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What is the difference between an economic investment and a financial investment?

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Economic investment refers either to pay...

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An investment's rate of return is positively related to the price paid for it.

A) True
B) False

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Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?


A) (1+i) tX( 1 + i ) ^ { t } X
B) X/(1+i) tX / ( 1 + i) t
C) (1+X) it( 1 + X ) i ^ { t }
D) (X+i) t( X + i ) ^ { t }

E) C) and D)
F) A) and B)

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The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

A) True
B) False

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Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

A) True
B) False

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Another name for nondiversifiable risk is


A) inflation risk.
B) systemic risk.
C) cyclical risk.
D) idiosyncratic risk.

E) A) and B)
F) B) and C)

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Roger has the opportunity to invest $100,000 in two different assets. The investment in Asset #1 will have a present value of $120,000. The investment in Asset #2 is expected to have a future value of $140,000 in four years. If the market interest rate is 5 percent a year, which one would be the better Investment?


A) Asset #2, because its future value is greater than the present value of Asset #1
B) Asset #1, because its present value is greater than the future value of Asset #2
C) Asset #2, because its present value is greater than the present value of Asset #1
D) Asset #1, because its present value is greater than the present value of Asset #2

E) A) and B)
F) A) and C)

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The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversifiable risk of financial assets.

A) True
B) False

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An investor with a diversified portfolio is generally less concerned about


A) the diversifiable risk of potential new investments.
B) rates of return of potential new investments.
C) the nondiversifiable risk of potential new investments.
D) recessions.

E) A) and D)
F) B) and D)

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Which one of the following is an example of an economic investment?


A) putting money in a bank CD
B) buying a corporate bond or stock
C) purchasing shares of a mutual fund
D) building a new bank office

E) A) and B)
F) A) and D)

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The correct formula that relates present value (PV) to future value (FV) , if interest rate is i percent per year over n years is


A) PV=FV(1+i) n\mathrm { PV } = \mathrm { FV } ( 1 + i ) ^ { n }
B) FV=PV(i) n\mathrm { FV } = \mathrm { PV } ( i) ^ { n }
C) PV=FVn/(1+i) n\mathrm { PV } = \mathrm { FV } _ { \mathrm { n } } / ( 1 + i ) ^ { n }
D) FV=PV(1+i) (n) \mathrm { FV } = \mathrm { PV } ( 1 + i ) ( n )

E) None of the above
F) A) and C)

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The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

A) True
B) False

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The interest rate on the bond


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

E) A) and B)
F) A) and C)

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An asset with a beta of 0.5 has


A) 5 percent more risk than a risk-free asset.
B) 50 percent more risk than a risk-free asset.
C) half the nondiversifiable risk as a market portfolio.
D) 5 times the nondiversifiable risk as a market portfolio.

E) None of the above
F) B) and D)

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Suppose that Clint wins a lottery jackpot of $300 million. He can receive it over the next 30 years in annual payments of $10 million, or he can receive a lump sum of $100 million immediately. Assuming that taxes are not a consideration, should Clint take his winnings as a lump sum?


A) Yes, but only if rapid inflation is expected over the next 30 years.
B) Yes, but only if deflation is expected over the next 30 years.
C) No, the rate of return will always be higher with the 30 annual payments.
D) Yes, if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments.

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

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The "time value" of money is based on the fact that prices may increase over time.

A) True
B) False

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Bankruptcy of a firm means that it


A) earned less revenues than its total costs.
B) cannot meet its contractual obligations to its stockholders.
C) has a lot of debt owed to its bondholders.
D) is unable to make timely promised payments on its debt.

E) A) and B)
F) A) and C)

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What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?


A) $1,927.72
B) $500
C) $4,545.45
D) $12,968.71

E) All of the above
F) A) and D)

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Risk in finance means that an asset


A) does not pay dividends.
B) does not pay capital gains.
C) has a present value that is negative.
D) has future payments that are uncertain.

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

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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


A) index funds.
B) dividend funds.
C) portfolio funds.
D) capital gain funds.

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

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Showing 201 - 220 of 356

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