Question 1

The vertical intercept of the Security Market Line is determined by the:

Accepted Answer

A)   beta of the market portfolio.
B)   discount rate.
C)   risk-free interest rate.
D)   risk premium.E) A) and C)
F) All of the above

Question 2

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000,Vilfredo's expected yearly rate of return will:

Accepted Answer

A)   remain unchanged,as the house price and the rate of return are independent of each other.
B)   be 13.6 percent.
C)   fall from 9 percent to 8 percent.
D)   fall from 10.9 percent to 9.6 percent.E) A) and B)
F) A) and C)

Question 3

Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500.If the price of the bond were to fall to $9,000:

Accepted Answer

A)   the bond's rate of return would rise from 5 percent to 5.6 percent.
B)   the bond payments would fall to $450 per year.
C)   Pavel should definitely buy the bond because the price is lower.
D)   Pavel should definitely not buy the bond because the lower price means it is worth less.E) A) and B)
F) B) and D)

Question 4

Arbitrage occurs when:

Accepted Answer

A)   bond and stock rates of return equalize.
B)   investors try to profit from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return.
C)   rates of return across all stocks equalize.
D)   investors move from lower to higher rate of return assets,regardless of the comparability of the assets.E) A) and B)
F) A) and C)

Question 5

The present value of a future amount of money will be greater the:

Accepted Answer

A)   greater the interest rate.
B)   greater the amount of time before the future payment is received.
C)   lower the interest rate.
D)   greater the rate of the expected rate of inflation.E) All of the above
F) C) and D)

Question 6

The maximum amount of money that company shareholders can lose on their investment in the corporation is:

Accepted Answer

A)   whatever percent of their wealth equals their percent of ownership.
B)   whatever they paid for the shares in the company.
C)   whatever the corporation loses each year times the percent of ownership in the company.
D)   zero.E) B) and C)
F) A) and B)

Question 7

Brinley holds stock in large high-tech companies in his portfolio.The best way for Brinley to diversify his risk would be to buy:

Accepted Answer

A)   more shares of the stock he already owns.
B)   shares in other large high-tech companies.
C)   bonds or stocks of small and medium-sized companies.
D)   bonds from the large high-tech companies already in his portfolio.E) A) and D)
F) C) and D)

Question 8

"Default" occurs when:

Accepted Answer

A)   bond issuers fail to make promised payments.
B)   corporations go bankrupt and stock becomes worthless.
C)   bond purchasers fail to pay full price for a bond.
D)   stocks are not federally insured.E) B) and C)
F) A) and B)

Question 9

For heavily traded assets like stocks and bonds,arbitrage:

Accepted Answer

A)   will equalize rates of return across all stocks and bonds.
B)   will drive up rates of return on all assets.
C)   is a lengthy process because of the large volume of transactions.
D)   will often equalize rates of return among similar assets within minutes.E) A) and B)
F) A) and C)

Question 10

The beta for an asset considered to be risk-free:

Accepted Answer

A)   can be any positive number.
B)   is negative.
C)   equals zero.
D)   equals 1.E) A) and B)
F) A) and C)

Question 11

The estimated value of all financial assets held by U.S.households and nonprofit organizations in 2012 was about:

Accepted Answer

A)   $5.3 trillion.
B)   $15.7 trillion.
C)   $45 trillion.
D)   $54 trillion.E) A) and D)
F) A) and C)

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?

Accepted Answer

A)   $504.
B)   $508.
C)   $540.
D)   $580.E) A) and C)
F) All of the above

Question 14

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested,but also on the accumulated interest payments?

Accepted Answer

A)   Present value.
B)   Future value.
C)   Compound interest.
D)   Real rate of interest.E) A) and B)
F) A) and C)

Question 15

The steeper the Security Market Line:

Accepted Answer

A)   the lower the risk premium.
B)   the more investors dislike risk.
C)   the less investors are concerned about risk.
D)   the greater the risk-free interest rate.E) A) and D)
F) All of the above

Question 16

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

Question 17

Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return:

Accepted Answer

A)   is 0.5 percent.
B)   is 5 percent.
C)   is 6 percent.
D)   cannot be determined until she sells the house.E) A) and C)
F) B) and C)

Question 18

Maria is looking to buy one of two houses to rent out for additional income.She determines that the first house,priced at $200,000,could rent for $1,500 per month.If the second house is priced at $280,000,how much rent would Maria have to charge to get an equivalent yearly rate of return?

Accepted Answer

A)   $2,100 per month.
B)   $2,600 per month.
C)   $2,800 per month.
D)   It cannot be determined with the information given.E) C) and D)
F) All of the above

Question 19

The rate of return on short-term U.S.government bonds is often referred to as the:

Accepted Answer

A)   federal funds rate.
B)   discount rate.
C)   risk-free interest rate.
D)   yield rate.E) A) and B)
F) C) and D)

Question 20

Nondiversifiable risk refers to potential losses from:

Accepted Answer

A)   random fluctuations in specific stocks.
B)   bad company policies.
C)   portfolio management fraud.
D)   events that move all investments in the same direction.E) C) and D)
F) B) and D)

Exam 36: Financial Economics

The estimated value of all financial assets held by U.S.households and nonprofit organizations in 2012 was about:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The maximum amount of money that company shareholders can lose on their investment in the corporation is:

Correct AnswerverifiedShow Answer

Brinley holds stock in large high-tech companies in his portfolio.The best way for Brinley to diversify his risk would be to buy:

Correct AnswerverifiedShow Answer

Arbitrage occurs when:

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The beta for an asset considered to be risk-free:

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Arbitrage occurs when investors try to profit from situations where:

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Nondiversifiable risk refers to potential losses from:

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The present value of a future amount of money will be greater the:

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Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return:

Correct AnswerverifiedShow Answer

The rate of return on short-term U.S.government bonds is often referred to as the:

Correct AnswerverifiedShow Answer

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000,Vilfredo's expected yearly rate of return will:

Correct AnswerverifiedShow Answer

Maria is looking to buy one of two houses to rent out for additional income.She determines that the first house,priced at $200,000,could rent for $1,500 per month.If the second house is priced at $280,000,how much rent would Maria have to charge to get an equivalent yearly rate of return?

Correct AnswerverifiedShow Answer

The steeper the Security Market Line:

Correct AnswerverifiedShow Answer

For heavily traded assets like stocks and bonds,arbitrage:

Correct AnswerverifiedShow Answer

Pavel is considering buying a $10,000 bond with no expiration date that generates yearly payments of $500.If the price of the bond were to fall to $9,000:

Correct AnswerverifiedShow Answer

The vertical intercept of the Security Market Line is determined by the:

Correct AnswerverifiedShow Answer

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested,but also on the accumulated interest payments?

Correct AnswerverifiedShow Answer

"Default" occurs when:

Correct AnswerverifiedShow Answer

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of one year?

Correct AnswerverifiedShow Answer

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