Question 1

A promised amount $FV "n" years into the future is worth how much today, if the interest rate is "i%" per year?

Accepted Answer

A)  $FV/(1 + i)n 
B)  ($FV/n) (i%) 
C)  (1 + i)n/$FV 
D)  [$FV/(1 + i)]n 
A)  $FV/(1 + i)n 
B)  ($FV/n) (i%) 
C)  (1 + i)n/$FV 
D)  [$FV/(1 + i)]n

Question 2

A stock investor may expect returns in the form of:

Accepted Answer

A)  Present and future values 
B)  Interest and dividends 
C)  Interest and capital gains 
D)  Dividends and capital gains 
A)  Present and future values 
B)  Interest and dividends 
C)  Interest and capital gains 
D)  Dividends and capital gains

Question 3

Terri buys a house for $200,000 and expects to sell it in three years for $300,000. Her expected percentage rate of return over that three-year period is:

Accepted Answer

A)  25 percent 
B)  33 percent 
C)  50 percent 
D)  67 percent 
A)  25 percent 
B)  33 percent 
C)  50 percent 
D)  67 percent

Question 4

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Accepted Answer

A) True 
 B)False

Question 5

One fundamental concept in financial economics is that an investment's rate of return is:

Accepted Answer

A)  Positively related to the price paid for it 
B)  Inversely related to the price paid for it 
C)  Inversely related to the riskiness of the investment 
D)  Inversely related to the maturity of the investment 
A)  Positively related to the price paid for it 
B)  Inversely related to the price paid for it 
C)  Inversely related to the riskiness of the investment 
D)  Inversely related to the maturity of the investment

Question 6

"Do not put all your eggs in one basket" is an advice that seeks to reduce:

Accepted Answer

A)  Idiosyncratic risk 
B)  Non-diversifiable risk 
C)  Systemic risk 
D)  Market risk 
A)  Idiosyncratic risk 
B)  Non-diversifiable risk 
C)  Systemic risk 
D)  Market risk

Question 7

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 8

If an investor owns a well-diversified portfolio, then:

Accepted Answer

A)  His portfolio does not involve any risk 
B)  The idiosyncratic risk in his portfolio is minimized 
C)  The systemic risk in his portfolio is minimized 
D)  His portfolio will have the highest expected return 
A)  His portfolio does not involve any risk 
B)  The idiosyncratic risk in his portfolio is minimized 
C)  The systemic risk in his portfolio is minimized 
D)  His portfolio will have the highest expected return

Question 9

After 4 years, a $5,000-investment earning 6% annual interest rate will be worth more than a $6,000-investment earning 1% annual interest.

Accepted Answer

A) True 
 B)False

Question 10

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year. The current market interest rate is 5 percent. What is the present value of this promotional budget?

Accepted Answer

A)  $175,146 
B)  $185,123 
C)  $190,476 
D)  $200,000 
A)  $175,146 
B)  $185,123 
C)  $190,476 
D)  $200,000

Question 11

What do stocks represent?

Accepted Answer

A)  Shares of ownership in a corporation and a guaranteed stream of profits 
B)  Shares of ownership in a corporation and an entitlement to its future profits 
C)  Debt contracts with a corporation and regular interest payments on the loan 
D)  Debt contracts with a corporation and variable interest payments on the loan 
A)  Shares of ownership in a corporation and a guaranteed stream of profits 
B)  Shares of ownership in a corporation and an entitlement to its future profits 
C)  Debt contracts with a corporation and regular interest payments on the loan 
D)  Debt contracts with a corporation and variable interest payments on the loan

Question 12

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P-500 are called:

Accepted Answer

A)  Index funds 
B)  Dividend funds 
C)  Portfolio funds 
D)  Capital gain funds 
A)  Index funds 
B)  Dividend funds 
C)  Portfolio funds 
D)  Capital gain funds

Question 13

The terms "economic investment" and "financial investment" can be used synonymously.

