Question 1

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

Accepted Answer

A)  $205
B)  $210
C)  $240
D)  $300E) C) and D)
F) A) and B)

Question 2

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Accepted Answer

A)  pooling.
B)  arbitrage.
C)  diversification.
D)  weighted average.E) C) and D)
F) A) and B)

Question 3

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.If Indy holds his shares for five years, he

Accepted Answer

A)  will have received $500 in dividends.
B)  will earn a capital gain of $500.
C)  will receive $500 in interest.
D)  should sell the stock to maximize the return on his investment.E) B) and C)
F) A) and D)

Question 4

For any given financial asset, risk levels and average expected rates of return are

Accepted Answer

A)  independent of each other.
B)  negatively related because assets with higher average expected rates of return sell for higher prices, which are inversely related to risk.
C)  positively related because both are inversely related to the rate of inflation.
D)  positively related because investors must be compensated for taking greater risks.E) B) and C)
F) B) and D)

Question 5

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year.The current market interest rate is 5 percent.What is the present value of this promotional budget?

Accepted Answer

A)  $175,146
B)  $185,123
C)  $190,476
D)  $200,000E) A) and B)
F) A) and C)

Question 6

The average expected rate of return of a financial asset equals

Accepted Answer

A)  the rate that compensates for time preference plus the rate that compensates for risk.
B)  the rate that compensates for time preference plus the rate of inflation.
C)  beta plus the rate that compensates for risk.
D)  the risk-free interest rate plus the rate of inflation.E) A) and B)
F) All of the above

Question 7

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

Accepted Answer

A)  The future payments are typically risky.
B)  The periodic payments they provide are regular.
C)  They typically are short term.
D)  They give the investor a stream of future payments, not just one payment.E) All of the above
F) B) and D)

Question 8

Compound interest

Accepted Answer

A)  describes how quickly an interest-bearing asset increases in value.
B)  measures the rate of return of a portfolio of stocks and bonds.
C)  measures the after-tax, inflation-adjusted rate of interest.
D)  refers to the multiple rates of interest of various types of bonds in a portfolio.E) A) and B)
F) None of the above

Question 9

In general, risk levels and average expected rates of return are

Accepted Answer

A)  not related.
B)  inversely related.
C)  directly related.
D)  as often inversely related as they are directly related.E) All of the above
F) A) and D)

Question 10

A change in Federal Reserve monetary policy will

Accepted Answer

A)  have no effect on the Security Market Line.
B)  invert the Security Market Line.
C)  change the slope of the Security Market Line.
D)  cause a vertical shift of the Security Market Line.E) A) and B)
F) A) and C)

Question 11

Which of the following statements best describes the relationship between asset prices and average expected returns?

Accepted Answer

A)  More risky assets will have similar prices to less risky assets.
B)  Less risky assets will have lower prices than more risky assets.
C)  Less risky assets will have higher prices than more risky assets.
D)  More risky assets will have higher prices than less risky assets.E) B) and C)
F) A) and D)

Question 12

Risk in finance means

Accepted Answer

A)  mostly positive outcomes.
B)  mostly negative outcomes.
C)  either positive or negative outcomes.
D)  the same thing as risk in health science.E) All of the above
F) None of the above

Question 13

(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) A) and C)

Question 14

Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time.His purchase would be considered

Accepted Answer

A)  an economic investment but not a financial investment.
B)  a financial investment but not an economic investment.
C)  both an economic and a financial investment.
D)  neither an economic nor a financial investment.E) B) and C)
F) A) and C)

Question 15

The type of risk that pushes the returns from all investment in the same direction at the same time is

Accepted Answer

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

Question 16

If investors are reasonably tolerant of risk, the Security Market Line will be relatively flat.

Accepted Answer

A) True 
 B)False

Question 17

You deposit $5,000 in a 5-year bank CD that pays 3 percent interest per year.How much will you get from this deposit at maturity?

Accepted Answer

A)  $5,155
B)  $5,751
C)  $5,796
D)  $6,500E) None of the above
F) B) and C)

Question 18

Stock investors can earn a return from stocks only in the form of dividends.

Accepted Answer

A) True 
 B)False

Question 19

In the accompanying graph, bracket B represents the

Accepted Answer

A)  amount of arbitrage for this asset.
B)  rate of return for the market portfolio.
C)  risk premium for an asset's risk level.
D)  compensation for time preference for an asset.E) A) and B)
F) A) and C)

Question 20

The risk-free market rate is essentially the rate of return that compensates solely for time preference.

Accepted Answer

A) True 
 B)False

Exam 17: C: Financial Economics

In general, risk levels and average expected rates of return are

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(Consider This) The increased popularity of mutual funds

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Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year.The current market interest rate is 5 percent.What is the present value of this promotional budget?

Correct AnswerverifiedShow Answer

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Correct AnswerverifiedShow Answer

If investors are reasonably tolerant of risk, the Security Market Line will be relatively flat.

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A change in Federal Reserve monetary policy will

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Compound interest

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$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

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

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For any given financial asset, risk levels and average expected rates of return are

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Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time.His purchase would be considered

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Which of the following statements best describes the relationship between asset prices and average expected returns?

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The type of risk that pushes the returns from all investment in the same direction at the same time is

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The risk-free market rate is essentially the rate of return that compensates solely for time preference.

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In the accompanying graph, bracket B represents the

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Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received, from company profits, $1 for each share he owns.If Indy holds his shares for five years, he

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Stock investors can earn a return from stocks only in the form of dividends.

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Risk in finance means

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The average expected rate of return of a financial asset equals

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You deposit $5,000 in a 5-year bank CD that pays 3 percent interest per year.How much will you get from this deposit at maturity?

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