Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

The Federal Reserve changes the risk-free interest rate most directly:

Accepted Answer

A)   by changing the reserve requirement.
B)   by changing the federal funds rate.
C)   by changing the discount rate.
D)   with open-market operations.

Question 4

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 5

If a corporation goes bankrupt:

Accepted Answer

A)   neither stockholders nor bondholders receive any money.
B)   stockholders get paid from the sale of company assets before bondholders do.
C)   bondholders get paid from the sale of company assets before stockholders do.
D)   stockholders must honor the debts to bondholders out of personal assets if necessary.

Question 6

Investment returns:

Accepted Answer

A)   are always positive.
B)   are only received when an asset is sold.
C)   are only received when there is stream of multiple payments generated by the asset.
D)   can be received either through the sale of an asset or as a stream of payments.

Question 7

Index funds are an example of passively managed funds.

Accepted Answer

A) True 
 B)False

Question 8

Because of arbitrage,any given financial asset will be expected to return to the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 9

Mutual funds may contain:

Accepted Answer

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

Question 10

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 11

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 12

(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 13

Present value is best defined as the:

Accepted Answer

A)   worth or value today of future expected returns or costs.
B)   worth in the future of a current flow of returns or costs.
C)   current worth of a financial asset purchased in the past.
D)   expected future value of a financial asset purchased today.

Question 14

Joan buys a house for $250,000,rents it for two years for $1,000 per month,and sells it at the end of those two years for $300,000.Joan's per-year rate of return is:

Accepted Answer

A)   4.8 percent.
B)   14.8 percent.
C)   20 percent.
D)   29.6 percent.

Question 15

Alex wants to borrow $1,000 from Kara.If he repays the loan in one year,Kara would 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 16

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 17

The process of arbitrage:

Accepted Answer

A)   raises or lowers the average expected rate of return of a financial asset with a given level of risk.
B)   vertically shifts the Security Market Line.
C)   moves a financial asset along the Security Market Line.
D)   pushes all financial assets to the same average expected rate of return and risk level.

Question 18

Hermione is considering an investment that has a ¾ chance of paying a 10 percent rate of return and a ¼ chance of paying 2 percent.What is the average expected rate of return on the investment?

Accepted Answer

A)   2 percent.
B)   6 percent.
C)   8 percent.
D)   10 percent.

Question 19

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is:

Accepted Answer

A)   8 percent.
B)   10.4 percent.
C)   12.2 percent.
D)   24 percent.

Question 20

Two investments,X and Y,have beta values of 0.1 and 3.0 respectively.Based on this we can claim that,relative to the market portfolio:

Accepted Answer

A)   both have more nondiversifiable risk than the market portfolio.
B)   both have less nondiversifiable risk than the market portfolio.
C)   X has more nondiversifiable risk and Y has less nondiversifiable risk than the market portfolio.
D)   X has less nondiversifiable risk and Y has more nondiversifiable risk than the market portfolio.

Exam 36: Financial Economics

Two investments,X and Y,have beta values of 0.1 and 3.0 respectively.Based on this we can claim that,relative to the market portfolio:

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

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Actively managed funds:

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is:

Correct AnswerverifiedShow Answer

Because of arbitrage,any given financial asset will be expected to return to the Security Market Line.

Correct AnswerverifiedShow Answer

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

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

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If a corporation goes bankrupt:

Correct AnswerverifiedShow Answer

Joan buys a house for $250,000,rents it for two years for $1,000 per month,and sells it at the end of those two years for $300,000.Joan's per-year rate of return is:

Correct AnswerverifiedShow Answer

Investment returns:

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Mutual funds may contain:

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The Federal Reserve changes the risk-free interest rate most directly:

Correct AnswerverifiedShow Answer

Present value is best defined as the:

Correct AnswerverifiedShow Answer

Index funds are an example of passively managed funds.

Correct AnswerverifiedShow Answer

Hermione is considering an investment that has a ¾ chance of paying a 10 percent rate of return and a ¼ chance of paying 2 percent.What is the average expected rate of return on the investment?

Correct AnswerverifiedShow Answer

The process of arbitrage:

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(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

Alex wants to borrow $1,000 from Kara.If he repays the loan in one year,Kara would 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:

Correct AnswerverifiedShow Answer

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