Question 1

If an asset has a beta of 1.5, it has 50 percent more nondiversiﬁable risk than the market portfolio.

Accepted Answer

A) True 
 B)False

Question 2

The Fed can regularly inﬂuence and change the risk-free rate of ﬁnancial investments through its

Accepted Answer

A)  open-market operations. 
B)  quantitative easing. 
C)  required reserve ratio. 
D)  bank supervision. 
A)  open-market operations. 
B)  quantitative easing. 
C)  required reserve ratio. 
D)  bank supervision.

Question 3

The underlying cause of risk in ﬁnance is

Accepted Answer

A)  danger. 
B)  uncertainty. 
C)  fear. 
D)  complexity. 
A)  danger. 
B)  uncertainty. 
C)  fear. 
D)  complexity.

Question 4

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in ﬁve
years. If the interest rate is 5 percent, then that asset will be worth $75 million today.

Accepted Answer

A) True 
 B)False

Question 5

Compound interest refers to the multiple interest rates an investor will be paid in a diversiﬁed
portfolio.

Accepted Answer

A) True 
 B)False

Question 6

Portfolio diversiﬁcation

Accepted Answer

A)  reduces the likelihood that the entire amount invested will be lost. 
B)  eliminates all risk of loss. 
C)  ensures that investors will receive a positive rate of return. 
D)  provides the maximum possible rate of return from an investment portfolio. 
A)  reduces the likelihood that the entire amount invested will be lost. 
B)  eliminates all risk of loss. 
C)  ensures that investors will receive a positive rate of return. 
D)  provides the maximum possible rate of return from an investment portfolio.

Question 7

Because of arbitrage, any given ﬁnancial asset will be expected to return to the Security Market
Line.

Accepted Answer

A) True 
 B)False

Question 8

The price of an asset should

Accepted Answer

A)  exactly equal the total present value of all of the asset's future payments. 
B)  exactly equal the total future value of all of the asset's future payments. 
C)  approximately equal X(1 + i)t, where X is the value of the asset, i is the interest rate, and t is the number of years. 
D)  exactly equal the total present and future value of all of the asset's future payments. 
A)  exactly equal the total present value of all of the asset's future payments. 
B)  exactly equal the total future value of all of the asset's future payments. 
C)  approximately equal X(1 + i)t, where X is the value of the asset, i is the interest rate, and t is the number of years. 
D)  exactly equal the total present and future value of all of the asset's future payments.

Question 9

Refer to the graph. The average expected rate of return for an asset with a beta equal to X would be

Accepted Answer

A)  Y. 
B)  A plus B. 
C)  Z minus A. 
D)  Z minus Y. 
A)  Y. 
B)  A plus B. 
C)  Z minus A. 
D)  Z minus Y.

Question 10

Ownership of a single corporation is represented by what investment?

Accepted Answer

A)  stock 
B)  bonds 
C)  mutual funds 
D)  commercial paper 
A)  stock 
B)  bonds 
C)  mutual funds 
D)  commercial paper

Question 11

Arbitrage causes all ﬁnancial assets

Accepted Answer

A)  of the same risk level to have the same price. 
B)  to have the same expected rate of return. 
C)  to have the same beta. 
D)  of the same risk level to have the same average expected rate of return. 
A)  of the same risk level to have the same price. 
B)  to have the same expected rate of return. 
C)  to have the same beta. 
D)  of the same risk level to have the same average expected rate of return.

Question 12

If stockholders sell their shares for more than they paid for those shares, the stockholders

Accepted Answer

A)  realize a share of equal proﬁts. 
B)  receive a dividend. 
C)  realize a capital gain. 
D)  obtain a mutual fund. 
A)  realize a share of equal proﬁts. 
B)  receive a dividend. 
C)  realize a capital gain. 
D)  obtain a mutual fund.

Question 13

Arbitrage is the process by which investors simultaneously sell

Accepted Answer

A)  assets with higher rates of return and buy otherwise identical assets with lower rates of return. 
B)  assets with lower rates of return and buy otherwise identical assets with higher rates of return. 
C)  riskier assets and buy less risky assets. 
D)  less risky assets and buy riskier assets. 
A)  assets with higher rates of return and buy otherwise identical assets with lower rates of return. 
B)  assets with lower rates of return and buy otherwise identical assets with higher rates of return. 
C)  riskier assets and buy less risky assets. 
D)  less risky assets and buy riskier assets.

