Question 1

Future value measures the present-day value of returns or costs expected to arrive in the future.

Accepted Answer

A) True 
 B)False

Question 2

Arbitrage occurs when investors try to profit from situations where

Accepted Answer

A)  stock rates of return exceed bond rates of return.
B)  bond rates of return exceed stock rates of return.
C)  two identical assets have different rates of return.
D)  returns on financial assets exceed returns on real assets.E) A) and B)
F) B) and D)

Question 3

The market portfolio, by definition, has a beta = 0.

Accepted Answer

A) True 
 B)False

Question 4

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Accepted Answer

A) True 
 B)False

Question 5

Which one of the following is an example of a financial investment but not an economic investment?

Accepted Answer

A)  renovating a shopping mall
B)  constructing an addition to a petroleum refinery
C)  building a new store
D)  buying gold to sell later at a higher priceE) All of the above
F) A) and C)

Question 6

After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than a $6,000 investment earning 1 percent annual interest.

Accepted Answer

A) True 
 B)False

Question 7

Another name for nondiversifiable risk is

Accepted Answer

A)  inflation risk.
B)  systemic risk.
C)  cyclical risk.
D)  idiosyncratic risk.E) A) and C)
F) A) and B)

Question 8

An investment's average expected rate of return is the

Accepted Answer

A)  probability-weighted average of the investment's possible future rates of return.
B)  simple average of the investment's possible future rates of return.
C)  probability-weighted average of all past rates of return.
D)  simple average of the rates of return of all similar investments.E) A) and C)
F) B) and C)

Question 9

Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

Accepted Answer

A) True 
 B)False

Question 10

Portfolio diversification eliminates all of the from a portfolio.

Accepted Answer

A)  risk
B)  diversifiable risk
C)  nondiversifiable risk
D)  risk from business cycle fluctuationsE) B) and D)
F) None of the above

Question 11

(Last Word)  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.E) A) and D)
F) A) and C)

Question 12

"Default" occurs when

Accepted Answer

A)  bond issuers fail to make promised payments.
B)  corporations go bankrupt and stock becomes worthless.
C)  bond purchasers fail to pay full price for a bond.
D)  stocks are not federally insured.E) A) and B)
F) A) and C)

Question 13

People tend to be impatient, and they typically prefer to

Accepted Answer

A)  save for later rather than spend now.
B)  be paid to consume now rather than in the future.
C)  be paid to consume in the future rather than now.
D)  pay in order to consume in the future rather than now.E) A) and B)
F) All of the above

Question 14

For most financial assets, investors must be compensated for

Accepted Answer

A)  nondiversifiable and diversifiable risk.
B)  diversifiable risk and time preference.
C)  nondiversifiable risk and time preference.
D)  nondiversifiable and diversifiable risk, and time preference.E) A) and B)
F) None of the above

Question 15

Denny buys a rare coin for $200 and sells the coin one year later for $220.Denny's rate of return is

Accepted Answer

A)  10 percent.
B)  20 percent.
C)  91 percent.
D)  110 percent.E) B) and D)
F) B) and C)

Question 16

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Accepted Answer

A)  increase, and the rates of return would decrease relative to other companies.
B)  decrease, and the rates of return would increase relative to other companies.
C)  decrease, but the rates of return would stay the same relative to other companies.
D)  decrease, and the rates of return would decrease relative to other companies.E) B) and C)
F) A) and D)

Question 17

What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

Accepted Answer

A)  $300
B)  $338.42
C)  $700
D)  $738.72E) A) and B)
F) A) and C)

Question 18

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Accepted Answer

A)  $38,050
B)  $39,516
C)  $40,323
D)  $42,108E) C) and D)
F) A) and B)

Question 19

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

Question 20

The rate of return on short-term U.S.government bonds is often referred to as the

Accepted Answer

A)  federal funds rate.
B)  discount rate.
C)  risk-free interest rate.
D)  yield rate.E) None of the above
F) B) and D)

Exam 17: C: Financial Economics

Arbitrage occurs when investors try to profit from situations where

Correct AnswerverifiedShow Answer

Future value measures the present-day value of returns or costs expected to arrive in the future.

Correct AnswerverifiedShow Answer

The rate of return on short-term U.S.government bonds is often referred to as the

Correct AnswerverifiedShow Answer

People tend to be impatient, and they typically prefer to

Correct AnswerverifiedShow Answer

An investment's average expected rate of return is the

Correct AnswerverifiedShow Answer

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Correct AnswerverifiedShow Answer

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Correct AnswerverifiedShow Answer

The market portfolio, by definition, has a beta = 0.

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Portfolio diversification eliminates all of the from a portfolio.

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If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

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Which one of the following is an example of a financial investment but not an economic investment?

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For most financial assets, investors must be compensated for

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Index funds consistently beat actively managed funds because actively managed funds incur greater management costs.

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"Default" occurs when

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After 4 years, a $5,000 investment earning a 6 percent annual interest rate will be worth more than a $6,000 investment earning 1 percent annual interest.

Correct AnswerverifiedShow Answer

Denny buys a rare coin for $200 and sells the coin one year later for $220.Denny's rate of return is

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

Another name for nondiversifiable risk is

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What is the present value of $500 to be received eight years from now if the interest rate is 5 percent?

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(Last Word) Actively managed funds

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