Question 1

Financial investment refers to

Accepted Answer

A)  the same idea as economic investment.
B)  earning profits from producing goods and services.
C)  purchasing or building an asset for monetary gain.
D)  making new additions to the capital stock.E) A) and B)
F) A) and C)

Question 2

One asset has a beta of 1.5 and another asset has a beta of 0.75.The difference in beta means that the asset with a beta of 0.75 has

Accepted Answer

A)  75 percent less nondiversifiable risk than the asset with a beta of 1.5.
B)  75 percent more nondiversifiable risk than the asset with a beta of 1.5.
C)  twice as much nondiversifiable risk as the asset with a beta of 1.5.
D)  one-half as much nondiversifiable risk as the asset with a beta of 1.5.E) B) and C)
F) A) and D)

Question 3

The current share price of a corporation's stock is determined by the

Accepted Answer

A)  original purchase price multiplied by 1 plus the interest rate.
B)  present value of capital gains and dividends received by stock owners.
C)  expected interest and dividend payments.
D)  expected capital gains and dividends prospective buyers will earn.E) C) and D)
F) B) and C)

Question 4

For most financial assets, investors must be compensated for

Accepted Answer

A)  nondiversifiable and diversifiable risk.
B)  diversifiable risk and time preference.
C)  nondiversifiable risk and time preference.
D)  nondiversifiable and diversifiable risk, and time preference.E) C) and D)
F) B) and C)

Question 5

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 B)
F) A) and C)

Question 6

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Accepted Answer

A) True 
 B)False

Question 7

A bank makes an auto loan for $10,000 at an annual rate of 6 percent.Assuming no repayment is made during the period, after two years the borrower will owe

Accepted Answer

A)  $10,000.
B)  $10,600.
C)  $11,236.
D)  $11,910.E) None of the above
F) A) and C)

Question 8

(Advanced analysis)  Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Accepted Answer

A)  4.6 percent
B)  6.5 percent
C)  8.4 percent
D)  9.3 percentE) B) and C)
F) A) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The underlying cause of risk in finance is

Accepted Answer

A)  danger.
B)  uncertainty.
C)  fear.
D)  complexity.E) None of the above
F) A) and D)

Question 11

Other factors constant, the present value will be larger,

Accepted Answer

A)  the smaller is the future value.
B)  the higher is the interest rate.
C)  the larger is the number of periods t.
D)  the shorter is the time period t.E) A) and B)
F) A) and C)

Question 12

When a company declares bankruptcy, stockholders are the first to be paid when company assets are sold.

Accepted Answer

A) True 
 B)False

Question 13

Rates of return on short-term U.S.government bonds are compensation for

Accepted Answer

A)  both the level of risk and the delaying of consumption.
B)  delaying consumption only.
C)  the level of risk only.
D)  factors other than risk and delaying consumption.E) A) and D)
F) B) and C)

Question 14

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

Accepted Answer

A)  significantly higher than those of index funds with similar risk.
B)  significantly lower than those of index funds with similar risk.
C)  about the same as those of index funds with similar risk.
D)  more volatile than those of index funds with similar risk.E) B) and C)
F) A) and D)

Question 15

Which of the following is not common to all investments?

Accepted Answer

A)  Investors are required to pay some price to acquire them.
B)  Owners are given the opportunity to receive future payments.
C)  Future payments are typically risky.
D)  The investment pays a positive rate of interest.E) A) and D)
F) None of the above

Question 16

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Accepted Answer

A) True 
 B)False

Question 17

Hermione is considering an investment that has a Â¾ chance of paying a 10 percent rate of return and a Â¼ chance of paying 2 percent.What is the average expected rate of return on the investment?

Accepted Answer

A)  2 percent.
B)  6 percent.
C)  8 percent.
D)  10 percent.E) A) and B)
F) A) and C)

Question 18

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Accepted Answer

A)  believe the rate of return they could find in other financial assets is less than that implied in the extended payout.
B)  sacrifice free money and are making an economically irrational decision.
C)  prefer immediate to delayed returns.
D)  are only making a rational economic decision if there is rapid inflation.E) A) and C)
F) None of the above

Question 19

The estimated value of all financial assets held by U.S.households and nonprofit organizations in 2015 was about

Accepted Answer

A)  $8.1 trillion.
B)  $17.9 trillion.
C)  $54 trillion.
D)  $70 trillion.E) A) and C)
F) A) and D)

Question 20

Equal shares of a firm's profit are paid out to stockholders as

Accepted Answer

A)  interest.
B)  dividends.
C)  capital gains.
D)  net earnings.E) A) and B)
F) A) and C)

Exam 37: Financial Economics

Other factors constant, the present value will be larger,

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Rates of return on short-term U.S.government bonds are compensation for

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The estimated value of all financial assets held by U.S.households and nonprofit organizations in 2015 was about

Correct AnswerverifiedShow Answer

The beta of an investment measures the probability-weighted expected rate of return of a portfolio.

Correct AnswerverifiedShow Answer

One asset has a beta of 1.5 and another asset has a beta of 0.75.The difference in beta means that the asset with a beta of 0.75 has

Correct AnswerverifiedShow Answer

A bank makes an auto loan for $10,000 at an annual rate of 6 percent.Assuming no repayment is made during the period, after two years the borrower will owe

Correct AnswerverifiedShow Answer

The current share price of a corporation's stock is determined by the

Correct AnswerverifiedShow Answer

When a company declares bankruptcy, stockholders are the first to be paid when company assets are sold.

Correct AnswerverifiedShow Answer

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five years.What annually compounded rate of interest would she have to earn to reach her goal?

Correct AnswerverifiedShow Answer

Financial investment refers to

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Which of the following is not common to all investments?

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The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Correct AnswerverifiedShow Answer

For most financial assets, investors must be compensated for

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

Correct AnswerverifiedShow Answer

Equal shares of a firm's profit are paid out to stockholders as

Correct AnswerverifiedShow Answer

The underlying cause of risk in finance is

Correct AnswerverifiedShow Answer

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Correct AnswerverifiedShow Answer

Hermione is considering an investment that has a Â¾ chance of paying a 10 percent rate of return and a Â¼ chance of paying 2 percent.What is the average expected rate of return on the investment?

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

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

Correct AnswerverifiedShow Answer

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