Question 1

The average expected rate of return is a

Accepted Answer

A)  volume-weighted average.
B)  price-weighted average.
C)  probability-weighted average.
D)  value-weighted average.E) None of the above
F) A) and B)

Question 2

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

Question 3

The steeper the Security Market Line,

Accepted Answer

A)  the lower the risk premium.
B)  the more investors dislike risk.
C)  the less investors are concerned about risk.
D)  the greater the risk-free interest rate.E) C) and D)
F) All of the above

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Question 6

If an investment is equally likely to return 10 percent per year or 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) A) and B)
F) B) and C)

Question 7

Time value of money refers to the idea that a specific amount of money

Accepted Answer

A)  can be converted into other currencies in the foreign exchange market.
B)  is needed to purchase goods and services.
C)  is more valuable the sooner it is received.
D)  can buy less goods and services if inflation occurs over time.E) None of the above
F) B) and D)

Question 8

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 D)
F) None of the above

Question 9

Two investments, X and Y, have beta values of 0.1 and 3.0 respectively.Based on this, we can claim that, relative to the market portfolio,

Accepted Answer

A)  both have more nondiversifiable risk than the market portfolio.
B)  both have less nondiversifiable risk than the market portfolio.
C)  X has more nondiversifiable risk and Y has less nondiversifiable risk than the market portfolio.
D)  X has less nondiversifiable risk and Y has more nondiversifiable risk than the market portfolio.E) A) and D)
F) A) and C)

Question 10

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) A) and B)

Question 11

The present value of a stream of lottery payments is less than the size of the stated jackpot.

Accepted Answer

A) True 
 B)False

Question 12

The market portfolio would have a beta of

Accepted Answer

A)  0.
B)   1.0
C)   100
D)   any valueE) B) and C)
F) A) and B)

Question 13

Which institution is least likely to default on a bond?

Accepted Answer

A)  local government
B)  small corporation
C)  U.S.federal government
D)  large corporationE) A) and C)
F) None of the above

Question 14

The U.S.federal government is unlikely to default on its bonds because

Accepted Answer

A)  the bonds are all long-term bonds and they are insured.
B)  the federal government has the ability to collect taxes and to sell securities to the Fed.
C)  foreigners are willing to buy the federal government bonds and lend to the U.S.government.
D)  the federal government can always borrow from the states and from businesses.E) None of the above
F) All of the above

Question 15

Alyssa is saving money for a vacation she wants to take five years from now.If the trip will cost $1,000 and she puts her money into a savings account paying 4 percent interest, compounded annually, how much would Alyssa need to deposit today to reach her goal without making further deposits?

Accepted Answer

A)  $961.54
B)  $923.75
C)  $867.81
D)  $821.93E) A) and B)
F) A) and C)

Question 16

A bond that pays annual interest (or coupons)  and a face value at maturity will fetch a price today that is equal to the

Accepted Answer

A)  future value of its annual coupons and face value.
B)  future value of its annual coupons minus its face value.
C)  present value of its annual coupons and face value.
D)  present value of its annual coupons minus its face vale.E) B) and D)
F) A) and D)

Question 17

The primary risk that bondholders face is that

Accepted Answer

A)  the bond will reduce in price.
B)  the bond issuer will default.
C)  inflation will decrease.
D)  the rate of return will increase.E) None of the above
F) A) and B)

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

One statistic that quantifies the risk of an investment is

Accepted Answer

A)  alpha.
B)  beta.
C)  gamma.
D)  the average expected rate of return.E) C) and D)
F) B) and C)

Question 20

The terms "economic investment" and "financial investment" can be used synonymously.

Accepted Answer

A) True 
 B)False

Exam 37: Financial Economics

Which institution is least likely to default on a bond?

Correct AnswerverifiedShow Answer

The present value of a stream of lottery payments is less than the size of the stated jackpot.

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If the demand for an asset increases, its price will

Correct AnswerverifiedShow Answer

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

Portfolio diversification eliminates all of the from a portfolio.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The average expected rate of return is a

Correct AnswerverifiedShow Answer

One statistic that quantifies the risk of an investment is

Correct AnswerverifiedShow Answer

The market portfolio would have a beta of

Correct AnswerverifiedShow Answer

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Correct AnswerverifiedShow Answer

If an investment is equally likely to return 10 percent per year or 15 percent a year, then its average expected rate of return is

Correct AnswerverifiedShow Answer

The primary risk that bondholders face is that

Correct AnswerverifiedShow Answer

Alyssa is saving money for a vacation she wants to take five years from now.If the trip will cost $1,000 and she puts her money into a savings account paying 4 percent interest, compounded annually, how much would Alyssa need to deposit today to reach her goal without making further deposits?

Correct AnswerverifiedShow Answer

The U.S.federal government is unlikely to default on its bonds because

Correct AnswerverifiedShow Answer

The steeper the Security Market Line,

Correct AnswerverifiedShow Answer

Two investments, X and Y, have beta values of 0.1 and 3.0 respectively.Based on this, we can claim that, relative to the market portfolio,

Correct AnswerverifiedShow Answer

The terms "economic investment" and "financial investment" can be used synonymously.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Time value of money refers to the idea that a specific amount of money

Correct AnswerverifiedShow Answer

People tend to be impatient, and they typically prefer to

Correct AnswerverifiedShow Answer

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