Question 14

The expected rate of return from an investment is

Accepted Answer

A)  the rate that compensates for time preference only. 
B)  the rate that compensates for risk only. 
C)  the rate that compensates for time preference plus the rate that compensates for risk. 
D)  the rate that compensates for time preference minus the rate that compensates for risk. 
A)  the rate that compensates for time preference only. 
B)  the rate that compensates for risk only. 
C)  the rate that compensates for time preference plus the rate that compensates for risk. 
D)  the rate that compensates for time preference minus the rate that compensates for risk.

Question 15

Hermione is considering an investment that has a ? chance of paying a 10 percent rate of return and a ? chance of paying 2 percent. What is the average expected rate of return on the investment?

Accepted Answer

A)  2 percent 
B)  6 percent 
C)  8 percent 
D)  10 percent 
A)  2 percent 
B)  6 percent 
C)  8 percent 
D)  10 percent

Question 16

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years. How much will be required to pay off the loan at the end of 10 years?

Accepted Answer

A)  $900 
B)  $962.85 
C)  $1,079.46 
D)  $1,123.21 
A)  $900 
B)  $962.85 
C)  $1,079.46 
D)  $1,123.21

Question 17

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Accepted Answer

A)  higher returns. 
B)  more likely outcomes. 
C)  higher risks. 
D)  smaller returns. 
A)  higher returns. 
B)  more likely outcomes. 
C)  higher risks. 
D)  smaller returns.

Question 18

If the Fed raises the interest rates on short-term U.S. government bonds, then the Security Market Line shifts

Accepted Answer

A)  downward as the risk-free interest rate increases. 
B)  downward as the risk-free interest rate decreases. 
C)  upward as the risk-free interest rate increases. 
D)  upward as the risk-free interest rate decreases. 
A)  downward as the risk-free interest rate increases. 
B)  downward as the risk-free interest rate decreases. 
C)  upward as the risk-free interest rate increases. 
D)  upward as the risk-free interest rate decreases.

Question 19

The type of risk that pushes the returns from all investment in the same direction at the same time is

Accepted Answer

A)  idiosyncratic. 
B)  diversiﬁable. 
C)  systemic. 
D)  time preference. 
A)  idiosyncratic. 
B)  diversiﬁable. 
C)  systemic. 
D)  time preference.

Question 20

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

Accepted Answer

A)  beta. 
B)  risk. 
C)  arbitrage. 
D)  diversiﬁcation. 
A)  beta. 
B)  risk. 
C)  arbitrage. 
D)  diversiﬁcation.

Exam 17: Financial Economics

If an asset has a beta of 1.5, it has 50 percent more nondiversiﬁable risk than the market portfolio.

The Fed can regularly inﬂuence and change the risk-free rate of ﬁnancial investments through its

The underlying cause of risk in ﬁnance is

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in ﬁve years. If the interest rate is 5 percent, then that asset will be worth $75 million today.

Compound interest refers to the multiple interest rates an investor will be paid in a diversiﬁed portfolio.

Portfolio diversiﬁcation

Because of arbitrage, any given ﬁnancial asset will be expected to return to the Security Market Line.

The price of an asset should

Refer to the graph. The average expected rate of return for an asset with a beta equal to X would be

Ownership of a single corporation is represented by what investment?

Arbitrage causes all ﬁnancial assets

If stockholders sell their shares for more than they paid for those shares, the stockholders

Arbitrage is the process by which investors simultaneously sell

The expected rate of return from an investment is

Hermione is considering an investment that has a ? chance of paying a 10 percent rate of return and a ? chance of paying 2 percent. What is the average expected rate of return on the investment?

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years. How much will be required to pay off the loan at the end of 10 years?

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

If the Fed raises the interest rates on short-term U.S. government bonds, then the Security Market Line shifts

The type of risk that pushes the returns from all investment in the same direction at the same time is

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

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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