Question 1

The "time value" of money is based on the fact that prices may increase over time.

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

An asset with a beta of 0.5 has

Accepted Answer

A)  5 percent more risk than a risk-free asset.
B)  50 percent more risk than a risk-free asset.
C)  half the nondiversifiable risk as a market portfolio.
D)  5 times the nondiversifiable risk as a market portfolio.

Question 4

The rise of mutual funds has radically changed the way corporations are controlled in that

Accepted Answer

A)  it shifted ownership away from individual investors toward "institutional" investors like mutual funds.
B)  mutual funds increased the percentage of corporate shares owned by individual investors.
C)  corporate ownership became restricted to a select few.
D)  it reduced the share of private ownership and increased the share of public (government)  ownership.

Question 5

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.

Question 6

Arbitrage equates rates of return across assets of all risk levels.

Accepted Answer

A) True 
 B)False

Question 7

According to economists, the two factors most important to personal investment decisions are

Accepted Answer

A)  rates of return and the rate of interest.
B)  rates of return and the rate of inflation.
C)  returns and diversifiable risk.
D)  returns and nondiversifiable risk.

Question 8

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

Accepted Answer

A)  practically zero percent
B)  1 percent
C)  50 percent
D)  $1

Question 9

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.

Question 10

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.

Question 11

An asset's price and rate of return are directly related.

Accepted Answer

A) True 
 B)False

Question 12

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

Accepted Answer

A)  X will fall and its rate of return will fall.
B)  Y will rise and its rate of return will fall.
C)  X will fall and its rate of return will rise.
D)  Y will fall and its rate of return will rise.

Question 13

An investment's rate of return is positively related to the price paid for it.

Accepted Answer

A) True 
 B)False

Question 14

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Accepted Answer

A) True 
 B)False

Question 15

Professional athletes attempting only to maximize income will defer larger salaries if

Accepted Answer

A)  deferred payouts are adjusted upward to compensate for forgone interest.
B)  it increases the team's chance to win.
C)  there is no chance of inflation.
D)  it allows them to stay in a city and not to have to move their family.

Question 16

What is the difference between economic and financial investments?

Accepted Answer

A)  Financial investments are sensitive to interest rates; economic investments are not.
B)  Economic investments add to the capital stock of an economy; financial investments do not.
C)  Economic investments are expressed in real (inflation-adjusted)  terms; financial investments are expressed in nominal terms.
D)  Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods.

Question 17

The underlying cause of risk in finance is

Accepted Answer

A)  danger.
B)  uncertainty.
C)  fear.
D)  complexity.

Question 18

A promised amount $FV n years into the future is worth how much today, if the interest rate is i percent per year?

Accepted Answer

A)  $FVn/(1 + i) n
B)  ($FV/n)  (i percent) 
C)  (1 + i) n/$FV 
D)   [$FV/(1 + i) ]n

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

(Last Word)  Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about percent per year.

Accepted Answer

A)  5
B)  1
C)  zero
D)  3

Exam 17: C: Financial Economics

A horizontal Security Market Line would imply that investors

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

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What is the difference between economic and financial investments?

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Arbitrage equates rates of return across assets of all risk levels.

Correct AnswerverifiedShow Answer

The rise of mutual funds has radically changed the way corporations are controlled in that

Correct AnswerverifiedShow Answer

A promised amount $FV n years into the future is worth how much today, if the interest rate is i percent per year?

Correct AnswerverifiedShow Answer

An asset with a beta of 0.5 has

Correct AnswerverifiedShow Answer

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

Correct AnswerverifiedShow Answer

An investment's rate of return is positively related to the price paid for it.

Correct AnswerverifiedShow Answer

(Last Word) Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about percent per year.

Correct AnswerverifiedShow Answer

The underlying cause of risk in finance is

Correct AnswerverifiedShow Answer

Professional athletes attempting only to maximize income will defer larger salaries if

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The steeper the Security Market Line,

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

Correct AnswerverifiedShow Answer

An asset's price and rate of return are directly related.

Correct AnswerverifiedShow Answer

The compound interest formula states that if X dollars are invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Correct AnswerverifiedShow Answer

The "time value" of money is based on the fact that prices may increase over time.

Correct AnswerverifiedShow Answer

According to economists, the two factors most important to personal investment decisions are

Correct AnswerverifiedShow Answer

Assume that there are two investments similar in all respects, but Investment X has a higher rate of return than does Investment Y.As a result of the arbitrage process, the price of Investment

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

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