Question 1

(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 percentE) B) and C)
F) C) and D)

Question 2

The price of an asset should

Accepted Answer

A)  exactly equal the total present value of all of the asset's future payments.
B)  exactly equal the total future value of all of the asset's future payments.
C)  approximately equal X(1 + i) t, where X is the value of the asset, i is the interest rate, and t is the number of years.
D)  exactly equal the total present and future value of all of the asset's future payments.E) B) and C)
F) A) and C)

Question 3

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a two-year contract but, because of salary cap limitations, can only pay $8 million for the first year (Alex's market value is $10 million per year) . The Hazards offer to pay $8 million in year 1 and $13 million in year 2. Should Alex sign the contract?

Accepted Answer

A)  Yes, Alex is better off financially regardless of the interest rate.
B)  Yes, if the interest rate is less than 50 percent.
C)  Yes, but only if the team expects to be successful.
D)  Yes, but only if the interest rate is less than 10 percent.E) None of the above
F) A) and D)

Question 6

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

Accepted Answer

A) True 
 B)False

Question 7

Arbitrage equalizes rates of return across similar investments because

Accepted Answer

A)  arbitrage also equalizes the prices of the assets.
B)  investors prefer diversity.
C)  investors will want to replace lower rate of return assets with those generating higher rates of return.
D)  investors will want to replace higher rate of return assets with those generating lower rates of return.E) None of the above
F) B) and C)

Question 8

(Last Word)  Passively managed funds produce higher rates of return for investors than actively managed funds because

Accepted Answer

A)  trading and management costs are higher with actively managed funds.
B)  passively managed funds invest in riskier assets that have higher rates of return.
C)  actively managed funds invest in riskier assets that have not reached expected rates of return.
D)  actively managed funds are taxed, while passively managed funds are not taxable.E) C) and D)
F) A) and B)

Question 9

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Accepted Answer

A) True 
 B)False

Question 10

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Accepted Answer

A) True 
 B)False

Question 11

Average expected rates of return and levels of risk are positively related.

Accepted Answer

A) True 
 B)False

Question 12

An asset's price and rate of return

Accepted Answer

A)  are independent of each other.
B)  can be either inversely or directly related.
C)  are inversely related.
D)  are directly related.E) A) and B)
F) B) and D)

Question 13

Investment risks vary across different countries.The International Country Risk Guide in 2015 ranked which of the following countries to have the least composite risk?

Accepted Answer

A)  Switzerland
B)  China
C)  United States
D)  IndiaE) C) and D)
F) A) and B)

Question 14

A bond pays a coupon (or interest)  rate of 5 percent each year for five years, with a future (face)  value of $200.If the bond were sold today, what would be the present value of the bond?

Accepted Answer

A)  $200
B)  $157
C)  $150
D)  $145E) All of the above
F) C) and D)

Question 15

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

Question 16

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.When the CD matures in 10 years, you will get more than $9,000 from it.

Accepted Answer

A) True 
 B)False

Question 17

Thea 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.Thea's per-year rate of return is

Accepted Answer

A)  4.8 percent.
B)  14.8 percent.
C)  20 percent.
D)  29.6 percent.E) B) and C)
F) All of the above

Question 18

Limited liability rules

Accepted Answer

A)  mean that bankrupt companies owe nothing to corporate bondholders.
B)  discourage investment in corporate stock.
C)  help prevent corporate fraud.
D)  encourage stock investing by limiting shareholder risk of loss.E) A) and D)
F) All of the above

Question 19

Arbitrage equalizes rates of return across assets of a given beta.

Accepted Answer

A) True 
 B)False

Question 20

If an investment is equally likely to return 10 percent per year or 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) A) and C)
F) B) and C)

Exam 17: C: Financial Economics

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 Answer
verified

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

Correct Answer
verified

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

Correct Answer
verified

A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200.If the bond were sold today, what would be the present value of the bond?

Correct Answer
verified

The price of an asset should

Correct Answer
verified

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Correct Answer
verified

Limited liability rules

Correct Answer
verified

Arbitrage equalizes rates of return across assets of a given beta.

Correct Answer
verified

Average expected rates of return and levels of risk are positively related.

Correct Answer
verified

An asset's price and rate of return

Correct Answer
verified

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.When the CD matures in 10 years, you will get more than $9,000 from it.

Correct Answer
verified

Thea 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.Thea's per-year rate of return is

Correct Answer
verified

Investment risks vary across different countries.The International Country Risk Guide in 2015 ranked which of the following countries to have the least composite risk?

Correct Answer
verified

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

Correct Answer
verified

(Last Word) Passively managed funds produce higher rates of return for investors than actively managed funds because

Correct Answer
verified

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Correct Answer
verified

Arbitrage equalizes rates of return across similar investments because

Correct Answer
verified

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Correct Answer
verified

(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 Answer
verified

Correct Answer
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Exam 17: C: Financial Economics

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

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

Correct AnswerverifiedShow Answer

Mutual funds allow individuals to own corporate stocks or bonds indirectly.

Correct AnswerverifiedShow Answer

A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200.If the bond were sold today, what would be the present value of the bond?

Correct AnswerverifiedShow Answer

The price of an asset should

Correct AnswerverifiedShow Answer

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Correct AnswerverifiedShow Answer

Limited liability rules

Correct AnswerverifiedShow Answer

Arbitrage equalizes rates of return across assets of a given beta.

Correct AnswerverifiedShow Answer

Average expected rates of return and levels of risk are positively related.

Correct AnswerverifiedShow Answer

An asset's price and rate of return

Correct AnswerverifiedShow Answer

You deposit $5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interest rate.When the CD matures in 10 years, you will get more than $9,000 from it.

Correct AnswerverifiedShow Answer

Thea 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.Thea's per-year rate of return is

Correct AnswerverifiedShow Answer

Investment risks vary across different countries.The International Country Risk Guide in 2015 ranked which of the following countries to have the least composite risk?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

(Last Word) Passively managed funds produce higher rates of return for investors than actively managed funds because

Correct AnswerverifiedShow Answer

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Correct AnswerverifiedShow Answer

Arbitrage equalizes rates of return across similar investments because

Correct AnswerverifiedShow Answer

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

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

Correct AnswerverifiedShow Answer

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