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A change in Federal Reserve monetary policy will


A) have no effect on the Security Market Line.
B) invert the Security Market Line.
C) change the slope of the Security Market Line.
D) cause a vertical shift of the Security Market Line.

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

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Other factors constant, if the interest rate is higher, the present value of a certain future amount will be smaller.

A) True
B) False

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What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?


A) future value
B) present value
C) time preference
D) market portfolio

E) C) and D)
F) A) and C)

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(Advanced analysis) Susie has $500 invested in a financial asset earning an annually compounded interest rate of 8 percent. If Susie plans to cash in the asset when it is worth $700, about how long Will she have to wait?


A) 4.4 years
B) 5 years
C) 6.1 years
D) 8 years

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

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Why might a lottery winner decide to take a large lump-sum payment rather than receive installments of their winnings over time? How does the concept of present value influence this decision?

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Present value is today?s value of some a...

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In the accompanying graph, bracket A represents the A) rate of return for an asset. B) rate of return for the risk-free asset. C) risk premium for an asset with a certain risk level. D) compensation for time preference for an asset with a certain risk level. In the accompanying graph, bracket A represents the


A) rate of return for an asset.
B) rate of return for the risk-free asset.
C) risk premium for an asset with a certain risk level.
D) compensation for time preference for an asset with a certain risk level.

E) All of the above
F) A) and B)

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What is the risk-free interest rate?

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The risk-free interest rate is the inter...

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An investment's average expected rate of return is the


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

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An expansionary monetary policy will shift the Security Market Line down.

A) True
B) False

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If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

A) True
B) False

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The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a two-year contract but, because of salary cap limitations, can only pay $8 million for the first year (Alex's Market value is $10 million per year) . The Hazards offer to pay $8 million in year 1 and $13 million in Year 2. Should Alex sign the contract?


A) Yes, Alex is better off financially regardless of the interest rate.
B) Yes, if the interest rate is less than 50 percent.
C) Yes, but only if the team expects to be successful.
D) Yes, but only if the interest rate is less than 10 percent.

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

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A manufacturing firm takes out a $500,000 loan to expand its plant. The loan has an annual interest rate of 7 percent. What would be the total compounded interest on the loan at the end of five years, Excluding the principal?


A) $175,000
B) $35,075
C) $150,750
D) $201,275

E) B) and C)
F) All of the above

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According to the concept of the time value of money,


A) money is more valuable to a person the sooner it is received.
B) money is more valuable to a person the later it is received.
C) people are indifferent between receiving a given sum of money now versus receiving it later.
D) there is no opportunity cost of receiving a sum of money later rather than sooner.

E) B) and D)
F) None of the above

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Mark buys a bond for $8,000 and receives interest payments of $100 every three months. The interest rate on the bond is approximately


A) 1.3 percent.
B) 2 percent.
C) 5 percent.
D) 20 percent.

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

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A stockholder owning 5 percent of a company's stock


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) A) and C)

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Which of the following statements is true?


A) Passively managed funds do not pay dividends.
B) Passively managed funds have only one asset in their portfolio.
C) Actively managed funds constantly buy or sell assets to generate better returns.
D) Actively managed funds adjust assets to match the performance of a particular index.

E) A) and B)
F) A) and C)

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Risk in finance means


A) mostly positive outcomes.
B) mostly negative outcomes.
C) either positive or negative outcomes.
D) the same thing as risk in health science.

E) B) and D)
F) None of the above

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Which of the following is common to all investments?


A) The investment pays interest.
B) Some price must be paid to acquire them.
C) Owners are guaranteed future payments.
D) Government insurance backs them.

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

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Alma recently purchased a Mexican restaurant for $450,000, from which she expects to earn a monthly profit of $1,500. Her expected annual rate of return is


A) 4 percent.
B) 6 percent.
C) 8 percent.
D) 10 percent.

E) B) and D)
F) A) and D)

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"Do not put all your eggs in one basket" is advice that seeks to reduce


A) idiosyncratic risk.
B) nondiversifiable risk.
C) systemic risk.
D) market risk.

E) A) and C)
F) C) and D)

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