Question 1

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return.As a result, the investor buys shares in several oil companies.By buying several companies to reduce risk, the investor is seeking to reduce

Accepted Answer

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

Question 2

If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

Accepted Answer

A) True 
 B)False

Question 3

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

Question 4

Which of the following is not common to all investments?

Accepted Answer

A)  Investors are required to pay some price to acquire them.
B)  Owners are given the opportunity to receive future payments.
C)  Future payments are typically risky.
D)  The investment pays a positive rate of interest.E) C) and D)
F) A) and D)

Question 5

Index funds are a portfolio of

Accepted Answer

A)  bonds with rates of return fixed at 2 percentage points above the rate of inflation.
B)  mutual funds that track different indexes.
C)  stocks or bonds that exactly match a particular index.
D)  stocks guaranteed rates of return in excess of growth in the GDP price index.E) C) and D)
F) A) and B)

Question 6

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.E) All of the above
F) None of the above

Question 7

Risk in finance means that an asset

Accepted Answer

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 B)

Question 8

The market portfolio would have a beta of

Accepted Answer

A)  0.
B)  1.0.
C)  100.
D)  any value.E) B) and D)
F) B) and C)

Question 9

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Accepted Answer

A) True 
 B)False

Question 10

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond

Accepted Answer

A)  is $110.
B)  is $125.
C)  is $140.
D)  depends on rates of return she could earn on other, similar investments.E) None of the above
F) A) and B)

Question 11

In the accompanying graph, bracket A represents the

Accepted Answer

A)  rate of return for an asset.
B)  rate of return for the risk-free asset.
C)  risk premium for an asset with a certain risk level.
D)  compensation for time preference for an asset with a certain risk level.E) All of the above
F) None of the above

Question 12

The idea that money has "time value" refers to the fact that

Accepted Answer

A)  people prefer to receive a given sum of money in the future rather than in the present.
B)  money can be used to purchase the services of labor, as measured in hourly units.
C)  a specific amount of money is more valuable to a person the sooner it is received.
D)  compound interest converts future dollars into a greater amount of current dollars.E) All of the above
F) B) and D)

Question 13

Compound interest describes increases in value when interest is paid, or compounded, on

Accepted Answer

A)  only the original amount invested.
B)  only the previously accumulated interest payments.
C)  the original amount invested and previously accumulated interest payments.
D)  the original amount invested minus any previously accumulated interest payments.E) C) and D)
F) A) and D)

Question 14

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Accepted Answer

A)  capital gains; dividends
B)  dividends; capital gains
C)  interest; dividends
D)  interest; capital gainsE) B) and C)
F) C) and D)

Question 15

Risk in financial economics refers mainly to the chance that an investment could lose value.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

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 officeE) A) and D)
F) B) and C)

Question 17

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.E) None of the above
F) All of the above

Question 18

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.E) A) and C)
F) All of the above

Question 19

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 20

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is

Accepted Answer

A)  34 percent.
B)  32 percent.
C)  30 percent.
D)  12 percent.E) C) and D)
F) B) and D)

Exam 17: C: Financial Economics

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return.As a result, the investor buys shares in several oil companies.By buying several companies to reduce risk, the investor is seeking to reduce

Correct AnswerverifiedShow Answer

In the accompanying graph, bracket A represents the

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

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Which of the following is not common to all investments?

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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

Risk in finance means that an asset

Correct AnswerverifiedShow Answer

Risk in financial economics refers mainly to the chance that an investment could lose value.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Correct AnswerverifiedShow Answer

The market portfolio would have a beta of

Correct AnswerverifiedShow Answer

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is

Correct AnswerverifiedShow Answer

Index funds are a portfolio of

Correct AnswerverifiedShow Answer

If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

Correct AnswerverifiedShow Answer

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Correct AnswerverifiedShow Answer

Compound interest describes increases in value when interest is paid, or compounded, on

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The idea that money has "time value" refers to the fact that

Correct AnswerverifiedShow Answer

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Correct AnswerverifiedShow Answer

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond

Correct AnswerverifiedShow Answer

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,

Correct AnswerverifiedShow Answer

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