Question 1

Stock investors can earn a return from stocks only in the form of dividends.

Accepted Answer

A) True 
 B)False

Question 2

An asset with a beta of 0.5 has:

Accepted Answer

A)  5 percent more risk than the risk-free asset 
B)  50 percent more risk than the risk-free asset 
C)  Half the nondiversifiable risk as in a market portfolio 
D)  5 times the nondiversifiable risk as in a market portfolio 
A)  5 percent more risk than the risk-free asset 
B)  50 percent more risk than the risk-free asset 
C)  Half the nondiversifiable risk as in a market portfolio 
D)  5 times the nondiversifiable risk as in a market portfolio

Question 3

Which of the following would best be a brief definition of present value?

Accepted Answer

A)  Assets minus liabilities incurred to acquire the assets 
B)  Benefits of an minus its costs 
C)  The sum of all the past values of an asset 
D)  The current value of the expected future returns on an asset 
A)  Assets minus liabilities incurred to acquire the assets 
B)  Benefits of an minus its costs 
C)  The sum of all the past values of an asset 
D)  The current value of the expected future returns on an asset

Question 4

Equal shares of a firm's profit are paid out to stockholders as:

Accepted Answer

A)  Interest 
B)  Dividends 
C)  Capital gains 
D)  Net earnings 
A)  Interest 
B)  Dividends 
C)  Capital gains 
D)  Net earnings

Question 5

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 6

Rick recently purchased a convenience store for $500,000. He expects monthly profits to be $10,000 in the next year. If a recession had struck, and Rick had instead paid $300,000 while his monthly profits was reduced to $6,000, his expected rate of return would have:

Accepted Answer

A)  Increased by 2 percentage points 
B)  Increased by 3 percentage points 
C)  Decreased by 2 percentage points 
D)  Remained the same 
A)  Increased by 2 percentage points 
B)  Increased by 3 percentage points 
C)  Decreased by 2 percentage points 
D)  Remained the same

Question 7

Bankruptcy of a firm means that it:

Accepted Answer

A)  Earned less revenues than its total costs 
B)  Cannot meet its contractual obligations to its stockholders 
C)  Has a lot of debt owed to its bondholders 
D)  Is unable to make timely promised payments on its debt 
A)  Earned less revenues than its total costs 
B)  Cannot meet its contractual obligations to its stockholders 
C)  Has a lot of debt owed to its bondholders 
D)  Is unable to make timely promised payments on its debt

Question 8

The Security Market Line (SML) is upward-sloping, indicating that the:

Accepted Answer

A)  Beta of an investment increases as its risk level increases 
B)  Average expected return on investments decreases as their risk level decreases 
C)  Average expected return on the risk-free asset increases as its beta increases 
D)  Average expected return of the market portfolio increases as its beta increases 
A)  Beta of an investment increases as its risk level increases 
B)  Average expected return on investments decreases as their risk level decreases 
C)  Average expected return on the risk-free asset increases as its beta increases 
D)  Average expected return of the market portfolio increases as its beta increases

Question 9

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 10

During the Financial Crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to:

Accepted Answer

A)  Shift up 
B)  Shift down 
C)  Become steeper 
D)  Become flatter 
A)  Shift up 
B)  Shift down 
C)  Become steeper 
D)  Become flatter

Question 11

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Accepted Answer

A)  Future value 
B)  Present value 
C)  Time preference 
D)  Market portfolio 
A)  Future value 
B)  Present value 
C)  Time preference 
D)  Market portfolio

Question 12

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Accepted Answer

A) True 
 B)False

Question 13

The compound interest formula states that if X dollars is invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)  The future payments are typically risky 
B)  The periodic payments they provide are regular 
C)  They typically are short term 
D)  They give the investor a stream of future payments, not just one payment 
A)  The future payments are typically risky 
B)  The periodic payments they provide are regular 
C)  They typically are short term 
D)  They give the investor a stream of future payments, not just one payment

Question 15

The vertical intercept of the Security Market Line (SML) shows the:

Accepted Answer

A)  Amount of arbitrage 
B)  Risk-free interest rate 
C)  Beta of the market portfolio 
D)  Risk premium for the market portfolio 
A)  Amount of arbitrage 
B)  Risk-free interest rate 
C)  Beta of the market portfolio 
D)  Risk premium for the market portfolio

Question 16

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is:

Accepted Answer

A)  34 percent 
B)  32 percent 
C)  30 percent 
D)  12 percent 
A)  34 percent 
B)  32 percent 
C)  30 percent 
D)  12 percent

Question 17

A bond that is currently selling at $1000 offers to pay $50 annually. What is the percentage rate of return on the bond?

Accepted Answer

A)  5 percent 
B)  10 percent 
C)  20 percent 
D)  50 percent 
A)  5 percent 
B)  10 percent 
C)  20 percent 
D)  50 percent

Question 18

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made at all during the period, after two years the borrower will owe:

Accepted Answer

A)  $10,000 
B)  $10,600 
C)  $11,236 
D)  $11,910 
A)  $10,000 
B)  $10,600 
C)  $11,236 
D)  $11,910

Question 19

Diversification in one's investments reduces:

Accepted Answer

A)  Idiosyncratic risk 
B)  Pooling risk 
C)  Systemic risk 
D)  Time preference risk 
A)  Idiosyncratic risk 
B)  Pooling risk 
C)  Systemic risk 
D)  Time preference risk

Question 20

Which of the following statements about stocks and bonds is true?

Accepted Answer

A)  Stocks pay interest while bonds pay dividends 
B)  One can lose with stocks, but not with bonds 
C)  The U.S. Federal government issues bonds, but not stocks 
D)  Bonds are long term while stocks are short term investments 
A)  Stocks pay interest while bonds pay dividends 
B)  One can lose with stocks, but not with bonds 
C)  The U.S. Federal government issues bonds, but not stocks 
D)  Bonds are long term while stocks are short term investments

Exam 17: Financial Economics

Stock investors can earn a return from stocks only in the form of dividends.

An asset with a beta of 0.5 has:

Which of the following would best be a brief definition of present value?

Equal shares of a firm's profit are paid out to stockholders as:

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Rick recently purchased a convenience store for $500,000. He expects monthly profits to be $10,000 in the next year. If a recession had struck, and Rick had instead paid $300,000 while his monthly profits was reduced to $6,000, his expected rate of return would have:

Bankruptcy of a firm means that it:

The Security Market Line (SML) is upward-sloping, indicating that the:

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

During the Financial Crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to:

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

The compound interest formula states that if X dollars is invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

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

The vertical intercept of the Security Market Line (SML) shows the:

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is:

A bond that is currently selling at $1000 offers to pay $50 annually. What is the percentage rate of return on the bond?

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made at all during the period, after two years the borrower will owe:

Diversification in one's investments reduces:

Which of the following statements about stocks and bonds is true?

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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