percent. 
B)  8 percent. 
C)  12.5 percent. 
D)  25 percent. 
A)  4 percent. 
B)  8 percent. 
C)  12.5 percent. 
D)  25 percent.

Question 3

People tend to be impatient, and they typically prefer to

Accepted Answer

A)  save for later rather than spend now. 
B)  consume now rather than in the future. 
C)  be paid to consume in the future rather than now. 
D)  pay in order to consume in the future rather than now. 
A)  save for later rather than spend now. 
B)  consume now rather than in the future. 
C)  be paid to consume in the future rather than now. 
D)  pay in order to consume in the future rather than now.

Question 4

Index funds consistently beat actively managed funds because actively managed funds incur
greater management costs.

Accepted Answer

A) True 
 B)False

Question 5

Risk in ﬁnancial economics refers mainly to the chance that an investment could lose value.

Accepted Answer

A) True 
 B)False

Question 6

Stockholders of a company can beneﬁt from either capital gains or dividends when the company is
proﬁtable.

Accepted Answer

A) True 
 B)False

Question 7

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can conclude that X has

Accepted Answer

A)  5 times the nondiversiﬁable risk of the market portfolio. 
B)  5 times the nondiversiﬁable risk of Y. 
C)  2.5 times the nondiversiﬁable risk of Y. 
D)  2.5 times the diversiﬁable risk of the market portfolio. 
A)  5 times the nondiversiﬁable risk of the market portfolio. 
B)  5 times the nondiversiﬁable risk of Y. 
C)  2.5 times the nondiversiﬁable risk of Y. 
D)  2.5 times the diversiﬁable risk of the market portfolio.

Question 8

The key difference between bonds and stocks is that stocks' income streams are more predictable
than those of bonds.

Accepted Answer

A) True 
 B)False

Question 9

If an asset has a risk-return combination that is above the Security Market Line (SML), then arbitrage will make that asset's

Accepted Answer

A)  beta increase. 
B)  beta decrease. 
C)  average expected return increase. 
D)  average expected return decrease. 
A)  beta increase. 
B)  beta decrease. 
C)  average expected return increase. 
D)  average expected return decrease.

Question 10

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 holds his shares for
ﬁve years, he

Accepted Answer

A)  will have received $500 in dividends. 
B)  will earn a capital gain of $500. 
C)  will receive $500 in interest. 
D)  should sell the stock to maximize the return on his investment. 
A)  will have received $500 in dividends. 
B)  will earn a capital gain of $500. 
C)  will receive $500 in interest. 
D)  should sell the stock to maximize the return on his investment.

Question 11

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.
When the CD matures in 10 years, you will get more than $9,000 from it.

Accepted Answer

A) True 
 B)False

Question 12

Average expected rates of return and levels of risk are positively related.

Accepted Answer

A) True 
 B)False

Question 13

What do bonds represent?

Accepted Answer

A)  shares of ownership in a corporation and a guaranteed stream of proﬁts 
B)  shares of ownership in a corporation and an entitlement to its future proﬁts 
C)  debt contracts with corporations or governments and regular interest payments on the loan 
D)  debt contracts with corporations or governments and some unspeciﬁed interest payments on the loan 
A)  shares of ownership in a corporation and a guaranteed stream of proﬁts 
B)  shares of ownership in a corporation and an entitlement to its future proﬁts 
C)  debt contracts with corporations or governments and regular interest payments on the loan 
D)  debt contracts with corporations or governments and some unspeciﬁed interest payments on the loan

Question 14

For heavily traded assets like stocks and bonds, arbitrage

Accepted Answer

A)  will equalize rates of return across all stocks and bonds. 
B)  will drive up rates of return on all assets. 
C)  is a lengthy process because of the large volume of transactions. 
D)  will often equalize rates of return among similar assets within minutes. 
A)  will equalize rates of return across all stocks and bonds. 
B)  will drive up rates of return on all assets. 
C)  is a lengthy process because of the large volume of transactions. 
D)  will often equalize rates of return among similar assets within minutes.

