Question 1

Choose the series that places these financial instruments in order of increasing average risk.

Accepted Answer

A)  U.S. T-Bills, corporate bonds, small stocks, S&P 500 Index fund 
B)  corporate bonds, U.S. T-Bills, small stocks, S&P 500 Index fund 
C)  U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks 
D)  corporate bonds, U.S. T-Bills, S&P 500 Index fund, small stocks 
A)  U.S. T-Bills, corporate bonds, small stocks, S&P 500 Index fund 
B)  corporate bonds, U.S. T-Bills, small stocks, S&P 500 Index fund 
C)  U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks 
D)  corporate bonds, U.S. T-Bills, S&P 500 Index fund, small stocks

Question 2

It is recommended that investors buy stocks from a large number of different companies, avoid high fees, and hold the stocks for a long period.

Accepted Answer

A) True 
 B)False

Question 3

The S&P 500:

Accepted Answer

A)  is an index that tracks the stock prices of 500 large companies. 
B)  is Spain's largest stock exchange, consisting of 500 of the largest European companies. 
C)  comprises the stocks of at least 500 of the smallest (S) but most profitable (P) companies in the world. 
D)  consists of 500 stocks and 500 bonds from the world's largest companies. 
A)  is an index that tracks the stock prices of 500 large companies. 
B)  is Spain's largest stock exchange, consisting of 500 of the largest European companies. 
C)  comprises the stocks of at least 500 of the smallest (S) but most profitable (P) companies in the world. 
D)  consists of 500 stocks and 500 bonds from the world's largest companies.

Question 4

Diversification typically ______ portfolio risk.

Accepted Answer

A)  increases 
B)  decreases 
C)  maintains 
D)  eliminates 
A)  increases 
B)  decreases 
C)  maintains 
D)  eliminates

Question 5

Stock market bubbles have real effects in the economy because:

Accepted Answer

A)  overvalued stocks cause inflationary effects in the economy. 
B)  overvalued stocks violate the efficient markets hypothesis. 
C)  overvalued stocks divert capital to less-productive uses. 
D)  when these bubbles burst, they raise the value of capital in those industries. 
A)  overvalued stocks cause inflationary effects in the economy. 
B)  overvalued stocks violate the efficient markets hypothesis. 
C)  overvalued stocks divert capital to less-productive uses. 
D)  when these bubbles burst, they raise the value of capital in those industries.

Question 6

Which statement is TRUE regarding active investing?

Accepted Answer

A)  Active investing typically has higher average returns than passive investing. 
B)  Active investing and passive investing typically have equal returns on average. 
C)  Active investments typically have higher fees and lower returns on average than passive investments. 
D)  Active investing has been shown to be the only type of investing that can consistently "beat the market." 
A)  Active investing typically has higher average returns than passive investing. 
B)  Active investing and passive investing typically have equal returns on average. 
C)  Active investments typically have higher fees and lower returns on average than passive investments. 
D)  Active investing has been shown to be the only type of investing that can consistently "beat the market."

Question 7

Approximately how many years will it take for an investment of $1,000 that yields 5% a year to double in value?

Accepted Answer

A)  10 
B)  14 
C)  20 
D)  35 
A)  10 
B)  14 
C)  20 
D)  35

Question 8

Which of the following investments would you expect to have the highest rate of return in the long run?

Accepted Answer

A)  real estate 
B)  owning your own Major League Baseball franchise 
C)  an index fund (such as the S&P 500) 
D)  art 
A)  real estate 
B)  owning your own Major League Baseball franchise 
C)  an index fund (such as the S&P 500) 
D)  art

Question 9

A passive fund is a fund that:

Accepted Answer

A)  uses dividend reinvestment strategies to seek long-term capital appreciation. 
B)  tries to time the market when buying and selling stocks. 
C)  uses technical analysis to pick winning stocks. 
D)  invests in the companies that constitute a broad market index. 
A)  uses dividend reinvestment strategies to seek long-term capital appreciation. 
B)  tries to time the market when buying and selling stocks. 
C)  uses technical analysis to pick winning stocks. 
D)  invests in the companies that constitute a broad market index.

Question 10

A mutual fund pools money from many customers and invests the money in many firms. The fees charged by fund managers are:

Accepted Answer

A)  lower in bond funds. 
B)  higher in passive funds. 
C)  lower in passive funds. 
D)  higher in bond funds. 
A)  lower in bond funds. 
B)  higher in passive funds. 
C)  lower in passive funds. 
D)  higher in bond funds.

Question 11

While luck is certainly useful in picking stocks, there are some strategies for good investing. List these strategies.

Accepted Answer

These strategies are

Question 12

An efficient stock market means that:

Accepted Answer

A)  it is difficult to outperform the market, since stock prices convey all relevant public information about a company. 
B)  traders with inside information cannot even outperform market averages. 
C)  new information is slowly reflected in stock prices. 
D)  All of the answers are correct. 
A)  it is difficult to outperform the market, since stock prices convey all relevant public information about a company. 
B)  traders with inside information cannot even outperform market averages. 
C)  new information is slowly reflected in stock prices. 
D)  All of the answers are correct.

