Question 1

Which one of the following is an example of a financial investment but not an economic investment?

Accepted Answer

A)  A renovation of a shopping mall 
B)  An addition to a petroleum refinery 
C)  Building a new store 
D)  Buying gold to sell later at a higher price 
A)  A renovation of a shopping mall 
B)  An addition to a petroleum refinery 
C)  Building a new store 
D)  Buying gold to sell later at a higher price

Question 2

A recession in an economy would be an example of a diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 3

An investor wants to invest in the oil industry, but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By buying several companies to reduce risk, the investor is seeking to reduce:

Accepted Answer

A)  Systemic risk 
B)  The risk premium 
C)  Idiosyncratic risk 
D)  Nondiversifiable risk 
A)  Systemic risk 
B)  The risk premium 
C)  Idiosyncratic risk 
D)  Nondiversifiable risk

Question 4

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 5

You deposit $5,000 in a 5-year bank CD that pays 3% interest per year. How much will you get from this deposit be at maturity?

Accepted Answer

A)  $5,155 
B)  $5,751 
C)  $5,796 
D)  $6,500 
A)  $5,155 
B)  $5,751 
C)  $5,796 
D)  $6,500

Question 6

Other factors constant, the present value will be larger:

Accepted Answer

A)  The smaller is the future value 
B)  The higher is the interest rate 
C)  The larger is the number of periods t 
D)  The shorter is the time period t 
A)  The smaller is the future value 
B)  The higher is the interest rate 
C)  The larger is the number of periods t 
D)  The shorter is the time period t

Question 7

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Accepted Answer

A) True 
 B)False

Question 8

Which one of the following is an example of an economic investment?

Accepted Answer

A)  Putting money in a bank CD 
B)  Buying a corporate bond or stock 
C)  Purchasing shares of a mutual fund 
D)  Building a new bank office 
A)  Putting money in a bank CD 
B)  Buying a corporate bond or stock 
C)  Purchasing shares of a mutual fund 
D)  Building a new bank office

Question 9

Xavier is a baseball player negotiating a contract to play for a team for one year. He is usually paid $10 million a year for playing, but the salary caps for his team means that he will have to be paid $5 million this year and the remainder next year. If the interest rate is 8 percent, how much should that remaining amount be next year?

Accepted Answer

A)  $5.0 million 
B)  $5.1 million 
C)  $5.4 million 
D)  $6.1 million 
A)  $5.0 million 
B)  $5.1 million 
C)  $5.4 million 
D)  $6.1 million

Question 10

Alma recently purchased a Mexican restaurant for $450,000 from which she expects to earn a monthly profit of $1,500. Her expected annual rate of return is:

Accepted Answer

A)  4 percent 
B)  6 percent 
C)  8 percent 
D)  10 percent 
A)  4 percent 
B)  6 percent 
C)  8 percent 
D)  10 percent

Question 11

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Accepted Answer

A) True 
 B)False

Question 12

Compound interest describes increases in value when interest is paid, or compounded, on:

Accepted Answer

A)  Only the original amount invested 
B)  Only the previously accumulated interest payments 
C)  The original amount invested and previously accumulated interest payments 
D)  The original amount invested minus any previously accumulated interest payments 
A)  Only the original amount invested 
B)  Only the previously accumulated interest payments 
C)  The original amount invested and previously accumulated interest payments 
D)  The original amount invested minus any previously accumulated interest payments

Question 13

Risk in finance means that an asset:

Accepted Answer

A)  Does not pay dividends 
B)  Does not pay capital gains 
C)  Has a present value that is negative 
D)  Has future payments that are uncertain 
A)  Does not pay dividends 
B)  Does not pay capital gains 
C)  Has a present value that is negative 
D)  Has future payments that are uncertain

Question 14

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S. government bonds.

Accepted Answer

A) True 
 B)False

Question 15

Assume that two firms (Firm A and Firm B) are very similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock. Arbitrage will occur as investors:

Accepted Answer

A)  Sell Firm A's stock and buy Firm B's stock 
B)  Buy Firm A's stock and buy Firm B's stock also 
C)  Sell Firm A's stock and sell Firm B's stock also 
D)  Buy Firm A's stock and sell Firm B's stock 
A)  Sell Firm A's stock and buy Firm B's stock 
B)  Buy Firm A's stock and buy Firm B's stock also 
C)  Sell Firm A's stock and sell Firm B's stock also 
D)  Buy Firm A's stock and sell Firm B's stock

Question 16

Refer to the graph above. The bracket B represents the:

Accepted Answer

A)  Amount of arbitrage for this asset 
B)  Rate of return for the market portfolio 
C)  Risk premium for an asset's risk level 
D)  Compensation for time preference for an asset 
A)  Amount of arbitrage for this asset 
B)  Rate of return for the market portfolio 
C)  Risk premium for an asset's risk level 
D)  Compensation for time preference for an asset

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would:

Accepted Answer

A)  Increase, and the rates of return would decrease relative to other companies 
B)  Decrease, and the rates of return would increase relative to other companies 
C)  Decrease, but the rates of return would stay the same relative to other companies 
D)  Decrease, and the rates of return would decrease relative to other companies 
A)  Increase, and the rates of return would decrease relative to other companies 
B)  Decrease, and the rates of return would increase relative to other companies 
C)  Decrease, but the rates of return would stay the same relative to other companies 
D)  Decrease, and the rates of return would decrease relative to other companies

Question 19

The present value model of investment states that an asset's current price should be equal to the:

Accepted Answer

A)  Sum of the present values of all of its future payments or earnings 
B)  Sum of all of its future payments or earnings times the number of years of its life 
C)  Life of the asset times the present values of all of its future payments or earnings 
D)  Present values of all of its future payments or earnings divided by its life in years 
A)  Sum of the present values of all of its future payments or earnings 
B)  Sum of all of its future payments or earnings times the number of years of its life 
C)  Life of the asset times the present values of all of its future payments or earnings 
D)  Present values of all of its future payments or earnings divided by its life in years

Question 20

An index fund:

Accepted Answer

A)  Is a passively managed mutual fund 
B)  Has higher trading costs than an actively managed mutual fund 
C)  Has higher trading costs than a passively managed mutual fund 
D)  Is an actively managed mutual fund 
A)  Is a passively managed mutual fund 
B)  Has higher trading costs than an actively managed mutual fund 
C)  Has higher trading costs than a passively managed mutual fund 
D)  Is an actively managed mutual fund

Exam 17: Financial Economics

Which one of the following is an example of a financial investment but not an economic investment?

A recession in an economy would be an example of a diversifiable risk.

An investor wants to invest in the oil industry, but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By buying several companies to reduce risk, the investor is seeking to reduce:

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

You deposit $5,000 in a 5-year bank CD that pays 3% interest per year. How much will you get from this deposit be at maturity?

Other factors constant, the present value will be larger:

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Which one of the following is an example of an economic investment?

Alma recently purchased a Mexican restaurant for $450,000 from which she expects to earn a monthly profit of $1,500. Her expected annual rate of return is:

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Compound interest describes increases in value when interest is paid, or compounded, on:

Risk in finance means that an asset:

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S. government bonds.

Assume that two firms (Firm A and Firm B) are very similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock. Arbitrage will occur as investors:

Refer to the graph above. The bracket B represents the:

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

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would:

The present value model of investment states that an asset's current price should be equal to the:

An index fund:

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role 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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