Question 1

The Security Market Line depicts the inverse relationship between the average expected rates of
return and risk levels of ﬁnancial assets.

Accepted Answer

A) True 
 B)False

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.

Question 3

The present value model of investment states that an asset's current price should be equal to the

Accepted Answer

A)   sum of the present values of all of its future payments or earnings.
B)   sum of all of its future payments or earnings times the number of years of its life.
C)   life of the asset times the present values of all of its future payments or earnings.
D)   present values of all of its future payments or earnings divided by its life in years.

Question 4

In the accompanying graph, bracket B represents the

Accepted Answer

A)   amount of arbitrage for this asset.
B)   rate of return for the market portfolio.
C)   risk premium for an asset's risk level.
D)   compensation for time preference for an asset.

Question 5

(Advanced analysis)  Indy has $2,000 invested in a ﬁnancial asset earning an annually compounded interest rate of 6 percent. Approximately how many years will it take before Indy's investment is
Worth $5,000?

Accepted Answer

A)   25
B)   10.5
C)   12.8
D)   15.7

Question 6

What are the two ways that a stock investor can gain ﬁnancially from owning stocks?

Accepted Answer

The two ways a stock investor can gain ﬁ...

Question 7

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

Question 8

(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 9

Diversiﬁcation in one's investments reduces

Accepted Answer

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

Question 10

Katie buys a house for $200,000 and rents it for $1,000 per month. Katie's annual rate of return

Accepted Answer

A)   is 0.5 percent.
B)   is 5 percent.
C)   is 6 percent.
D)   cannot be determined until she sells the house.

Question 11

Rates of return on short-term U.S. government bonds are compensation for

Accepted Answer

A)   both the level of risk and the delaying of consumption.
B)   delaying consumption only.
C)   the level of risk only.
D)   factors other than risk and delaying consumption.

Question 12

Refer to the graph. Each labeled point represents a different asset. For which of these assets would we expect arbitrage to cause movement to a different point?

Accepted Answer

A)   D and F
B)   G and H
C)   D, F, G and H
D)   D, E, and F

Question 13

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security
Market Line upward.

Accepted Answer

A) True 
 B)False

Question 14

Burt bought a house for $250,000 and plans to rent it out for $2,000 per month. His expected annual rate of return from renting the house is approximately

Accepted Answer

A)   8.0 percent.
B)   9.6 percent.
C)   19.2 percent.
D)   20 percent.

Question 15

Assume that two ﬁrms (Firm A and Firm B)  are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock. Arbitrage will occur as investors

Accepted Answer

A)   sell Firm A's stock and buy Firm B's stock.
B)   buy Firm A's stock and buy Firm B's stock also.
C)   sell Firm A's stock and sell Firm B's stock also.
D)   buy Firm A's stock and sell Firm B's stock.

Question 16

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.

Question 17

Which of the following statements is true about buying an old factory?

Accepted Answer

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

Question 18

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

Accepted Answer

A)   the bonds are all long-term bonds and they are insured.
B)   the federal government has the ability to collect taxes and to sell securities to the Fed.
C)   foreigners are willing to buy the federal government bonds and lend to the U.S. government.
D)   the federal government can always borrow from the states and from businesses.

Question 19

In general, risk levels and average expected rates of return are

Accepted Answer

A)   not related.
B)   inversely related.
C)   directly related.
D)   as often inversely related as they are directly related.

Question 20

The average expected rate of return on most ﬁnancial assets is the sum of the rates that compensate for

Accepted Answer

A)   nondiversiﬁable risk and time preference.
B)   diversiﬁable risk and time preference.
C)   nondiversiﬁable and diversiﬁable risk.
D)   nondiversiﬁable and diversiﬁable risk, and time preference.

Exam 17: Financial Economics

Burt bought a house for $250,000 and plans to rent it out for $2,000 per month. His expected annual rate of return from renting the house is approximately

Correct AnswerverifiedShow Answer

A stock investor may expect returns in the form of

Correct AnswerverifiedShow Answer

The present value model of investment states that an asset's current price should be equal to the

Correct AnswerverifiedShow Answer

In the accompanying graph, bracket B represents the

Correct AnswerverifiedShow Answer

(Last Word) Actively managed funds

Correct AnswerverifiedShow Answer

The average expected rate of return on most ﬁnancial assets is the sum of the rates that compensate for

Correct AnswerverifiedShow Answer

In general, risk levels and average expected rates of return are

Correct AnswerverifiedShow Answer

Assume that two ﬁrms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock. Arbitrage will occur as investors

Correct AnswerverifiedShow Answer

Refer to the graph. Each labeled point represents a different asset. For which of these assets would we expect arbitrage to cause movement to a different point?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Correct AnswerverifiedShow Answer

Diversiﬁcation in one's investments reduces

Correct AnswerverifiedShow Answer

What are the two ways that a stock investor can gain ﬁnancially from owning stocks?

Correct AnswerverifiedThe two ways a stock investor can gain ﬁ...View AnswerShow 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 AnswerverifiedShow Answer

The Security Market Line depicts the inverse relationship between the average expected rates of return and risk levels of ﬁnancial assets.

Correct AnswerverifiedShow Answer

(Advanced analysis) Indy has $2,000 invested in a ﬁnancial asset earning an annually compounded interest rate of 6 percent. Approximately how many years will it take before Indy's investment is Worth $5,000?

Correct AnswerverifiedShow Answer

Rates of return on short-term U.S. government bonds are compensation for

Correct AnswerverifiedShow Answer

Which of the following statements is true about buying an old factory?

Correct AnswerverifiedShow Answer

Katie buys a house for $200,000 and rents it for $1,000 per month. Katie's annual rate of return

Correct AnswerverifiedShow Answer

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

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The two ways a stock investor can gain ﬁ...
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