Question 1

Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time. His purchase would be considered

Accepted Answer

A)  an economic investment but not a ﬁnancial investment. 
B)  a ﬁnancial investment but not an economic investment. 
C)  both an economic and a ﬁnancial investment. 
D)  neither an economic nor a ﬁnancial investment. 
A)  an economic investment but not a ﬁnancial investment. 
B)  a ﬁnancial investment but not an economic investment. 
C)  both an economic and a ﬁnancial investment. 
D)  neither an economic nor a ﬁnancial investment.

Question 2

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of ﬁve years, assuming all interest earned remains in the account?

Accepted Answer

A)  $1,250 
B)  $250 
C)  $267.25 
D)  $255.26 
A)  $1,250 
B)  $250 
C)  $267.25 
D)  $255.26

Question 3

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month. If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Accepted Answer

A)  remain unchanged, as the house price and the rate of return are independent of each other. 
B)  be 13.6 percent. 
C)  fall from 9 percent to 8 percent. 
D)  fall from 10.9 percent to 9.6 percent. 
A)  remain unchanged, as the house price and the rate of return are independent of each other. 
B)  be 13.6 percent. 
C)  fall from 9 percent to 8 percent. 
D)  fall from 10.9 percent to 9.6 percent.

Question 4

Riskier investments tend to sell for

Accepted Answer

A)  lower prices, so they provide a higher expected rate of return to compensate for risk. 
B)  higher prices, so they provide a higher expected rate of return to compensate for risk. 
C)  higher prices; that is why they are considered to be riskier. 
D)  prices directly correlated with expected rates of return. 
A)  lower prices, so they provide a higher expected rate of return to compensate for risk. 
B)  higher prices, so they provide a higher expected rate of return to compensate for risk. 
C)  higher prices; that is why they are considered to be riskier. 
D)  prices directly correlated with expected rates of return.

Question 5

One statistic that quantiﬁes the risk of an investment is

Accepted Answer

A)  alpha. 
B)  beta. 
C)  gamma. 
D)  the average expected rate of return. 
A)  alpha. 
B)  beta. 
C)  gamma. 
D)  the average expected rate of return.

Question 6

According to economists, the two factors most important to personal investment decisions are

Accepted Answer

A)  rates of return and the rate of interest. 
B)  rates of return and the rate of inﬂation. 
C)  returns and diversiﬁable risk. 
D)  returns and nondiversiﬁable risk. 
A)  rates of return and the rate of interest. 
B)  rates of return and the rate of inﬂation. 
C)  returns and diversiﬁable risk. 
D)  returns and nondiversiﬁable risk.

Question 7

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

Accepted Answer

A)  They provide regular interest payments. 
B)  They are typically long term. 
C)  They have minimal risk for future payments to be made. 
D)  They give owners a chance to receive future payments. 
A)  They provide regular interest payments. 
B)  They are typically long term. 
C)  They have minimal risk for future payments to be made. 
D)  They give owners a chance to receive future payments.

Question 8

Suppose two corporate bonds with similar risk pay different rates of return. The process of arbitrage should

Accepted Answer

A)  not affect their rates of return. 
B)  increase the return on the asset with the higher rate of return as the demand for it increases. 
C)  increase the gap between the two rates of return. 
D)  eventually equalize their rates of return. 
A)  not affect their rates of return. 
B)  increase the return on the asset with the higher rate of return as the demand for it increases. 
C)  increase the gap between the two rates of return. 
D)  eventually equalize their rates of return.

Question 9

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years. If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Accepted Answer

A)  4.8 percent 
B)  5.2 percent 
C)  5.7 percent 
D)  6.2 percent 
A)  4.8 percent 
B)  5.2 percent 
C)  5.7 percent 
D)  6.2 percent

Question 10

The risk-free interest rate is determined primarily by the

Accepted Answer

A)  largest commercial banks. 
B)  Internal Revenue Service. 
C)  U.S. Treasury. 
D)  Federal Reserve. 
A)  largest commercial banks. 
B)  Internal Revenue Service. 
C)  U.S. Treasury. 
D)  Federal Reserve.

Question 11

Portfolio diversiﬁcation eliminates all of the ___________ from a portfolio.

