Question 1

Portfolio diversiﬁcation eliminates all of the ___________ from a portfolio.

Accepted Answer

A)   risk
B)   diversiﬁable risk
C)   nondiversiﬁable risk
D)   risk from business cycle ﬂuctuations

Question 2

If the demand for an asset increases, its price will

Accepted Answer

A)   increase and the rate of return for new investors of this asset will increase.
B)   decrease and the rate of return for new investors of this asset will increase.
C)   decrease and the rate of return for new investors of this asset will decrease.
D)   increase and the rate of return for new investors of this asset will decrease.

Question 3

If investors are reasonably tolerant of risk, the Security Market Line will be relatively ﬂat.

Accepted Answer

A) True 
 B)False

Question 4

(Advanced analysis)  Ricardo deposits $1,000 into his savings account. What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Accepted Answer

A)   8.75 percent
B)   9.1 percent
C)   10 percent
D)   10.4 percent

Question 5

The risk-free interest rate is determined primarily by the

Accepted Answer

A)   largest commercial banks.
B)   Internal Revenue Service.
C)   U.S. Treasury.
D)   Federal Reserve.

Question 6

The so-called market portfolio used as a benchmark in ﬁnancial economics is

Accepted Answer

A)   the lowest risk portfolio.
B)   the most diversiﬁed portfolio.
C)   the portfolio with the highest expected return.
D)   the portfolio with zero systemic risk.

Question 7

What are the three common features of all investments, and why are they important?

Accepted Answer

The three common features of all investm...

Question 8

Which one of the following is a feature of all investments?

Accepted Answer

A)   They provide regular interest payments.
B)   They are typically long term.
C)   They have minimal risk for future payments to be made.
D)   They give owners a chance to receive future payments.

Question 9

According to economists, the two factors most important to personal investment decisions are

Accepted Answer

A)   rates of return and the rate of interest.
B)   rates of return and the rate of inﬂation.
C)   returns and diversiﬁable risk.
D)   returns and nondiversiﬁable risk.

Question 10

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

Accepted Answer

A)   signiﬁcantly higher than those of index funds with similar risk.
B)   signiﬁcantly lower than those of index funds with similar risk.
C)   about the same as those of index funds with similar risk.
D)   more volatile than those of index funds with similar risk.

Question 11

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 12

Suppose two corporate bonds with similar risk pay different rates of return. The process of arbitrage should

Accepted Answer

A)   not affect their rates of return.
B)   increase the return on the asset with the higher rate of return as the demand for it increases.
C)   increase the gap between the two rates of return.
D)   eventually equalize their rates of return.

Question 13

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.

Question 14

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of ﬁve years, assuming all interest earned remains in the account?

Accepted Answer

A)   $1,250
B)   $250
C)   $267.25
D)   $255.26

Question 15

A bank account pays 4 percent interest per year. If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Accepted Answer

A)   $3,122
B)   $3,246
C)   $3,600
D)   $4,206

Question 16

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month. If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Accepted Answer

A)   remain unchanged, as the house price and the rate of return are independent of each other.
B)   be 13.6 percent.
C)   fall from 9 percent to 8 percent.
D)   fall from 10.9 percent to 9.6 percent.

Question 17

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 18

Riskier investments tend to sell for

Accepted Answer

A)   lower prices, so they provide a higher expected rate of return to compensate for risk.
B)   higher prices, so they provide a higher expected rate of return to compensate for risk.
C)   higher prices; that is why they are considered to be riskier.
D)   prices directly correlated with expected rates of return.

Question 19

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 20

(Advanced analysis)  Alex wants to have $800 saved up at the end of 10 years. If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Accepted Answer

A)   4.8 percent
B)   5.2 percent
C)   5.7 percent
D)   6.2 percent

Exam 17: Financial Economics

If investors are reasonably tolerant of risk, the Security Market Line will be relatively ﬂat.

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Portfolio diversiﬁcation eliminates all of the ___________ from a portfolio.

Correct AnswerverifiedShow Answer

The beta for an asset considered to be risk-free

Correct AnswerverifiedShow Answer

One statistic that quantiﬁes the risk of an investment is

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

A bank account pays 4 percent interest per year. If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Correct AnswerverifiedShow Answer

(Advanced analysis) Ricardo deposits $1,000 into his savings account. What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Correct AnswerverifiedShow Answer

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years. If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Correct AnswerverifiedShow Answer

Riskier investments tend to sell for

Correct AnswerverifiedShow Answer

Suppose two corporate bonds with similar risk pay different rates of return. The process of arbitrage should

Correct AnswerverifiedShow Answer

What are the three common features of all investments, and why are they important?

Correct AnswerverifiedThe three common features of all investm...View AnswerShow Answer

According to economists, the two factors most important to personal investment decisions are

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following is a feature of all investments?

Correct AnswerverifiedShow Answer

If the demand for an asset increases, its price will

Correct AnswerverifiedShow Answer

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

Correct AnswerverifiedShow Answer

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month. If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Correct AnswerverifiedShow Answer

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of ﬁve years, assuming all interest earned remains in the account?

Correct AnswerverifiedShow Answer

The so-called market portfolio used as a benchmark in ﬁnancial economics is

Correct AnswerverifiedShow Answer

The risk-free interest rate is determined primarily by the

Correct AnswerverifiedShow Answer

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The three common features of all investm...
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