Question 1

Ownership of a single corporation is represented by what investment?

Accepted Answer

A)   stock
B)   bonds
C)   mutual funds
D)   commercial paperE) B) and C)
F) A) and D)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Accepted Answer

A)   higher returns.
B)   more likely outcomes.
C)   higher risks.
D)   smaller returns.E) A) and B)
F) B) and D)

Question 4

Hermione is considering an investment that has a ? chance of paying a 10 percent rate of return and a ? 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 percentE) A) and B)
F) A) and C)

Question 5

If an asset has a beta of 1.5, it has 50 percent more nondiversiﬁable risk than the market portfolio.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

Accepted Answer

A)   beta.
B)   risk.
C)   arbitrage.
D)   diversiﬁcation.E) B) and C)
F) A) and D)

Question 8

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 C)
F) B) and D)

Question 9

The expected rate of return from an investment is

Accepted Answer

A)   the rate that compensates for time preference only.
B)   the rate that compensates for risk only.
C)   the rate that compensates for time preference plus the rate that compensates for risk.
D)   the rate that compensates for time preference minus the rate that compensates for risk.E) A) and B)
F) B) and C)

Question 10

The Fed can regularly inﬂuence and change the risk-free rate of ﬁnancial investments through its

Accepted Answer

A)   open-market operations.
B)   quantitative easing.
C)   required reserve ratio.
D)   bank supervision.E) A) and B)
F) A) and C)

Question 11

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in ﬁve
years. If the interest rate is 5 percent, then that asset will be worth $75 million today.

Accepted Answer

A) True 
 B)False

Question 12

The underlying cause of risk in ﬁnance is

Accepted Answer

A)   danger.
B)   uncertainty.
C)   fear.
D)   complexity.E) All of the above
F) C) and D)

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) All of the above
F) A) and C)

Question 14

If the Fed raises the interest rates on short-term U.S. government bonds, then the Security Market Line shifts

Accepted Answer

A)   downward as the risk-free interest rate increases.
B)   downward as the risk-free interest rate decreases.
C)   upward as the risk-free interest rate increases.
D)   upward as the risk-free interest rate decreases.E) None of the above
F) A) and C)

Question 15

Refer to the graph. The average expected rate of return for an asset with a beta equal to X would be

Accepted Answer

A)   Y.
B)   A plus B.
C)   Z minus A.
D)   Z minus Y.E) C) and D)
F) B) and D)

Question 16

Portfolio diversiﬁcation

Accepted Answer

A)   reduces the likelihood that the entire amount invested will be lost.
B)   eliminates all risk of loss.
C)   ensures that investors will receive a positive rate of return.
D)   provides the maximum possible rate of return from an investment portfolio.E) None of the above
F) All of the above

Question 17

Arbitrage causes all ﬁnancial assets

Accepted Answer

A)   of the same risk level to have the same price.
B)   to have the same expected rate of return.
C)   to have the same beta.
D)   of the same risk level to have the same average expected rate of return.E) None of the above
F) A) and D)

Question 18

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

Question 19

Because of arbitrage, any given ﬁnancial asset will be expected to return to the Security Market
Line.

Accepted Answer

A) True 
 B)False

Question 20

The price of an asset should

Accepted Answer

A)   exactly equal the total present value of all of the asset's future payments.
B)   exactly equal the total future value of all of the asset's future payments.
C)   approximately equal X(1 + i) t, where X is the value of the asset, i is the interest rate, and t is the number of years.
D)   exactly equal the total present and future value of all of the asset's future payments.E) A) and B)
F) A) and C)

Exam 17: Financial Economics

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Portfolio diversiﬁcation

Correct AnswerverifiedShow Answer

If an asset has a beta of 1.5, it has 50 percent more nondiversiﬁable risk than the market portfolio.

Correct AnswerverifiedShow Answer

Ownership of a single corporation is represented by what investment?

Correct AnswerverifiedShow Answer

Investors evaluate an investment by estimating its average expected rate of return, and this estimation process assigns higher weights to

Correct AnswerverifiedShow Answer

The Fed can regularly inﬂuence and change the risk-free rate of ﬁnancial investments through its

Correct AnswerverifiedShow Answer

The underlying cause of risk in ﬁnance is

Correct AnswerverifiedShow Answer

You believe that a certain asset, such as a business or shop, is going to be worth $100 million in ﬁve years. If the interest rate is 5 percent, then that asset will be worth $75 million today.

Correct AnswerverifiedShow Answer

Because of arbitrage, any given ﬁnancial asset will be expected to return to the Security Market Line.

Correct AnswerverifiedShow Answer

Refer to the graph. The average expected rate of return for an asset with a beta equal to X would be

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

Correct AnswerverifiedShow Answer

Arbitrage is the process by which investors simultaneously sell

Correct AnswerverifiedShow Answer

If the Fed raises the interest rates on short-term U.S. government bonds, then the Security Market Line shifts

Correct AnswerverifiedShow Answer

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

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

The price of an asset should

Correct AnswerverifiedShow Answer

The expected rate of return from an investment is

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Arbitrage causes all ﬁnancial assets

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