Question 13

For a mutual fund, a load is:

Accepted Answer

A)  the expected return of the fund. 
B)  the risk of the fund. 
C)  the fee for managing the fund. 
D)  the charge for insuring the fund. 
A)  the expected return of the fund. 
B)  the risk of the fund. 
C)  the fee for managing the fund. 
D)  the charge for insuring the fund.

Question 14

The rule of 70 explains:

Accepted Answer

A)  how many stocks you need to completely diversify your portfolio. 
B)  how much money you need to invest monthly in order to retire comfortably. 
C)  how long it takes an investment to double in value. 
D)  how long it takes for an investment to achieve the efficient markets hypothesis. 
A)  how many stocks you need to completely diversify your portfolio. 
B)  how much money you need to invest monthly in order to retire comfortably. 
C)  how long it takes an investment to double in value. 
D)  how long it takes for an investment to achieve the efficient markets hypothesis.

Question 15

The Dow Jones Industrial Average:

Accepted Answer

A)  weights larger companies' stocks more than small companies' stocks. 
B)  has stocks from thousands of companies. 
C)  has stocks from 500 companies. 
D)  has stocks from 30 companies. 
A)  weights larger companies' stocks more than small companies' stocks. 
B)  has stocks from thousands of companies. 
C)  has stocks from 500 companies. 
D)  has stocks from 30 companies.

Question 16

The riskiest stocks tend to be those that:

Accepted Answer

A)  are positively correlated with the market. 
B)  are negatively correlated with the market. 
C)  have done well in the past. 
D)  have done poorly in the past. 
A)  are positively correlated with the market. 
B)  are negatively correlated with the market. 
C)  have done well in the past. 
D)  have done poorly in the past.

Question 17

Which statement is TRUE?

Accepted Answer

A)  In the long run, stock returns are higher than bond returns. 
B)  Passive investments underperform active investments. 
C)  One can earn higher returns by investing in funds with high loading costs. 
D)  The efficient markets hypothesis only holds in the short run. 
A)  In the long run, stock returns are higher than bond returns. 
B)  Passive investments underperform active investments. 
C)  One can earn higher returns by investing in funds with high loading costs. 
D)  The efficient markets hypothesis only holds in the short run.

Question 18

When inside information becomes public information, profit opportunities:

Accepted Answer

A)  grow. 
B)  evaporate. 
C)  remain the same. 
D)  change in an indeterminate direction. 
A)  grow. 
B)  evaporate. 
C)  remain the same. 
D)  change in an indeterminate direction.

Question 19

Roulette is a gambling game where a wheel with 37 (Fr.) or 38 (Am.) squares spins around in one direction and a ball runs along its circumference in the opposite direction. Eventually the ball loses momentum and lands in a square. Roulette wheels pay 35-to-1 on a winning square. In other words, a $10 bet on square 20 will pay $350 if the ball lands on square 20. Many people feel this is an excellent payout and thus consider it superior to other games with lower payouts. Why is this payout less of a good deal than some might think?

Accepted Answer

A)  The risk of losing is greater than 97%. 
B)  The opportunity cost of holding your money while the wheel spins is high. 
C)  The efficient markets hypothesis suggests it costs upfront money to play this game. 
D)  There are fewer than 35 squares on the wheel, thus the expected payoff is low. 
A)  The risk of losing is greater than 97%. 
B)  The opportunity cost of holding your money while the wheel spins is high. 
C)  The efficient markets hypothesis suggests it costs upfront money to play this game. 
D)  There are fewer than 35 squares on the wheel, thus the expected payoff is low.

Question 20

When a stock has an average rate of return of 10% per year, then the value of the stock:

Accepted Answer

A)  triples in 5 years. 
B)  doubles in 7 years. 
C)  doubles in 10 years. 
D)  triples in 10 years. 
A)  triples in 5 years. 
B)  doubles in 7 years. 
C)  doubles in 10 years. 
D)  triples in 10 years.

Exam 23: Stock Markets and Personal Finance

Choose the series that places these financial instruments in order of increasing average risk.

It is recommended that investors buy stocks from a large number of different companies, avoid high fees, and hold the stocks for a long period.

The S&P 500:

Diversification typically ______ portfolio risk.

Stock market bubbles have real effects in the economy because:

Which statement is TRUE regarding active investing?

Approximately how many years will it take for an investment of $1,000 that yields 5% a year to double in value?

Which of the following investments would you expect to have the highest rate of return in the long run?

A passive fund is a fund that:

A mutual fund pools money from many customers and invests the money in many firms. The fees charged by fund managers are:

While luck is certainly useful in picking stocks, there are some strategies for good investing. List these strategies.

An efficient stock market means that:

For a mutual fund, a load is:

The rule of 70 explains:

The Dow Jones Industrial Average:

The riskiest stocks tend to be those that:

Which statement is TRUE?

When inside information becomes public information, profit opportunities:

When a stock has an average rate of return of 10% per year, then the value of the stock:

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Price Discrimination

Consumer Choice

Filters