Question 1

The Security Market Line depicts the relationship between the

Accepted Answer

A)  average expected rate of return on stocks and the average expected rate of return on bonds.
B)  average expected rate of return of a financial asset and the discount rate.
C)  risk level of a financial asset and the prime interest rate.
D)  average expected rate of return and risk level of a financial asset.E) All of the above
F) A) and C)

Question 2

Investors face the risk that the economy could go into another recession.This risk is

Accepted Answer

A)  idiosyncratic.
B)  diversifiable.
C)  systemic.
D)  time preference.E) None of the above
F) A) and C)

Question 3

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.E) None of the above
F) B) and C)

Question 4

When shares of stock are sold for more than the price at which they were purchased, the difference received by the seller is referred to as

Accepted Answer

A)  a dividend.
B)  a capital gain.
C)  interest.
D)  economic profit.E) A) and B)
F) All of the above

Question 5

Which of the following is common to all investments?

Accepted Answer

A)  The investment pays interest.
B)  Some price must be paid to acquire them.
C)  Owners are guaranteed future payments.
D)  Government insurance backs them.E) None of the above
F) A) and B)

Question 6

Arbitrage equates rates of return across assets of all risk levels.

Accepted Answer

A) True 
 B)False

Question 7

(Consider This)  The increased popularity of mutual funds

Accepted Answer

A)  means that far more shares of corporate stock are owned by fund companies than individuals.
B)  has greatly reduced diversification.
C)  causes corporations to focus more on long-run profitability.
D)  has increased overall market risk.E) C) and D)
F) All of the above

Question 8

"Do not put all your eggs in one basket" is advice that seeks to reduce

Accepted Answer

A)  idiosyncratic risk.
B)  nondiversifiable risk.
C)  systemic risk.
D)  market risk.E) C) and D)
F) B) and C)

Question 9

The compensation for bearing more risk in owning an asset is a higher rate of return for the asset.

Accepted Answer

A) True 
 B)False

Question 10

Arbitrage occurs when

Accepted Answer

A)  bond and stock rates of return equalize.
B)  investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return.
C)  rates of return across all stocks equalize.
D)  investors move from lower to higher rate of return assets, regardless of the comparability of the assets.E) B) and C)
F) A) and D)

Question 11

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Accepted Answer

A)  future value
B)  present value
C)  time preference
D)  market portfolioE) B) and C)
F) None of the above

Question 12

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Accepted Answer

A) True 
 B)False

Question 13

A bond that is currently selling at $1,000 offers to pay $50 annually.What is the percentage rate of return on the bond?

Accepted Answer

A)  5 percent
B)  10 percent
C)  20 percent
D)  50 percentE) C) and D)
F) None of the above

Question 14

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

Accepted Answer

A)  10.5 percent.
B)  11.0 percent.
C)  11.5 percent.
D)  12.5 percent.E) None of the above
F) All of the above

Question 15

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

Accepted Answer

A)  X will fall and its rate of return will fall.
B)  Y will rise and its rate of return will fall.
C)  X will fall and its rate of return will rise.
D)  Y will fall and its rate of return will rise.E) None of the above
F) A) and B)

Question 16

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.E) A) and C)
F) A) and D)

Question 17

Debt contracts (also called instruments)  issued by government and corporations are known as

Accepted Answer

A)  bonds.
B)  stocks.
C)  real assets.
D)  federally insured deposits.E) None of the above
F) B) and D)

Question 18

Les buys a bond for $5,000.Every year that he holds the bond, he will receive interest payments of $250.The interest rate on the bond

Accepted Answer

A)  is 2 percent.
B)  is 5 percent.
C)  is 20 percent.
D)  cannot be determined.E) A) and C)
F) A) and B)

Question 19

A change in investors' feelings about risk will change the intercept (and therefore shift) the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 20

Other factors constant, the present value will be larger,

Accepted Answer

A)  the smaller is the future value.
B)  the higher is the interest rate.
C)  the larger is the number of periods t.
D)  the shorter is the time period t.E) A) and B)
F) None of the above

Exam 17: Part C: Financial Economics

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Correct AnswerverifiedShow Answer

Which of the following statements is true?

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Arbitrage occurs when

Correct AnswerverifiedShow Answer

The compensation for bearing more risk in owning an asset is a higher rate of return for the asset.

Correct AnswerverifiedShow Answer

Les buys a bond for $5,000.Every year that he holds the bond, he will receive interest payments of $250.The interest rate on the bond

Correct AnswerverifiedShow Answer

When shares of stock are sold for more than the price at which they were purchased, the difference received by the seller is referred to as

Correct AnswerverifiedShow Answer

A bond that is currently selling at $1,000 offers to pay $50 annually.What is the percentage rate of return on the bond?

Correct AnswerverifiedShow Answer

Other factors constant, the present value will be larger,

Correct AnswerverifiedShow Answer

Investors face the risk that the economy could go into another recession.This risk is

Correct AnswerverifiedShow Answer

A change in investors' feelings about risk will change the intercept (and therefore shift) the Security Market Line.

Correct AnswerverifiedShow Answer

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Correct AnswerverifiedShow Answer

(Consider This) The increased popularity of mutual funds

Correct AnswerverifiedShow Answer

The Security Market Line depicts the relationship between the

Correct AnswerverifiedShow Answer

Which of the following is common to all investments?

Correct AnswerverifiedShow Answer

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

Correct AnswerverifiedShow Answer

Debt contracts (also called instruments) issued by government and corporations are known as

Correct AnswerverifiedShow Answer

"Do not put all your eggs in one basket" is advice that seeks to reduce

Correct AnswerverifiedShow Answer

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is

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

Arbitrage equates rates of return across assets of all risk levels.

Correct AnswerverifiedShow Answer

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