Question 1

Suppose that some people invest $1,000 today in a financial asset that will make one future payment.The longer they must wait for the future payment, the

Accepted Answer

A)  higher the future payment they will expect to receive.
B)  lower the future payment they will expect to receive.
C)  lower the risk of not receiving that future payment.
D)  more they will want to invest.

Question 2

The present value of a stream of lottery payments is less than the size of the stated jackpot.

Accepted Answer

A) True 
 B)False

Question 3

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.

Question 4

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years.How much will be required to pay off the loan at the end of the five years?

Accepted Answer

A)  $401.47
B)  $390
C)  $393.54
D)  $408.75

Question 5

A horizontal Security Market Line would imply that investors

Accepted Answer

A)  are unconcerned about risk and require no additional compensation for risk.
B)  view all financial assets as equally risky.
C)  greatly dislike risk and must be compensated for it.
D)  prefer assets with greater risk.

Question 6

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

Accepted Answer

A)  5 times the nondiversifiable risk of the market portfolio.
B)  5 times the nondiversifiable risk of Y.
C)  2.5 times the nondiversifiable risk of Y.
D)  2.5 times the diversifiable risk of the market portfolio.

Question 7

The U.S.federal government is unlikely to default on its bond payments because

Accepted Answer

A)  if necessary, it can print the money needed to make payments on time.
B)  its bond payments are insured.
C)  the U.S.federal budget usually runs a surplus, providing ample funds for repaying debt.
D)  of all of these.

Question 8

The Security Market line (SML)  shows how the average expected rates of return on assets vary with

Accepted Answer

A)  stock price.
B)  dividend payment.
C)  risk level.
D)  time preference.

Question 9

The idea that money has "time value" refers to the fact that

Accepted Answer

A)  people prefer to receive a given sum of money in the future rather than in the present.
B)  money can be used to purchase the services of labor, as measured in hourly units.
C)  a specific amount of money is more valuable to a person the sooner it is received.
D)  compound interest converts future dollars into a greater amount of current dollars.

Question 10

Refer to the graph.The intercept of the three Security Market Lines is determined by

Accepted Answer

A)  the risk-free interest rate.
B)  the interest rate on financial assets with a beta of 1.
C)  the rate on long-term U.S.government bonds.
D)  all of these.

Question 11

Payments to shareholders from corporate profits are known as

Accepted Answer

A)  dividends.
B)  capital gains.
C)  interest.
D)  appreciation.

Question 12

Stocks represent a debt, and buyers of stock expect to earn interest.

Accepted Answer

A) True 
 B)False

Question 13

One statistic that quantifies the risk of an investment is

Accepted Answer

A)  alpha.
B)  beta.
C)  gamma.
D)  the average expected rate of return.

Question 14

Diversification in one's investments reduces

Accepted Answer

A)  idiosyncratic risk.
B)  pooling risk.
C)  systemic risk.
D)  time preference risk.

Question 15

One asset has a beta of 1.5 and another asset has a beta of 0.75.The difference in beta means that the asset with a beta of 0.75 has

Accepted Answer

A)  75 percent less nondiversifiable risk than the asset with a beta of 1.5.
B)  75 percent more nondiversifiable risk than the asset with a beta of 1.5.
C)  twice as much nondiversifiable risk as the asset with a beta of 1.5.
D)  one-half as much nondiversifiable risk as the asset with a beta of 1.5.

Question 16

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Accepted Answer

A)  higher returns.
B)  more likely outcomes.
C)  higher risks.
D)  smaller returns.

Question 17

What is considered to be the best measure of the risk-free interest rate?

Accepted Answer

A)  the rate of return on a corporate bond index fund
B)  the rate of return on a corporate stock index fund
C)  the rate of return on the Standard and Poor's 500
D)  the rate of return on short-term U.S.government bonds

Question 18

Which one of the following would best describe a mutual fund?

Accepted Answer

A)  an investment that is available at many banks and is FDIC insured
B)  a company that manages a portfolio that is purchased by pooling the money of its investors
C)  a debt contract that is issued by a company and offers interest payment on the loan
D)  ownership of shares in a corporation with no guarantee the company will be profitable

Question 19

The primary risk that bondholders face is that

Accepted Answer

A)  the bond will reduce in price.
B)  the bond issuer will default.
C)  inflation will decrease.
D)  the rate of return will increase.

Question 20

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Accepted Answer

A)  believe the rate of return they could find in other financial assets is less than that implied in the extended payout.
B)  sacrifice free money and are making an economically irrational decision.
C)  prefer immediate to delayed returns.
D)  are only making a rational economic decision if there is rapid inflation.

Exam 17: Part C: Financial Economics

Suppose that some people invest $1,000 today in a financial asset that will make one future payment.The longer they must wait for the future payment, the

Correct AnswerverifiedShow Answer

Stocks represent a debt, and buyers of stock expect to earn interest.

Correct AnswerverifiedShow Answer

Refer to the graph.The intercept of the three Security Market Lines is determined by

Correct AnswerverifiedShow Answer

The primary risk that bondholders face is that

Correct AnswerverifiedShow Answer

The idea that money has "time value" refers to the fact that

Correct AnswerverifiedShow Answer

The U.S.federal government is unlikely to default on its bond payments because

Correct AnswerverifiedShow Answer

One statistic that quantifies the risk of an investment is

Correct AnswerverifiedShow Answer

Payments to shareholders from corporate profits are known as

Correct AnswerverifiedShow Answer

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Correct AnswerverifiedShow Answer

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

Correct AnswerverifiedShow Answer

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Correct AnswerverifiedShow Answer

What is considered to be the best measure of the risk-free interest rate?

Correct AnswerverifiedShow Answer

Diversification in one's investments reduces

Correct AnswerverifiedShow Answer

Which one of the following would best describe a mutual fund?

Correct AnswerverifiedShow Answer

One asset has a beta of 1.5 and another asset has a beta of 0.75.The difference in beta means that the asset with a beta of 0.75 has

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A horizontal Security Market Line would imply that investors

Correct AnswerverifiedShow Answer

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years.How much will be required to pay off the loan at the end of the five years?

Correct AnswerverifiedShow Answer

The Security Market line (SML) shows how the average expected rates of return on assets vary with

Correct AnswerverifiedShow Answer

The present value of a stream of lottery payments is less than the size of the stated jackpot.

Correct AnswerverifiedShow Answer

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