Question 1

Refer to the graph. An increase in the Security Market Line from SML1 to SML2 and an increase in the average expected rate of return of asset A from Y1 to Y2 would be explained by A) arbitrage only. B) a restrictive monetary policy only. C) both arbitrage and a restrictive monetary policy. D) neither arbitrage nor a restrictive monetary policy." class="answers-bank-image d-inline" rel="preload" > Refer to the graph. An increase in the Security Market Line from SML1 to SML2 and an increase in the average expected rate of return of asset A from Y1 to Y2 would be explained by

Accepted Answer

A)  arbitrage only.
B)  a restrictive monetary policy only.
C)  both arbitrage and a restrictive monetary policy.
D)  neither arbitrage nor a restrictive monetary policy.E) B) and C)
F) A) and C)

Question 2

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) B) and D)
F) None of the above

Question 3

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

Question 4

(Advanced analysis)  Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Accepted Answer

A)  5.2
B)  6.8
C)  8.3
D)  10E) All of the above
F) A) and D)

Question 5

(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) All of the above
F) None of the above

Question 6

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 7

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) All of the above

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Payments to holders of corporate bonds are known as dividends.

Accepted Answer

A) True 
 B)False

Question 10

If the Fed raises the interest rates on short-term U.S.government bonds, then the Security Market Line shifts

Accepted Answer

A)  downward as the risk-free interest rate increases.
B)  downward as the risk-free interest rate decreases.
C)  upward as the risk-free interest rate increases.
D)  upward as the risk-free interest rate decreases.E) None of the above
F) A) and C)

Question 11

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

Question 12

A recession in an economy would be an example of a diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 13

If an asset has a risk-return combination that is above the Security Market Line (SML) , then arbitrage will make that asset's

Accepted Answer

A)  beta increase.
B)  beta decrease.
C)  average expected return increase.
D)  average expected return decrease.E) B) and C)
F) None of the above

Question 14

If the Federal Reserve conducts an open-market purchase, then the SML will

Accepted Answer

A)  shift up.
B)  shift down.
C)  rotate and become steeper.
D)  rotate and become flatter.E) A) and B)
F) A) and C)

Question 15

During the financial crisis of 2007-2008, investors demanded much higher risk premiums in their investments.This caused the SML to

Accepted Answer

A)  shift up.
B)  shift down.
C)  become steeper.
D)  become flatter.E) A) and B)
F) B) and C)

Question 16

The Security Market Line depicts the inverse relationship between the average expected rates of return and risk levels of financial assets.

Accepted Answer

A) True 
 B)False

Question 17

A bank account pays 4 percent interest per year.If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Accepted Answer

A)  $3,122
B)  $3,246
C)  $3,600
D)  $4,206E) None of the above
F) A) and D)

Question 18

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

Question 19

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 20

Mutual fund managers tend to focus solely on the

Accepted Answer

A)  short-term (quarterly)  performance of the corporations whose securities they invest in.
B)  long-term performance of the corporations whose securities they invest in.
C)  assets of the corporations whose securities they invest in.
D)  liabilities of the corporations whose securities they invest in.E) All of the above
F) B) and D)

Exam 17: Part C: Financial Economics

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

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A bank account pays 4 percent interest per year.If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

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Risk in finance means that an asset

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Payments to holders of corporate bonds are known as dividends.

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During the financial crisis of 2007-2008, investors demanded much higher risk premiums in their investments.This caused the SML to

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If the Fed raises the interest rates on short-term U.S.government bonds, then the Security Market Line shifts

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A recession in an economy would be an example of a diversifiable risk.

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

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Refer to the graph. An increase in the Security Market Line from SML1 to SML2 and an increase in the average expected rate of return of asset A from Y1 to Y2 would be explained by

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Mutual fund managers tend to focus solely on the

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Portfolio diversification

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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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Present value is best defined as the

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(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Correct AnswerverifiedShow Answer

Risk in finance means

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

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If the Federal Reserve conducts an open-market purchase, then the SML will

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If an asset has a risk-return combination that is above the Security Market Line (SML) , then arbitrage will make that asset's

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The Security Market Line depicts the inverse relationship between the average expected rates of return and risk levels of financial assets.

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

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