Question 1

Arbitrage is the process by which investors simultaneously sell

Accepted Answer

A)  assets with higher rates of return and buy otherwise identical assets with lower rates of return.
B)  assets with lower rates of return and buy otherwise identical assets with higher rates of return.
C)  riskier assets and buy less risky assets.
D)  less risky assets and buy riskier assets.E) A) and B)
F) C) and D)

Question 2

Economic investment refers to

Accepted Answer

A)  buying a financial asset for a gain.
B)  selling a financial asset for a gain.
C)  postponing purchases of goods and services.
D)  making new additions to a firm's stock of capital.E) B) and D)
F) C) and D)

Question 3

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Accepted Answer

A)  stock A to fall and/or the price of stock B to rise.
B)  stock A to rise and/or the price of stock B to fall.
C)  both stocks to rise or fall together.
D)  neither stock to change.E) All of the above
F) A) and B)

Question 4

The Security Market Line (SML)  is upward-sloping, indicating that the

Accepted Answer

A)  beta of an investment increases as its risk level increases.
B)  average expected return on investments decreases as their risk level decreases.
C)  average expected return on the risk-free asset increases as its beta increases.
D)  average expected return of the market portfolio increases as its beta increases.E) B) and C)
F) None of the above

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

Accepted Answer

A) True 
 B)False

Question 7

According to The International Country Risk Guide, financial assets in

Accepted Answer

A)  low-income economies tend to be less risky than in high-income economies.
B)  low-income economies tend to be riskier than in high-income economies.
C)  low-income economies tend to be about the same level of risk as in high-income economies.
D)  all countries carry about the same level of risk.E) All of the above
F) C) and D)

Question 8

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Accepted Answer

A)  8 percent.
B)  10.4 percent.
C)  12.2 percent.
D)  24 percent.E) B) and C)
F) A) and B)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The "time value" of money is based on the fact that prices may increase over time.

Accepted Answer

A) True 
 B)False

Question 11

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

Accepted Answer

A)  not affect their rates of return.
B)  increase the return on the asset with the higher rate of return as the demand for it increases.
C)  increase the gap between the two rates of return.
D)  eventually equalize their rates of return.E) A) and B)
F) A) and C)

Question 12

Which one of the following is an example of a financial investment but not an economic investment?

Accepted Answer

A)  renovating a shopping mall
B)  constructing an addition to a petroleum refinery
C)  building a new store
D)  buying gold to sell later at a higher priceE) B) and D)
F) None of the above

Question 13

Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.

Accepted Answer

A)  $2,480
B)  $2,524.95
C)  $1,584.19
D)  $1,520E) All of the above
F) A) and C)

Question 14

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 15

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Accepted Answer

A) True 
 B)False

Question 16

An investment's rate of return is positively related to the price paid for it.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following would be the best brief definition of present value?

Accepted Answer

A)  assets minus liabilities incurred to acquire the assets
B)  benefits of an investment minus its costs
C)  the sum of all the past values of an asset
D)  the current value of the expected future returns on an assetE) A) and B)
F) None of the above

Question 18

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S.government bonds.

Accepted Answer

A) True 
 B)False

Question 19

Diversifiable risk refers to risk

Accepted Answer

A)  faced by a portfolio in general.
B)  that can be reduced with appropriate fiscal and monetary policy.
C)  posed by business cycle fluctuations.
D)  specific to a particular investment.E) A) and C)
F) A) and B)

Question 20

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Accepted Answer

A) True 
 B)False

Exam 37: Financial Economics

An investment's rate of return is positively related to the price paid for it.

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Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

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The Security Market Line (SML) is upward-sloping, indicating that the

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Arbitrage occurs when investors try to profit from situations where

Correct AnswerverifiedShow Answer

The "time value" of money is based on the fact that prices may increase over time.

Correct AnswerverifiedShow Answer

Which of the following would be the best brief definition of present value?

Correct AnswerverifiedShow Answer

Economic investment refers to

Correct AnswerverifiedShow Answer

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should

Correct AnswerverifiedShow Answer

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

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Which one of the following is an example of a financial investment but not an economic investment?

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Arbitrage is the process by which investors simultaneously sell

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According to The International Country Risk Guide, financial assets in

Correct AnswerverifiedShow Answer

Diversifiable risk refers to risk

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The fact that people prefer to consume in the present rather than the future is referred to as time preference.

Correct AnswerverifiedShow Answer

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year.Stock B sells for $100 per share and pays dividends of $4 per share per year.Through the process of arbitrage, we would expect the price of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.

Correct AnswerverifiedShow Answer

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Correct AnswerverifiedShow Answer

The key difference between bonds and stocks is that stocks' income streams are more predictable than those of bonds.

Correct AnswerverifiedShow Answer

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S.government bonds.

Correct AnswerverifiedShow Answer

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