Question 1

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Accepted Answer

A)  Less risky assets will have similar average expected rates of return to more risky assets.
B)  Less risky assets will have higher average expected rates of return than more risky assets.
C)  More risky assets will have higher average expected rates of return than less risky assets.
D)  More risky assets will have lower average expected rates of return than less risky assets.

Question 2

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

Accepted Answer

A)  practically zero percent
B)  1 percent
C)  50 percent
D)  $1 A

Question 5

The beta for an asset considered to be risk-free

Accepted Answer

A)  can be any positive number.
B)  is negative.
C)  equals zero.
D)  equals 1. C

Question 6

An investment with a beta of 4.0 means that the investment has four times the

Accepted Answer

A)  average expected rate of return of the market portfolio.
B)  risk of all similar investments.
C)  level of nondiversifiable risk as the market portfolio.
D)  level of diversifiable risk as the market portfolio.

Question 7

For heavily traded assets like stocks and bonds, arbitrage

Accepted Answer

A)  will equalize rates of return across all stocks and bonds.
B)  will drive up rates of return on all assets.
C)  is a lengthy process because of the large volume of transactions.
D)  will often equalize rates of return among similar assets within minutes.

Question 8

A change in Federal Reserve monetary policy will

Accepted Answer

A)  have no effect on the Security Market Line.
B)  invert the Security Market Line.
C)  change the slope of the Security Market Line.
D)  cause a vertical shift of the Security Market Line.

Question 9

Which of the following is an economic investment?

Accepted Answer

A)  shares of corporate stock
B)  U.S.savings bonds
C)  newly built houses
D)  bonds issued by private corporations

Question 10

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Accepted Answer

A)  pooling.
B)  arbitrage.
C)  diversification.
D)  weighted average.

Question 11

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.

Question 12

The formula for present value allows investors to

Accepted Answer

A)  convert a given number of dollars in the future into its present equivalent.
B)  determine the future impact of inflation on a present amount of money.
C)  know which financial assets will provide the greatest future returns.
D)  do all of these.

Question 13

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  True

Question 14

The beta for the market portfolio's level of nondiversifiable risk is

Accepted Answer

A)  zero.
B)  1.
C)  100.
D)  always fluctuating.

Question 15

The present value of a future amount of money will be greater the

Accepted Answer

A)  greater the interest rate.
B)  less the amount of time before the future payment is received.
C)  more the amount of time before the future payment is received.
D)  greater the expected rate of inflation.

Question 16

Which of the following statements best describes the relationship between asset prices and average expected returns?

Accepted Answer

A)  More risky assets will have similar prices to less risky assets.
B)  Less risky assets will have lower prices than more risky assets.
C)  Less risky assets will have higher prices than more risky assets.
D)  More risky assets will have higher prices than less risky assets.

Question 17

Bonds represent

Accepted Answer

A)  a claim on company dividends.
B)  ownership of a company.
C)  all financial assets guaranteed to pay interest.
D)  loans to governments and corporations.

Question 18

Mutual funds may contain

Accepted Answer

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

Question 19

(Advanced analysis)  Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Accepted Answer

A)  4.6 percent
B)  6.5 percent
C)  8.4 percent
D)  9.3 percent

Question 20

Matt, a star basketball player, is looking to join a new NBA team. The Bulls are offering him $24 million for one year. The Heat is offering him $10 million this year and $7.0 million in each of the next two years. The market interest rate is 5 percent.What is the present value of the offer from The Heat  in millions (rounded to the nearest one hundred thousand dollars) ?

Accepted Answer

A)  $22.5 million
B)  $23.0 million
C)  $24.0 million
D)  $25.2 million

Exam 17: Part C: Financial Economics

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Correct Answer
verified

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Correct Answer
verified

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

Correct Answer
verified

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

Correct Answer
verified
A

The beta for an asset considered to be risk-free

Correct Answer
verified
C

An investment with a beta of 4.0 means that the investment has four times the

Correct Answer
verified

For heavily traded assets like stocks and bonds, arbitrage

Correct Answer
verified

A change in Federal Reserve monetary policy will

Correct Answer
verified

Which of the following is an economic investment?

Correct Answer
verified

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Correct Answer
verified

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

Correct Answer
verified

The formula for present value allows investors to

Correct Answer
verified

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.

Correct Answer
verified
True

The beta for the market portfolio's level of nondiversifiable risk is

Correct Answer
verified

The present value of a future amount of money will be greater the

Correct Answer
verified

Which of the following statements best describes the relationship between asset prices and average expected returns?

Correct Answer
verified

Bonds represent

Correct Answer
verified

Mutual funds may contain

Correct Answer
verified

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Correct Answer
verified

Correct Answer
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Exam 17: Part C: Financial Economics

Which of the following statements best describes the relationship between risk and the average expected return of investments?

Correct AnswerverifiedShow Answer

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

Correct AnswerverifiedA

The beta for an asset considered to be risk-free

Correct AnswerverifiedC

An investment with a beta of 4.0 means that the investment has four times the

Correct AnswerverifiedShow Answer

For heavily traded assets like stocks and bonds, arbitrage

Correct AnswerverifiedShow Answer

A change in Federal Reserve monetary policy will

Correct AnswerverifiedShow Answer

Which of the following is an economic investment?

Correct AnswerverifiedShow Answer

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The formula for present value allows investors to

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedTrue

The beta for the market portfolio's level of nondiversifiable risk is

Correct AnswerverifiedShow Answer

The present value of a future amount of money will be greater the

Correct AnswerverifiedShow Answer

Which of the following statements best describes the relationship between asset prices and average expected returns?

Correct AnswerverifiedShow Answer

Bonds represent

Correct AnswerverifiedShow Answer

Mutual funds may contain

Correct AnswerverifiedShow Answer

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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A

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C

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True

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