Question 1

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 2

Another name for diversifiable risk is:

Accepted Answer

A)  systemic risk. 
B)  inflation risk. 
C)  idiosyncratic risk. 
D)  cyclical risk. 
A)  systemic risk. 
B)  inflation risk. 
C)  idiosyncratic risk. 
D)  cyclical risk.

Question 3

(Advanced analysis)Indy has $2,000 invested in a financial asset earning an annually compounded interest rate of 6 percent.Approximately how many years will it take before Indy's investment is worth $5,000?

Accepted Answer

A)  25. 
B)  10.5. 
C)  12.8. 
D)  15.7. 
A)  25. 
B)  10.5. 
C)  12.8. 
D)  15.7.

Question 4

A change in Federal Reserve monetary policy will:

Accepted Answer

A)  have no effect on the Security Market Line. 
B)  invert the Security Market Line. 
C)  change the slope of the Security Market Line. 
D)  cause a vertical shift of the Security Market Line. 
A)  have no effect on the Security Market Line. 
B)  invert the Security Market Line. 
C)  change the slope of the Security Market Line. 
D)  cause a vertical shift of the Security Market Line.

Question 5

Which of the following statements best reflects the concept of present value?

Accepted Answer

A)  "The savings bond I bought five years ago is now worth $1,000." 
B)  "My $100 savings bond will be worth $200 in 10 years." 
C)  "You owe me $500,due at the end of the year,but I will reduce your debt to $450 if you pay me now." 
D)  "The $5,000 in my savings account is worth less today than five years ago because of inflation." 
A)  "The savings bond I bought five years ago is now worth $1,000." 
B)  "My $100 savings bond will be worth $200 in 10 years." 
C)  "You owe me $500,due at the end of the year,but I will reduce your debt to $450 if you pay me now." 
D)  "The $5,000 in my savings account is worth less today than five years ago because of inflation."

Question 6

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 7

The beta for the market portfolio's level of nondiversifiable risk is:

Accepted Answer

A)  zero. 
B)  1. 
C)  100. 
D)  always fluctuating. 
A)  zero. 
B)  1. 
C)  100. 
D)  always fluctuating.

Question 8

The formula for present value allows investors to:

Accepted Answer

A)  convert a given number of dollars in the future into its present equivalent. 
B)  determine the future impact of inflation on a present amount of money. 
C)  know which financial assets will provide the greatest future returns. 
D)  do all of these. 
A)  convert a given number of dollars in the future into its present equivalent. 
B)  determine the future impact of inflation on a present amount of money. 
C)  know which financial assets will provide the greatest future returns. 
D)  do all of these.

Question 9

Professional athletes attempting only to maximize income will defer larger salaries if:

Accepted Answer

A)  deferred payouts are adjusted upward to compensate for forgone interest. 
B)  it increases the team's chance to win. 
C)  there is no chance of inflation. 
D)  it allows them to stay in a city and not to have to move their family. 
A)  deferred payouts are adjusted upward to compensate for forgone interest. 
B)  it increases the team's chance to win. 
C)  there is no chance of inflation. 
D)  it allows them to stay in a city and not to have to move their family.

Question 10

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 11

The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the:

Accepted Answer

A)  Beta Line. 
B)  Security Market Line. 
C)  Risk Premium Line. 
D)  Risk-Return Line. 
A)  Beta Line. 
B)  Security Market Line. 
C)  Risk Premium Line. 
D)  Risk-Return Line.

Question 12

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Accepted Answer

A) True 
 B)False

Question 13

Index funds are a portfolio of:

Accepted Answer

A)  bonds with rates of return fixed at 2 percentage points above the rate of inflation. 
B)  mutual funds that track different indexes. 
C)  stocks or bonds that exactly match a particular index. 
D)  stocks guaranteed rates of return in excess of growth in the GDP price index. 
A)  bonds with rates of return fixed at 2 percentage points above the rate of inflation. 
B)  mutual funds that track different indexes. 
C)  stocks or bonds that exactly match a particular index. 
D)  stocks guaranteed rates of return in excess of growth in the GDP price index.

Question 14

An asset's price and rate of return are directly related.

Accepted Answer

A) True 
 B)False

Question 15

Actively managed funds consistently outperform index funds.

Accepted Answer

A) True 
 B)False

Question 16

$800 invested at an annually compounded interest rate of 6 percent will be worth how much at the end of 10 years?

Accepted Answer

A)  $1,280. 
B)  $1,433. 
C)  $1,417. 
D)  $1,369. 
A)  $1,280. 
B)  $1,433. 
C)  $1,417. 
D)  $1,369.

Question 17

When a company declares bankruptcy,stockholders are the first to be paid when company assets are sold.

Accepted Answer

A) True 
 B)False

Question 18

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Accepted Answer

A) True 
 B)False

Question 19

Pigou buys a house for $500,000,rents it for $2,000 per month for four years,and then sells it for $600,000.What is Pigou's per-year rate of return?

Accepted Answer

A)  4.8 percent. 
B)  9.8 percent. 
C)  20 percent. 
D)  39.2 percent. 
A)  4.8 percent. 
B)  9.8 percent. 
C)  20 percent. 
D)  39.2 percent.

Question 20

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Accepted Answer

A) True 
 B)False

Exam 36: Financial Economics

Arbitrage is the process by which investors simultaneously sell:

Another name for diversifiable risk is:

(Advanced analysis)Indy has $2,000 invested in a financial asset earning an annually compounded interest rate of 6 percent.Approximately how many years will it take before Indy's investment is worth $5,000?

A change in Federal Reserve monetary policy will:

Which of the following statements best reflects the concept of present value?

Investors diversify portfolios:

The beta for the market portfolio's level of nondiversifiable risk is:

The formula for present value allows investors to:

Professional athletes attempting only to maximize income will defer larger salaries if:

Portfolio diversification eliminates all of the ___________ from a portfolio.

The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the:

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Index funds are a portfolio of:

An asset's price and rate of return are directly related.

Actively managed funds consistently outperform index funds.

$800 invested at an annually compounded interest rate of 6 percent will be worth how much at the end of 10 years?

When a company declares bankruptcy,stockholders are the first to be paid when company assets are sold.

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Pigou buys a house for $500,000,rents it for $2,000 per month for four years,and then sells it for $600,000.What is Pigou's per-year rate of return?

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Income Inequality Poverty and Discrimination

Health Care

Immigration

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

The Balance of Payments, Exchange Rates, and Trade Deficits

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

The United States and the Global Economy

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