Question 15

Alex wants to borrow $1,000 from Kara. If he repays the loan in one year, Kara will require him to pay 5 percent interest on the loan. If Alex wants to repay the loan over three years, but Kara
Strongly prefers present to future consumption, we would expect the interest rate on a three-year
Loan to be

Accepted Answer

A)  lower than for a one-year loan. 
B)  greater than for a one-year loan. 
C)  the same as for a one-year loan. 
D)  higher if Kara expected there to be no inﬂation over the loan repayment period. 
A)  lower than for a one-year loan. 
B)  greater than for a one-year loan. 
C)  the same as for a one-year loan. 
D)  higher if Kara expected there to be no inﬂation over the loan repayment period.

Question 16

What are the two main investor preferences, and how do they conﬂict?

Accepted Answer

The two most important investor preferen

Question 17

An asset's price and rate of return

Accepted Answer

A)  are independent of each other. 
B)  can be either inversely or directly related. 
C)  are inversely related. 
D)  are directly related. 
A)  are independent of each other. 
B)  can be either inversely or directly related. 
C)  are inversely related. 
D)  are directly related.

Question 18

Investors diversify portfolios

Accepted Answer

A)  because diversiﬁed portfolios pay the highest rates of return. 
B)  because diversiﬁed portfolios are guaranteed not to lose money. 
C)  to reduce the risk of losing their investment. 
D)  to guarantee minimum returns on their investment. 
A)  because diversiﬁed portfolios pay the highest rates of return. 
B)  because diversiﬁed portfolios are guaranteed not to lose money. 
C)  to reduce the risk of losing their investment. 
D)  to guarantee minimum returns on their investment.

Question 19

The risk premium of a ﬁnancial asset is the

Accepted Answer

A)  additional price that must be paid for riskier investments. 
B)  rate that compensates for risk. 
C)  rate that compensates for the risk of inﬂation. 
D)  same as the discount rate. 
A)  additional price that must be paid for riskier investments. 
B)  rate that compensates for risk. 
C)  rate that compensates for the risk of inﬂation. 
D)  same as the discount rate.

Question 20

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S. government bonds, then, as a consequence, asset prices

Accepted Answer

A)  increase and the average expected rate of return on assets decreases. 
B)  decrease and the average expected rate of return on assets increases. 
C)  increase and the average expected rate of return on assets increases. 
D)  decrease and the average expected rate of return on assets decreases. 
A)  increase and the average expected rate of return on assets decreases. 
B)  decrease and the average expected rate of return on assets increases. 
C)  increase and the average expected rate of return on assets increases. 
D)  decrease and the average expected rate of return on assets decreases.

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Augi buys a bond for $10,000 and receives interest payments of $400 every six months. The interest rate on the bond is approximately

People tend to be impatient, and they typically prefer to

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

Risk in ﬁnancial economics refers mainly to the chance that an investment could lose value.

Stockholders of a company can beneﬁt from either capital gains or dividends when the company is proﬁtable.

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can conclude that X has

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

If an asset has a risk-return combination that is above the Security Market Line (SML), then arbitrage will make that asset's

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 holds his shares for ﬁve years, he

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate. When the CD matures in 10 years, you will get more than $9,000 from it.

Average expected rates of return and levels of risk are positively related.

What do bonds represent?

For heavily traded assets like stocks and bonds, arbitrage

What are the two main investor preferences, and how do they conﬂict?

An asset's price and rate of return

Investors diversify portfolios

The risk premium of a ﬁnancial asset is the

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S. government bonds, then, as a consequence, asset prices

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

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Augi buys a bond for $10,000 and receives interest payments of $400 every six months. The interest rate on the bond is approximately

People tend to be impatient, and they typically prefer to

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

Risk in ﬁnancial economics refers mainly to the chance that an investment could lose value.

Stockholders of a company can beneﬁt from either capital gains or dividends when the company is proﬁtable.

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can conclude that X has

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

If an asset has a risk-return combination that is above the Security Market Line (SML), then arbitrage will make that asset's

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 holds his shares for ﬁve years, he

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate. When the CD matures in 10 years, you will get more than $9,000 from it.

Average expected rates of return and levels of risk are positively related.

What do bonds represent?

For heavily traded assets like stocks and bonds, arbitrage

What are the two main investor preferences, and how do they conﬂict?

An asset's price and rate of return

Investors diversify portfolios

The risk premium of a ﬁnancial asset is the

If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S. government bonds, then, as a consequence, asset prices

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