Question 1

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.

Question 2

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?

Accepted Answer

A)  $1,250.
B)  $250.
C)  $267.25.
D)  $255.26.

Question 3

Refer to the graph.Which of the three Security Market Lines depicts the situation where investors most dislike risk?

Accepted Answer

A)  line A
B)  line B
C)  line C
D)  It cannot be determined from the graph.

Question 4

A change in investors' feelings about risk will change the intercept (and therefore shift) the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is both an economic and a financial investment?

Accepted Answer

A)  government building a new road
B)  Boeing Corporation building a new factory
C)  a private citizen buying corporate stock
D)  the Federal Reserve buying bonds from commercial banks

Question 6

If a corporation goes bankrupt,

Accepted Answer

A)  neither stockholders nor bondholders receive any money.
B)  stockholders get paid from the sale of company assets before bondholders do.
C)  bondholders get paid from the sale of company assets before stockholders do.
D)  stockholders must honor the debts to bondholders out of personal assets if necessary.

Question 7

The vertical intercept of the Security Market Line (SML)  shows the

Accepted Answer

A)  amount of arbitrage.
B)  risk-free interest rate.
C)  beta of the market portfolio.
D)  risk premium for the market portfolio.

Question 8

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

Accepted Answer

A)  pooling.
B)  arbitrage.
C)  diversification.
D)  time preference.

Question 9

Which of the following is a difference between stocks and bonds?

Accepted Answer

A)  Stocks are issued for a fixed period; bonds are not.
B)  Stocks pay interest; bonds pay dividends.
C)  Bond payouts are more predictable than payouts from stocks.
D)  Bonds represent ownership; stocks represent debt.

Question 10

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

Accepted Answer

A)  index funds require more buying and selling to generate their returns.
B)  management and trading costs reduce the returns of actively managed funds.
C)  index funds spend more on research and management.
D)  diversification is more important to actively managed funds.

Question 11

What do stocks represent?

Accepted Answer

A)  shares of ownership in a corporation and a guaranteed stream of profits
B)  shares of ownership in a corporation and an entitlement to its future profits
C)  debt contracts with a corporation and regular interest payments on the loan
D)  debt contracts with a corporation and variable interest payments on the loan

Question 12

The present value model of investment states that an asset's current price should be equal to the

Accepted Answer

A)  sum of the present values of all of its future payments or earnings.
B)  sum of all of its future payments or earnings times the number of years of its life.
C)  life of the asset times the present values of all of its future payments or earnings.
D)  present values of all of its future payments or earnings divided by its life in years.

Question 13

The Standard & Poor's 500 Index measures prices of the 500

Accepted Answer

A)  most purchased consumer goods in the United States.
B)  stocks of the largest companies in the United States.
C)  largest bonds trading in the United States.
D)  largest index funds trading in the United States.

Question 14

The risk-free interest rate is determined primarily by the

Accepted Answer

A)  largest commercial banks.
B)  Internal Revenue Service.
C)  U.S.Treasury.
D)  Federal Reserve.

Question 15

Investors face the risk that the economy could go into another recession.This risk is

Accepted Answer

A)  idiosyncratic.
B)  diversifiable.
C)  systemic.
D)  time preference.

Question 16

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 17

Mutual funds may contain

Accepted Answer

A)  stocks only.
B)  bonds only.
C)  either stocks or bonds.
D)  neither stocks nor bonds.

Question 18

(Advanced analysis)  Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Accepted Answer

A)  5.2
B)  6.8
C)  8.3
D)  10

Question 19

What is considered to be the best measure of the risk-free interest rate?

Accepted Answer

A)  the rate of return on a corporate bond index fund
B)  the rate of return on a corporate stock index fund
C)  the rate of return on the Standard and Poor's 500
D)  the rate of return on short-term U.S.government bonds

Question 20

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.

Exam 17: C: Financial Economics

What do stocks represent?

Correct AnswerverifiedShow Answer

Bond payments are generally more predictable than stocks because

Correct AnswerverifiedShow Answer

A change in investors' feelings about risk will change the intercept (and therefore shift) the Security Market Line.

Correct AnswerverifiedShow Answer

The risk-free interest rate is determined primarily by the

Correct AnswerverifiedShow Answer

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Correct AnswerverifiedShow Answer

What is considered to be the best measure of the risk-free interest rate?

Correct AnswerverifiedShow Answer

Investors face the risk that the economy could go into another recession.This risk is

Correct AnswerverifiedShow Answer

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that

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

Mutual funds may contain

Correct AnswerverifiedShow Answer

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth how much at the end of five years, assuming all interest earned remains in the account?

Correct AnswerverifiedShow Answer

Which of the following is both an economic and a financial investment?

Correct AnswerverifiedShow Answer

The Standard & Poor's 500 Index measures prices of the 500

Correct AnswerverifiedShow Answer

Which of the following is a difference between stocks and bonds?

Correct AnswerverifiedShow Answer

The present value model of investment states that an asset's current price should be equal to the

Correct AnswerverifiedShow Answer

Refer to the graph.Which of the three Security Market Lines depicts the situation where investors most dislike risk?

Correct AnswerverifiedShow Answer

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

Correct AnswerverifiedShow Answer

If a corporation goes bankrupt,

Correct AnswerverifiedShow Answer

The vertical intercept of the Security Market Line (SML) shows the

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified