Question 1

Augi buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately

Accepted Answer

A)  4 percent.
B)  8 percent.
C)  12.5 percent.
D)  25 percent.E) B) and D)
F) A) and C)

Question 2

Economic investment refers to the buying or selling of any asset in expectation of a financial gain.

Accepted Answer

A) True 
 B)False

Question 3

Short-term U.S.government securities are practically risk-free, and thus their rates of return are payments solely for

Accepted Answer

A)  diversifiable risk.
B)  time preference.
C)  idiosyncratic risk.
D)  pure profit.E) A) and C)
F) A) and B)

Question 4

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 D)
F) A) and B)

Question 5

If stockholders sell their shares for more than they paid for those shares, the stockholders

Accepted Answer

A)  realize a share of equal profits.
B)  receive a dividend.
C)  realize a capital gain.
D)  obtain a mutual fund.E) None of the above
F) A) and B)

Question 6

Bonds represent

Accepted Answer

A)  a claim on company dividends.
B)  ownership of a company.
C)  all financial assets guaranteed to pay interest.
D)  loans to governments and corporations.E) A) and D)
F) A) and C)

Question 7

(Last Word)  Before being adjusted for costs,

Accepted Answer

A)  actively managed funds outperform index funds.
B)  actively managed funds and index funds perform about the same.
C)  index funds outperform actively managed funds.
D)  arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds.E) B) and C)
F) A) and D)

Question 8

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Accepted Answer

A)  index funds require more buying and selling to generate their returns.
B)  management and trading costs reduce the returns of actively managed funds.
C)  index funds spend more on research and management.
D)  diversification is more important to actively managed funds.E) All of the above
F) A) and B)

Question 9

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

Question 10

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

Accepted Answer

A)  $604,000
B)  $624,000
C)  $680,000
D)  $700,000E) B) and D)
F) A) and D)

Question 11

An investment with a beta of 4.0 means that the investment has four times the

Accepted Answer

A)  average expected rate of return of the market portfolio.
B)  risk of all similar investments.
C)  level of nondiversifiable risk as the market portfolio.
D)  level of diversifiable risk as the market portfolio.E) None of the above
F) All of the above

Question 12

Assume that two firms (Firm A and Firm B)  are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock.Arbitrage will occur as investors

Accepted Answer

A)  sell Firm A's stock and buy Firm B's stock.
B)  buy Firm A's stock and buy Firm B's stock also.
C)  sell Firm A's stock and sell Firm B's stock also.
D)  buy Firm A's stock and sell Firm B's stock.E) A) and C)
F) All of the above

Question 13

The type of risk that pushes the returns from all investment in the same direction at the same time is

Accepted Answer

A)  idiosyncratic.
B)  diversifiable.
C)  systemic.
D)  time preference.E) B) and C)
F) A) and B)

Question 14

(Advanced analysis)  Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Accepted Answer

A)  8.75 percent
B)  9.1 percent
C)  10 percent
D)  10.4 percentE) A) and D)
F) All of the above

Question 15

Short-term U.S.government bonds are considered to be risk-free.

Accepted Answer

A) True 
 B)False

Question 16

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Accepted Answer

A) True 
 B)False

Question 17

A stockholder owning 5 percent of a company's stock

Accepted Answer

A)  is guaranteed to receive 5 percent of the company's yearly profits.
B)  is personally responsible for 5 percent of the debts if the company goes bankrupt.
C)  has 5 percent of her personal assets vulnerable if the company goes bankrupt.
D)  gets 5 percent of the votes at the shareholders' meetings.E) A) and B)
F) B) and C)

Question 18

The risk-free interest rate is determined primarily by the

Accepted Answer

A)  largest commercial banks.
B)  Internal Revenue Service.
C)  U.S.Treasury.
D)  Federal Reserve.E) A) and B)
F) A) and D)

Question 19

You deposit $5,000 in a 5-year bank CD that pays 3 percent interest per year.How much will you get from this deposit at maturity?

Accepted Answer

A)  $5,155
B)  $5,751
C)  $5,796
D)  $6,500E) A) and B)
F) All of the above

Question 20

Arbitrage equates rates of return across assets of all risk levels.

Accepted Answer

A) True 
 B)False

Exam 37: Financial Economics

An investment with a beta of 4.0 means that the investment has four times the

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(Last Word) Before being adjusted for costs,

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Assume that two firms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock.Arbitrage will occur as investors

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Augi buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately

Correct AnswerverifiedShow Answer

Short-term U.S.government bonds are considered to be risk-free.

Correct AnswerverifiedShow Answer

Bonds represent

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You deposit $5,000 in a 5-year bank CD that pays 3 percent interest per year.How much will you get from this deposit at maturity?

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(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Correct AnswerverifiedShow Answer

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

Correct AnswerverifiedShow Answer

A stockholder owning 5 percent of a company's stock

Correct AnswerverifiedShow Answer

Economic investment refers to the buying or selling of any asset in expectation of a financial gain.

Correct AnswerverifiedShow Answer

If stockholders sell their shares for more than they paid for those shares, the stockholders

Correct AnswerverifiedShow Answer

Arbitrage equates rates of return across assets of all risk levels.

Correct AnswerverifiedShow Answer

The risk-free interest rate is determined primarily by the

Correct AnswerverifiedShow Answer

Short-term U.S.government securities are practically risk-free, and thus their rates of return are payments solely for

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Diversification is an investment strategy that seeks to reduce the overall risk in an investment portfolio by selecting a group of assets whose risks differ from one another.

Correct AnswerverifiedShow Answer

The type of risk that pushes the returns from all investment in the same direction at the same time is

Correct AnswerverifiedShow Answer

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Correct AnswerverifiedShow Answer

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