Question 1

The Fed can regularly influence and change the risk-free rate of financial investments through its

Accepted Answer

A)  open-market operations.
B)  quantitative easing.
C)  required reserve ratio.
D)  bank supervision.E) B) and C)
F) B) and D)

Question 2

What are the two most important factors influencing investor preferences?

Accepted Answer

A)  the desire for high rates of return and the thrill of uncertainty
B)  the desire for high rates of return and dislike of risk and uncertainty
C)  an equal balance between stocks and bonds, and high rates of return
D)  stable rates of return and balance between private and public sector financial assetsE) None of the above
F) A) and B)

Question 3

Ownership of a single corporation is represented by what investment?

Accepted Answer

A)  stock
B)  bonds
C)  mutual funds
D)  commercial paperE) None of the above
F) C) and D)

Question 4

One fundamental concept in financial economics is that an investment's rate of return is

Accepted Answer

A)  positively related to the price paid for it.
B)  inversely related to the price paid for it.
C)  inversely related to the riskiness of the investment.
D)  inversely related to the maturity of the investment.E) B) and D)
F) A) and C)

Question 5

The limited liability rule means that if a corporation goes bankrupt,

Accepted Answer

A)  shareholders are responsible for all the debts of the firm.
B)  bondholders are responsible for all the debts of the firm.
C)  shareholders can only lose the amount they invested.
D)  bondholders only lose the face value of the bond.E) None of the above
F) B) and D)

Question 6

"Do not put all your eggs in one basket" is advice that seeks to reduce

Accepted Answer

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

Question 7

Portfolio diversification

Accepted Answer

A)  reduces the likelihood that the entire amount invested will be lost.
B)  eliminates all risk of loss.
C)  ensures that investors will receive a positive rate of return.
D)  provides the maximum possible rate of return from an investment portfolio.E) A) and D)
F) A) and C)

Question 8

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

Accepted Answer

A)  5 times the nondiversifiable risk of the market portfolio.
B)  5 times the nondiversifiable risk of Y.
C)  2.5 times the nondiversifiable risk of Y.
D)  2.5 times the diversifiable risk of the market portfolio.E) B) and C)
F) B) and D)

Question 9

Augi buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately

Accepted Answer

A)  4 percent.
B)  8 percent.
C)  12.5 percent.
D)  25 percent.E) None of the above
F) All of the above

Question 10

Suppose that some people invest $1,000 today in a financial asset that will make one future payment.The longer they must wait for the future payment, the

Accepted Answer

A)  higher the future payment they will expect to receive.
B)  lower the future payment they will expect to receive.
C)  lower the risk of not receiving that future payment.
D)  more they will want to invest.E) All of the above
F) A) and D)

Question 11

How do actively managed funds differ from passively managed funds?

Accepted Answer

A)  Managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns.
B)  Actively managed funds focus on stocks; passively managed funds focus on bonds.
C)  Actively managed funds necessarily contain a greater variety of stocks or bonds than does a passively managed fund.
D)  Actively managed funds consistently outperform passively managed funds.E) B) and D)
F) None of the above

Question 12

What do bonds represent?

Accepted Answer

A)  shares of ownership in a corporation and a guaranteed stream of profits
B)  shares of ownership in a corporation and an entitlement to its future profits
C)  debt contracts with corporations or governments and regular interest payments on the loan
D)  debt contracts with corporations or governments and some unspecified interest payments on the loanE) None of the above
F) B) and C)

Question 13

What does the "beta" of an asset measure?

Accepted Answer

A)  how the nondiversifiable risk compares with diversifiable risk for an asset
B)  how the expected return compares with the diversifiable risk of a given asset
C)  how the expected return compares with the nondiversifiable risk of the market portfolio
D)  how the nondiversifiable risk of a given asset compares with that of the market portfolioE) All of the above
F) B) and C)

Question 14

Joe and Linda have the opportunity to purchase a new home.The house in Glen Oaks is currently worth $250,000 but is predicted to be worth $270,000 in a year.What is the rate of appreciation for the house from one year to the next?

Accepted Answer

A)  5 percent
B)  6 percent
C)  7 percent
D)  8 percentE) B) and C)
F) C) and D)

Question 15

If the demand for an asset increases, its price will

Accepted Answer

A)  increase and the rate of return for new investors of this asset will increase.
B)  decrease and the rate of return for new investors of this asset will increase.
C)  decrease and the rate of return for new investors of this asset will decrease.
D)  increase and the rate of return for new investors of this asset will decrease.E) None of the above
F) C) and D)

Question 16

Present value is best defined as the

Accepted Answer

A)  worth or value today of future expected returns or costs.
B)  worth in the future of a current flow of returns or costs.
C)  current worth of a financial asset purchased in the past.
D)  expected future value of a financial asset purchased today.E) A) and B)
F) A) and D)

Question 17

Stocks represent a debt, and buyers of stock expect to earn interest.

Accepted Answer

A) True 
 B)False

Question 18

The intercept of the Security Market Line at any point in time is determined primarily by

Accepted Answer

A)  the prime interest rate.
B)  Federal Reserve monetary policy.
C)  the average beta of the market.
D)  investor tolerance of risk.E) B) and D)
F) A) and C)

Question 19

Compound interest refers to the multiple interest rates an investor will be paid in a diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 20

The current price of an asset is equal to the future value of its expected returns or income streams.

Accepted Answer

A) True 
 B)False

Exam 17: C: Financial Economics

The limited liability rule means that if a corporation goes bankrupt,

Correct AnswerverifiedShow Answer

One fundamental concept in financial economics is that an investment's rate of return is

Correct AnswerverifiedShow Answer

Compound interest refers to the multiple interest rates an investor will be paid in a diversified portfolio.

Correct AnswerverifiedShow Answer

Ownership of a single corporation is represented by what investment?

Correct AnswerverifiedShow Answer

Joe and Linda have the opportunity to purchase a new home.The house in Glen Oaks is currently worth $250,000 but is predicted to be worth $270,000 in a year.What is the rate of appreciation for the house from one year to the next?

Correct AnswerverifiedShow Answer

Suppose that some people invest $1,000 today in a financial asset that will make one future payment.The longer they must wait for the future payment, the

Correct AnswerverifiedShow Answer

Portfolio diversification

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The current price of an asset is equal to the future value of its expected returns or income streams.

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Augi buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately

Correct AnswerverifiedShow Answer

What does the "beta" of an asset measure?

Correct AnswerverifiedShow Answer

The intercept of the Security Market Line at any point in time is determined primarily by

Correct AnswerverifiedShow Answer

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

Correct AnswerverifiedShow Answer

Present value is best defined as the

Correct AnswerverifiedShow Answer

"Do not put all your eggs in one basket" is advice that seeks to reduce

Correct AnswerverifiedShow Answer

How do actively managed funds differ from passively managed funds?

Correct AnswerverifiedShow Answer

What do bonds represent?

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If the demand for an asset increases, its price will

Correct AnswerverifiedShow Answer

What are the two most important factors influencing investor preferences?

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Stocks represent a debt, and buyers of stock expect to earn interest.

Correct AnswerverifiedShow Answer

The Fed can regularly influence and change the risk-free rate of financial investments through its

Correct AnswerverifiedShow Answer

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