Question 1

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Accepted Answer

A) True 
 B)False

Question 2

Terri buys a house for $200,000 and expects to sell it in three years for $300,000. Her expected percentage rate of return over that three-year period is:

Accepted Answer

A)   25 percent
B)   33 percent
C)   50 percent
D)   67 percentE) A) and B)
F) All of the above

Question 3

The terms "economic investment" and "financial investment" can be used synonymously.

Accepted Answer

A) True 
 B)False

Question 4

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 loanE) C) and D)
F) A) and D)

Question 5

One fundamental concept in financial economics is that an investment's rate of return is:

Accepted Answer

A)   Positively related to the price paid for it
B)   Inversely related to the price paid for it
C)   Inversely related to the riskiness of the investment
D)   Inversely related to the maturity of the investmentE) B) and D)
F) A) and D)

Question 6

The average expected rate of return is a:

Accepted Answer

A)   Volume-weighted average
B)   Price-weighted average
C)   Probability-weighted average
D)   Value-weighted averageE) A) and C)
F) C) and D)

Question 7

"Do not put all your eggs in one basket" is an advice that seeks to reduce:

Accepted Answer

A)   Idiosyncratic risk
B)   Non-diversifiable risk
C)   Systemic risk
D)   Market riskE) A) and B)
F) B) and C)

Question 8

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P-500 are called:

Accepted Answer

A)   Index funds
B)   Dividend funds
C)   Portfolio funds
D)   Capital gain fundsE) All of the above
F) A) and D)

Question 9

Which of the following statements is true?

Accepted Answer

A)   Passively managed funds do not pay dividends
B)   Passively managed funds have only one asset in their portfolio
C)   Actively managed funds constantly buy or sell assets to generate better returns
D)   Actively managed funds adjust assets to match the performance of a particular indexE) A) and B)
F) None of the above

Question 10

If an investor owns a well-diversified portfolio, then:

Accepted Answer

A)   His portfolio does not involve any risk
B)   The idiosyncratic risk in his portfolio is minimized
C)   The systemic risk in his portfolio is minimized
D)   His portfolio will have the highest expected returnE) A) and C)
F) A) and D)

Question 11

After 4 years, a $5,000-investment earning 6% annual interest rate will be worth more than a $6,000-investment earning 1% annual interest.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)   $FV/(1 + i) n
B)   ($FV/n)  (i%) 
C)   (1 + i) n/$FV
D)   [$FV/(1 + i) ]nE) A) and B)
F) A) and C)

Question 13

A stock investor may expect returns in the form of:

Accepted Answer

A)   Present and future values
B)   Interest and dividends
C)   Interest and capital gains
D)   Dividends and capital gainsE) A) and D)
F) All of the above

Question 14

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year. The current market interest rate is 5 percent. What is the present value of this promotional budget?

Accepted Answer

A)   $175,146
B)   $185,123
C)   $190,476
D)   $200,000E) A) and C)
F) A) and B)

Question 15

The limited liability rule means that if a corporation goes bankrupt:

Accepted Answer

A)   Shareholders are responsible for all the debts of the firm
B)   Bondholders are responsible for all the debts of the firm
C)   Shareholders can only lose the amount they invested
D)   Bondholders only lose the face value of the bondE) A) and B)
F) B) and C)

Question 16

A Ponzi scheme has the following characteristics, except:

Accepted Answer

A)   It promises a much higher expected return relative to the investment risk involved
B)   It seems to involve a significantly lower risk relative to the expected returns promised
C)   Its implied risk-return combination (or point)  lies below the security market line
D)   Trust plays a very important role, with investors believing in the promoter's ability to somehow prevent arbitrageE) A) and B)
F) None of the above

Question 17

You estimate that a piece of real estate for investment will be worth $700,000 in five years. The current interest rate is 3 percent. What is the present value of this investment?

Accepted Answer

A)   $604,000
B)   $624,000
C)   $680,000
D)   $700,000E) A) and B)
F) All of the above

Question 18

If the Federal Reserve conducts an open-market purchase, then the SML will:

Accepted Answer

A)   Shift up
B)   Shift down
C)   Rotate and become steeper
D)   Rotate and become flatterE) B) and C)
F) C) and D)

Question 19

Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate of return on the table is:

Accepted Answer

A)   10 percent
B)   20 percent
C)   25 percent
D)   30 percentE) A) and D)
F) A) and C)

Question 20

The underlying cause of risk in finance is:

Accepted Answer

A)   Danger
B)   Uncertainty
C)   Fear
D)   ComplexityE) None of the above
F) C) and D)

Exam 17: Financial Economics

A stock investor may expect returns in the form of:

Correct AnswerverifiedShow Answer

One fundamental concept in financial economics is that an investment's rate of return is:

Correct AnswerverifiedShow Answer

The average expected rate of return is a:

Correct AnswerverifiedShow Answer

After 4 years, a $5,000-investment earning 6% annual interest rate will be worth more than a $6,000-investment earning 1% annual interest.

Correct AnswerverifiedShow Answer

The Security Market Line is a straight line that plots how the average expected rates of return on assets and portfolios in an economy vary with their respective levels of nondiversifiable risk as measured by beta.

Correct AnswerverifiedShow Answer

"Do not put all your eggs in one basket" is an advice that seeks to reduce:

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

If the Federal Reserve conducts an open-market purchase, then the SML will:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The limited liability rule means that if a corporation goes bankrupt:

Correct AnswerverifiedShow Answer

Terri buys a house for $200,000 and expects to sell it in three years for $300,000. Her expected percentage rate of return over that three-year period is:

Correct AnswerverifiedShow Answer

The underlying cause of risk in finance is:

Correct AnswerverifiedShow Answer

The terms "economic investment" and "financial investment" can be used synonymously.

Correct AnswerverifiedShow Answer

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year. The current market interest rate is 5 percent. What is the present value of this promotional budget?

Correct AnswerverifiedShow Answer

A Ponzi scheme has the following characteristics, except:

Correct AnswerverifiedShow Answer

If an investor owns a well-diversified portfolio, then:

Correct AnswerverifiedShow Answer

Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate of return on the table is:

Correct AnswerverifiedShow Answer

Investments that are designed to match exactly the performance of a group of stocks like the Dow Jones Industrial Average or the S&P-500 are called:

Correct AnswerverifiedShow Answer

You estimate that a piece of real estate for investment will be worth $700,000 in five years. The current interest rate is 3 percent. What is the present value of this investment?

Correct AnswerverifiedShow Answer

What do stocks represent?

Correct AnswerverifiedShow Answer

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