Accepted Answer

A) True 
 B)False

Question 14

Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate of return on the table is:

Accepted Answer

A)  10 percent 
B)  20 percent 
C)  25 percent 
D)  30 percent 
A)  10 percent 
B)  20 percent 
C)  25 percent 
D)  30 percent

Question 15

If the Federal Reserve conducts an open-market purchase, then the SML will:

Accepted Answer

A)  Shift up 
B)  Shift down 
C)  Rotate and become steeper 
D)  Rotate and become flatter 
A)  Shift up 
B)  Shift down 
C)  Rotate and become steeper 
D)  Rotate and become flatter

Question 16

A Ponzi scheme has the following characteristics, except:

Accepted Answer

A)  It promises a much higher expected return relative to the investment risk involved 
B)  It seems to involve a significantly lower risk relative to the expected returns promised 
C)  Its implied risk-return combination (or point) lies below the security market line 
D)  Trust plays a very important role, with investors believing in the promoter's ability to somehow prevent arbitrage 
A)  It promises a much higher expected return relative to the investment risk involved 
B)  It seems to involve a significantly lower risk relative to the expected returns promised 
C)  Its implied risk-return combination (or point) lies below the security market line 
D)  Trust plays a very important role, with investors believing in the promoter's ability to somehow prevent arbitrage

Question 17

You estimate that a piece of real estate for investment will be worth $700,000 in five years. The current interest rate is 3 percent. What is the present value of this investment?

Accepted Answer

A)  $604,000 
B)  $624,000 
C)  $680,000 
D)  $700,000 
A)  $604,000 
B)  $624,000 
C)  $680,000 
D)  $700,000

Question 18

The average expected rate of return is a:

Accepted Answer

A)  Volume-weighted average 
B)  Price-weighted average 
C)  Probability-weighted average 
D)  Value-weighted average 
A)  Volume-weighted average 
B)  Price-weighted average 
C)  Probability-weighted average 
D)  Value-weighted average

Question 19

The limited liability rule means that if a corporation goes bankrupt:

Accepted Answer

A)  Shareholders are responsible for all the debts of the firm 
B)  Bondholders are responsible for all the debts of the firm 
C)  Shareholders can only lose the amount they invested 
D)  Bondholders only lose the face value of the bond 
A)  Shareholders are responsible for all the debts of the firm 
B)  Bondholders are responsible for all the debts of the firm 
C)  Shareholders can only lose the amount they invested 
D)  Bondholders only lose the face value of the bond

Question 20

Which of the following statements is true?

Accepted Answer

A)  Passively managed funds do not pay dividends 
B)  Passively managed funds have only one asset in their portfolio 
C)  Actively managed funds constantly buy or sell assets to generate better returns 
D)  Actively managed funds adjust assets to match the performance of a particular index 
A)  Passively managed funds do not pay dividends 
B)  Passively managed funds have only one asset in their portfolio 
C)  Actively managed funds constantly buy or sell assets to generate better returns 
D)  Actively managed funds adjust assets to match the performance of a particular index

Exam 17: Financial Economics

A promised amount $FV "n" years into the future is worth how much today, if the interest rate is "i%" per year?

A stock investor may expect returns in the form of:

Terri buys a house for $200,000 and expects to sell it in three years for $300,000. Her expected percentage rate of return over that three-year period is:

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

One fundamental concept in financial economics is that an investment's rate of return is:

"Do not put all your eggs in one basket" is an advice that seeks to reduce:

The underlying cause of risk in finance is:

If an investor owns a well-diversified portfolio, then:

After 4 years, a $5,000-investment earning 6% annual interest rate will be worth more than a $6,000-investment earning 1% annual interest.

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year. The current market interest rate is 5 percent. What is the present value of this promotional budget?

What do stocks represent?

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P-500 are called:

The terms "economic investment" and "financial investment" can be used synonymously.

Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate of return on the table is:

If the Federal Reserve conducts an open-market purchase, then the SML will:

A Ponzi scheme has the following characteristics, except:

You estimate that a piece of real estate for investment will be worth $700,000 in five years. The current interest rate is 3 percent. What is the present value of this investment?

The average expected rate of return is a:

The limited liability rule means that if a corporation goes bankrupt:

Which of the following statements 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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