Accepted Answer

A)  risk 
B)  diversiﬁable risk 
C)  nondiversiﬁable risk 
D)  risk from business cycle ﬂuctuations 
A)  risk 
B)  diversiﬁable risk 
C)  nondiversiﬁable risk 
D)  risk from business cycle ﬂuctuations

Question 12

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

Accepted Answer

A)  signiﬁcantly higher than those of index funds with similar risk. 
B)  signiﬁcantly lower than those of index funds with similar risk. 
C)  about the same as those of index funds with similar risk. 
D)  more volatile than those of index funds with similar risk. 
A)  signiﬁcantly higher than those of index funds with similar risk. 
B)  signiﬁcantly lower than those of index funds with similar risk. 
C)  about the same as those of index funds with similar risk. 
D)  more volatile than those of index funds with similar risk.

Question 13

The so-called market portfolio used as a benchmark in ﬁnancial economics is

Accepted Answer

A)  the lowest risk portfolio. 
B)  the most diversiﬁed portfolio. 
C)  the portfolio with the highest expected return. 
D)  the portfolio with zero systemic risk. 
A)  the lowest risk portfolio. 
B)  the most diversiﬁed portfolio. 
C)  the portfolio with the highest expected return. 
D)  the portfolio with zero systemic risk.

Question 14

If investors are reasonably tolerant of risk, the Security Market Line will be relatively ﬂat.

Accepted Answer

A) True 
 B)False

Question 15

What are the three common features of all investments, and why are they important?

Accepted Answer

The three common features of all investm

Question 16

The beta for an asset considered to be risk-free

Accepted Answer

A)  can be any positive number. 
B)  is negative. 
C)  equals zero. 
D)  equals 1. 
A)  can be any positive number. 
B)  is negative. 
C)  equals zero. 
D)  equals 1.

Question 17

If the demand for an asset increases, its price will

Accepted Answer

A)  increase and the rate of return for new investors of this asset will increase. 
B)  decrease and the rate of return for new investors of this asset will increase. 
C)  decrease and the rate of return for new investors of this asset will decrease. 
D)  increase and the rate of return for new investors of this asset will decrease. 
A)  increase and the rate of return for new investors of this asset will increase. 
B)  decrease and the rate of return for new investors of this asset will increase. 
C)  decrease and the rate of return for new investors of this asset will decrease. 
D)  increase and the rate of return for new investors of this asset will decrease.

Question 18

A bank account pays 4 percent interest per year. If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Accepted Answer

A)  $3,122 
B)  $3,246 
C)  $3,600 
D)  $4,206 
A)  $3,122 
B)  $3,246 
C)  $3,600 
D)  $4,206

Question 19

Which of the following statements is true?

Accepted Answer

A)  Asset prices and average expected rates of return are directly related, but levels of nondiversiﬁable risk and average expected rates of return are inversely related. 
B)  Asset prices and average expected rates of return are inversely related, but levels of nondiversiﬁable risk and average expected rates of return are directly related. 
C)  Asset prices, average expected rates of return, and levels of nondiversiﬁable risk are all directly related. 
D)  Average expected rates of return are inversely related to both asset prices and levels of nondiversiﬁable risk. 
A)  Asset prices and average expected rates of return are directly related, but levels of nondiversiﬁable risk and average expected rates of return are inversely related. 
B)  Asset prices and average expected rates of return are inversely related, but levels of nondiversiﬁable risk and average expected rates of return are directly related. 
C)  Asset prices, average expected rates of return, and levels of nondiversiﬁable risk are all directly related. 
D)  Average expected rates of return are inversely related to both asset prices and levels of nondiversiﬁable risk.

Question 20

(Advanced analysis) Ricardo deposits $1,000 into his savings account. What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Accepted Answer

A)  8.75 percent 
B)  9.1 percent 
C)  10 percent 
D)  10.4 percent 
A)  8.75 percent 
B)  9.1 percent 
C)  10 percent 
D)  10.4 percent

Exam 17: Financial Economics

Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time. His purchase would be considered

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of ﬁve years, assuming all interest earned remains in the account?

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month. If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Riskier investments tend to sell for

One statistic that quantiﬁes the risk of an investment is

According to economists, the two factors most important to personal investment decisions are

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

Suppose two corporate bonds with similar risk pay different rates of return. The process of arbitrage should

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years. If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

The risk-free interest rate is determined primarily by the

Portfolio diversiﬁcation eliminates all of the ___________ from a portfolio.

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

The so-called market portfolio used as a benchmark in ﬁnancial economics is

If investors are reasonably tolerant of risk, the Security Market Line will be relatively ﬂat.

What are the three common features of all investments, and why are they important?

The beta for an asset considered to be risk-free

If the demand for an asset increases, its price will

A bank account pays 4 percent interest per year. If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Which of the following statements is true?

(Advanced analysis) Ricardo deposits $1,000 into his savings account. What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

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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