Question 1

What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?

Accepted Answer

A)  $1,927.72
B)  $500
C)  $4,545.45
D)  $12,968.71E) A) and B)
F) B) and D)

Question 2

The process of arbitrage

Accepted Answer

A)  raises or lowers the average expected rate of return of a financial asset with a given level of risk.
B)  vertically shifts the Security Market Line.
C)  moves a financial asset along the Security Market Line.
D)  pushes all financial assets to the same average expected rate of return and risk level.E) None of the above
F) B) and D)

Question 3

Which of the following statements is true about buying an old factory?

Accepted Answer

A)  It is a financial investment but not an economic investment.
B)  It is an economic investment but not a financial investment.
C)  It is both an economic and a financial investment.
D)  It is neither an economic nor a financial investment.E) B) and C)
F) None of the above

Question 4

Index funds

Accepted Answer

A)  are passively managed.
B)  are actively managed.
C)  may be either passively or actively managed.
D)  are neither passively nor actively managed.E) All of the above
F) None of the above

Question 5

The rise of mutual funds has radically changed the way corporations are controlled in that

Accepted Answer

A)  it shifted ownership away from individual investors toward "institutional" investors like mutual funds.
B)  mutual funds increased the percentage of corporate shares owned by individual investors.
C)  corporate ownership became restricted to a select few.
D)  it reduced the share of private ownership and increased the share of public (government)  ownership.E) B) and C)
F) A) and D)

Question 6

The expected rate of return from an investment is

Accepted Answer

A)  the rate that compensates for time preference only.
B)  the rate that compensates for risk only.
C)  the rate that compensates for time preference plus the rate that compensates for risk.
D)  the rate that compensates for time preference minus the rate that compensates for risk.E) A) and B)
F) B) and C)

Question 7

Brinley holds stock in large high-tech companies in his portfolio.The best way for Brinley to diversify his risk would be to buy

Accepted Answer

A)  more shares of the stock he already owns.
B)  shares in other large high-tech companies.
C)  bonds or stocks of small and medium-sized companies.
D)  bonds from the large high-tech companies already in his portfolio.E) None of the above
F) A) and B)

Question 8

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

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) None of the above
F) A) and C)

Question 11

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

Question 12

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Accepted Answer

A) True 
 B)False

Question 13

The present value of a future amount of money will be greater the

Accepted Answer

A)  greater the interest rate.
B)  greater the amount of time before the future payment is received.
C)  lower the interest rate.
D)  greater the rate of the expected rate of inflation.E) A) and B)
F) B) and D)

Question 14

Actively managed funds consistently outperform index funds.

Accepted Answer

A) True 
 B)False

Question 15

The largest mutual fund, as of April 2016, held approximately billion in assets under management.

Accepted Answer

A)  $70
B)  $90
C)  $147
D)  $170E) A) and C)
F) A) and B)

Question 16

Another name for nondiversifiable risk is

Accepted Answer

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

Question 17

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years.How much will be required to pay off the loan at the end of 10 years?

Accepted Answer

A)  $900
B)  $962.85
C)  $1,079.46
D)  $1,123.21E) A) and D)
F) None of the above

Question 18

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in five years.If the interest rate is 5 percent, then that asset will be worth $75 million today.

Accepted Answer

A) True 
 B)False

Question 19

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 sells all his shares at a price of $30 per share, he will receive a

Accepted Answer

A)  total capital gain of $10.
B)  dividend of $10 per share.
C)  total capital gain of $1,000.
D)  capital gain of $30 per share.E) All of the above
F) C) and D)

Question 20

An asset's price and rate of return are directly related.

Accepted Answer

A) True 
 B)False

Exam 17: Part C: Financial Economics

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 sells all his shares at a price of $30 per share, he will receive a

Correct AnswerverifiedShow Answer

The largest mutual fund, as of April 2016, held approximately billion in assets under management.

Correct AnswerverifiedShow Answer

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Correct AnswerverifiedShow Answer

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in five years.If the interest rate is 5 percent, then that asset will be worth $75 million today.

Correct AnswerverifiedShow Answer

The present value of a future amount of money will be greater the

Correct AnswerverifiedShow Answer

Another name for nondiversifiable risk is

Correct AnswerverifiedShow Answer

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will repay at the end of 10 years.How much will be required to pay off the loan at the end of 10 years?

Correct AnswerverifiedShow Answer

The rise of mutual funds has radically changed the way corporations are controlled in that

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

Index funds

Correct AnswerverifiedShow Answer

The process of arbitrage

Correct AnswerverifiedShow Answer

An asset's price and rate of return are directly related.

Correct AnswerverifiedShow Answer

Actively managed funds consistently outperform index funds.

Correct AnswerverifiedShow Answer

An investment's average expected rate of return is the

Correct AnswerverifiedShow Answer

The decision of the Federal Reserve to reduce the short-term interest rate will shift the Security Market Line upward.

Correct AnswerverifiedShow Answer

The expected rate of return from an investment is

Correct AnswerverifiedShow Answer

Brinley holds stock in large high-tech companies in his portfolio.The best way for Brinley to diversify his risk would be to buy

Correct AnswerverifiedShow Answer

What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?

Correct AnswerverifiedShow Answer

Arbitrage occurs when investors try to profit from situations where

Correct AnswerverifiedShow Answer

Which of the following statements is true about buying an old factory?

Correct AnswerverifiedShow Answer

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