Question 1

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Accepted Answer

A) True 
 B)False

Question 2

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 D)
F) A) and B)

Question 3

If we observe that many investors are selling Bond A and buying a similar Bond B, this suggests that the expected returns on

Accepted Answer

A)   Bond A will start falling.
B)   Bond B will start rising.
C)   Bond A were higher than those of Bond B.
D)   Bond A will start rising.E) C) and D)
F) All of the above

Question 4

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

Question 5

Deﬁne compound interest.

Accepted Answer

Compound interest is deﬁned as...

Question 6

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 C)
F) B) and D)

Question 7

The risk premium is the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 8

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

Question 9

Refer to the graph. Consider an asset represented by point F. The process of arbitrage will draw investors to the higher rates of return,

Accepted Answer

A)   increasing both price and the average expected rate of return.
B)   changing the intercept of the Security Market Line until it intersects point F.
C)   changing the slope of the Security Market Line until it intersects point F.
D)   increasing the asset's price and lowering the average expected rate of return.E) B) and C)
F) A) and D)

Question 10

Arbitrage causes an equalization of the _________ when assets are identical or nearly identical.

Accepted Answer

A)   levels of risk of assets
B)   rates of return of assets
C)   time when payments are made from assets
D)   prices of assetsE) A) and B)
F) A) and C)

Question 11

An index fund

Accepted Answer

A)   is a passively managed mutual fund.
B)   has higher trading costs than an actively managed mutual fund.
C)   has higher trading costs than a passively managed mutual fund.
D)   is an actively managed mutual fund.E) B) and D)
F) A) and C)

Question 12

The so-called risk-free rate essentially measures the investors'

Accepted Answer

A)   risk aversion.
B)   risk preference.
C)   time preference.
D)   expected rate of return.E) C) and D)
F) B) and C)

Question 13

Arbitrage equalizes rates of return across similar investments because

Accepted Answer

A)   arbitrage also equalizes the prices of the assets.
B)   investors prefer diversity.
C)   investors will want to replace lower rate of return assets with those generating higher rates of return.
D)   investors will want to replace higher rate of return assets with those generating lower rates of return.E) B) and C)
F) A) and B)

Question 14

Mutual funds may contain

Accepted Answer

A)   stocks only.
B)   bonds only.
C)   either stocks or bonds.
D)   neither stocks nor bonds.E) A) and D)
F) None of the above

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

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

Question 18

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By
Buying several companies to reduce risk, the investor is seeking to reduce

Accepted Answer

A)   systemic risk.
B)   the risk premium.
C)   idiosyncratic risk.
D)   nondiversiﬁable risk.E) A) and B)
F) A) and C)

Question 19

For any given ﬁnancial asset, risk levels and average expected rates of return are

Accepted Answer

A)   independent of each other.
B)   negatively related because assets with higher average expected rates of return sell for higher prices, which are inversely related to risk.
C)   positively related because both are inversely related to the rate of inﬂation.
D)   positively related because investors must be compensated for taking greater risks.E) B) and C)
F) A) and D)

Question 20

A horizontal Security Market Line would imply that investors

Accepted Answer

A)   are unconcerned about risk and require no additional compensation for risk.
B)   view all ﬁnancial assets as equally risky.
C)   greatly dislike risk and must be compensated for it.
D)   prefer assets with greater risk.E) A) and B)
F) All of the above

Exam 17: Financial Economics

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

Correct AnswerverifiedShow Answer

Arbitrage equalizes rates of return across similar investments because

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Deﬁne compound interest.

Correct AnswerverifiedCompound interest is deﬁned as...View AnswerShow Answer

The risk premium is the rate that compensates for risk.

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Refer to the graph. Consider an asset represented by point F. The process of arbitrage will draw investors to the higher rates of return,

Correct AnswerverifiedShow Answer

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Correct AnswerverifiedShow Answer

For any given ﬁnancial asset, risk levels and average expected rates of return are

Correct AnswerverifiedShow Answer

A horizontal Security Market Line would imply that investors

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The so-called risk-free rate essentially measures the investors'

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

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

Mutual funds may contain

Correct AnswerverifiedShow Answer

An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By Buying several companies to reduce risk, the investor is seeking to reduce

Correct AnswerverifiedShow Answer

If we observe that many investors are selling Bond A and buying a similar Bond B, this suggests that the expected returns on

Correct AnswerverifiedShow Answer

An index fund

Correct AnswerverifiedShow Answer

Arbitrage causes an equalization of the _________ when assets are identical or nearly identical.

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

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Compound interest is deﬁned as...
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