Question 1

Which of the following is an economic investment?

Accepted Answer

A)   Shares of corporate stock.
B)   U.S.savings bonds.
C)   Newly built houses.
D)   Bonds issued by private corporations.E) C) and D)
F) A) and B)

Question 2

One statistic that quantifies the risk of an investment is:

Accepted Answer

A)   alpha.
B)   beta.
C)   gamma.
D)   the average expected rate of return.E) A) and D)
F) A) and C)

Question 3

The risk premium is the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 4

Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond:

Accepted Answer

A)   is $110.
B)   is $125.
C)   is $140.
D)   depends on rates of return she could earn on other,similar investments.E) C) and D)
F) B) and C)

Question 5

Riskier investments tend to sell for:

Accepted Answer

A)   lower prices so they provide a higher expected rate of return to compensate for risk.
B)   higher prices so they provide a higher expected rate of return to compensate for risk.
C)   higher prices;that is why they are considered to be riskier.
D)   prices directly correlated with expected rates of return.E) B) and C)
F) All of the above

Question 6

(Consider This) The implied risk-return point of a Ponzi scheme "asset":

Accepted Answer

A)   lies well above the Security Market Line.
B)   lies well below the Security Market Line.
C)   lies far out to the right along the Security Market Line.
D)   lies at the intercept of the Security Market Line.E) A) and B)
F) A) and C)

Question 7

Compound interest:

Accepted Answer

A)   describes how quickly an interest-bearing asset increases in value.
B)   measures the rate of return of a portfolio of stocks and bonds.
C)   measures the after-tax,inflation-adjusted rate of interest.
D)   refers to the multiple rates of interest of various types of bonds in a portfolio.E) All of the above
F) B) and C)

Question 8

For most financial assets,investors must be compensated for:

Accepted Answer

A)   nondiversifiable and diversifiable risk.
B)   diversifiable risk and time preference.
C)   nondiversifiable risk and time preference.
D)   nondiversifiable and diversifiable risk,and time preference.E) None of the above
F) All of the above

Question 9

Bond payments are generally more predictable than stocks because:

Accepted Answer

A)   interest on bonds is not taxable.
B)   stock prices and dividends exhibit little volatility.
C)   bonds generate higher average rates of return.
D)   bond owners know the size and timing of payments they will receive.E) B) and C)
F) A) and B)

Question 10

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 save average expected rate of return.E) A) and B)
F) A) and C)

Question 11

The Security Market Line depicts the inverse relationship between the average expected rates of return and risk levels of financial assets.

Accepted Answer

A) True 
 B)False

Question 12

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

Accepted Answer

A)   $205.
B)   $210.
C)   $240.
D)   $300.E) A) and D)
F) B) and D)

Question 13

Denny buys a rare coin for $200 and sells the coin one year later for $220.Denny's rate of return is:

Accepted Answer

A)   10 percent.
B)   20 percent.
C)   91 percent.
D)   110 percent.E) B) and C)
F) A) and C)

Question 14

According to the concept of the time-value of money:

Accepted Answer

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

Question 15

Edward buys a house for $400,000,rents it for one year for $1,500 per month,and sells it at the end of the year for $390,000.Edward's rate of return:

Accepted Answer

A)   is 2 percent.
B)   is 4.5 percent.
C)   is negative 2.5 percent.
D)   cannot be determined.E) None of the above
F) C) and D)

Question 16

The Security Market Line depicts the relationship between the:

Accepted Answer

A)   average expected rate of return on stocks and the average expected rate of return on bonds.
B)   average expected rate of return of a financial asset and the discount rate.
C)   risk level of a financial asset and the prime interest rate.
D)   average expected rate of return and risk level of a financial asset.E) B) and C)
F) A) and D)

Question 17

(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 percent.E) A) and D)
F) None of the above

Question 18

Another name for nondiversifiable risk is:

Accepted Answer

A)   inflation risk.
B)   systemic risk.
C)   cyclical risk.
D)   idiosyncratic risk.E) A) and B)
F) A) and C)

Question 19

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)   $1,123.21.E) B) and D)
F) A) and C)

Question 20

The average expected rate of return of a financial asset equals:

Accepted Answer

A)   the rate that compensates for time preference plus the rate that compensates for risk.
B)   the rate that compensates for time preference plus the rate of inflation.
C)   beta plus the rate that compensates for risk.
D)   the risk-free interest rate plus the rate of inflation.E) A) and B)
F) B) and C)

Exam 36: Financial Economics

Riskier investments tend to sell for:

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Karen holds a $100 bond that pays $10 per year in interest.The minimum price Karen would have to be offered before she would sell the bond:

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Denny buys a rare coin for $200 and sells the coin one year later for $220.Denny's rate of return is:

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(Consider This) The implied risk-return point of a Ponzi scheme "asset":

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Which of the following is an economic investment?

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Another name for nondiversifiable risk is:

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The Security Market Line depicts the inverse relationship between the average expected rates of return and risk levels of financial assets.

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Bond payments are generally more predictable than stocks because:

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According to the concept of the time-value of money:

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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?

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The Security Market Line depicts the relationship between the:

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$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

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Compound interest:

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One statistic that quantifies the risk of an investment is:

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The risk premium is the rate that compensates for risk.

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The average expected rate of return of a financial asset equals:

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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

For most financial assets,investors must be compensated for:

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Edward buys a house for $400,000,rents it for one year for $1,500 per month,and sells it at the end of the year for $390,000.Edward's rate of return:

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Arbitrage causes all financial assets:

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