Question 1

Which of the following statements is true?

Accepted Answer

A) Asset prices and average expected rates of return are directly related, but levels of nondiversifiable risk and average expected rates of return are inversely related. 
B) Asset prices and average expected rates of return are inversely related, but levels of nondiversifiable risk and average expected rates of return are directly related. 
C) Asset prices, average expected rates of return, and levels of nondiversifiable risk are all directly related. 
D) Average expected rates of return are inversely related to both asset prices and levels of nondiversifiable risk.

Question 2

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

Accepted Answer

A) diversification. 
B) arbitrage. 
C) hedging. 
D) securitization.

Question 3

Joe and Linda have the opportunity to purchase a new home.The house in Glen Oaks is currently worth $250,000 but is predicted to be worth $270,000 in a year.What is the rate of appreciation for the house from one year to the next?

Accepted Answer

A) 5 percent 
B) 6 percent 
C) 7 percent 
D) 8 percent

Question 4

The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a two-year contract but, because of salary cap limitations, can only pay $8 million for the first year (Alex's market value is $10 million per year).The Hazards offer to pay $8 million in year 1 and $13 million in year 2.Should Alex sign the contract?

Accepted Answer

A) Yes, Alex is better off financially regardless of the interest rate. 
B) Yes, if the interest rate is less than 50 percent. 
C) Yes, but only if the team expects to be successful. 
D) Yes, but only if the interest rate is less than 10 percent.

Question 5

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.

Question 6

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

Accepted Answer

A) X will fall and its rate of return will fall. 
B) Y will rise and its rate of return will fall. 
C) X will fall and its rate of return will rise. 
D) Y will fall and its rate of return will rise.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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.

Question 9

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

Question 10

What does the "beta" of an asset measure?

Accepted Answer

A) how the nondiversifiable risk compares with diversifiable risk for an asset 
B) how the expected return compares with the diversifiable risk of a given asset 
C) how the expected return compares with the nondiversifiable risk of the market portfolio 
D) how the nondiversifiable risk of a given asset compares with that of the market portfolio

Question 11

Arbitrage occurs when

Accepted Answer

A) bond and stock rates of return equalize. 
B) investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return. 
C) rates of return across all stocks equalize. 
D) investors move from lower to higher rate of return assets, regardless of the comparability of the assets.

Question 12

Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time.His purchase would be considered

Accepted Answer

A) an economic investment but not a financial investment. 
B) a financial investment but not an economic investment. 
C) both an economic and a financial investment. 
D) neither an economic nor a financial investment.

Question 13

Alex wants to borrow $1,000 from Kara.If he repays the loan in one year, Kara will require him to pay 5 percent interest on the loan.If Alex wants to repay the loan over three years, but Kara strongly prefers present to future consumption, we would expect the interest rate on a three-year loan to be

Accepted Answer

A) lower than for a one-year loan. 
B) greater than for a one-year loan. 
C) the same as for a one-year loan. 
D) higher if Kara expected there to be no inflation over the loan repayment period.

Question 14

Which of the following is a difference between stocks and bonds?

Accepted Answer

A) Stocks are issued for a fixed period; bonds are not. 
B) Stocks pay interest; bonds pay dividends. 
C) Bond payouts are more predictable than payouts from stocks. 
D) Bonds represent ownership; stocks represent debt.

Question 15

The compound interest formula states that if X dollars are 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 16

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.

Question 17

Joseph is considering purchasing a condo.He has the option of buying one in Midtown with a present value of $150,000 or one in downtown with a future value of $200,000.If the current market interest rate is 5 percent and he wants to buy the home with the highest future value in 5 years, he should buy the condo in downtown.

Accepted Answer

A) True 
 B)False

Question 18

The intercept of the Security Market Line at any point in time is determined primarily by

Accepted Answer

A) the prime interest rate. 
B) Federal Reserve monetary policy. 
C) the average beta of the market. 
D) investor tolerance of risk.

Question 19

(Last Word) Actively managed funds

Accepted Answer

A) generate lower costs than passively managed funds. 
B) generally outperform passively managed funds. 
C) generally perform the same as passively managed funds. 
D) are generally outperformed by passively managed funds.

Question 20

Mutual funds may contain

Accepted Answer

A) stocks only. 
B) bonds only. 
C) either stocks or bonds. 
D) neither stocks nor bonds.

Exam 37: Financial Economics

Which of the following statements is true?

The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as

Joe and Linda have the opportunity to purchase a new home.The house in Glen Oaks is currently worth $250,000 but is predicted to be worth $270,000 in a year.What is the rate of appreciation for the house from one year to the next?

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

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

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

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

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?

What does the "beta" of an asset measure?

Arbitrage occurs when

Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time.His purchase would be considered

Which of the following is a difference between stocks and bonds?

The compound interest formula states that if X dollars are 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 of the following statements about stocks and bonds is true?

The intercept of the Security Market Line at any point in time is determined primarily by

(Last Word) Actively managed funds

Mutual funds may contain