Question 1

Mutual fund managers tend to focus on the long-term performance of the corporations in whose securities they are invested, rather than their short-term quarterly performance.

Accepted Answer

A) True 
 B)False

Question 2

If an asset has a risk-return combination that is above the Security Market Line (SML) , then arbitrage will make that asset's

Accepted Answer

A)  beta increase.
B)  beta decrease.
C)  average expected return increase.
D)  average expected return decrease.E) B) and C)
F) None of the above

Question 3

Which of the following would be the best brief definition of present value?

Accepted Answer

A)  assets minus liabilities incurred to acquire the assets
B)  benefits of an investment minus its costs
C)  the sum of all the past values of an asset
D)  the current value of the expected future returns on an assetE) A) and D)
F) B) and C)

Question 4

A mutual fund company uses the funds of its investors to

Accepted Answer

A)  produce goods and services for consumers.
B)  buy stocks and bonds.
C)  build factories and other infrastructure.
D)  buy capital and other resources for other firms.E) B) and C)
F) A) and D)

Question 5

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

Question 6

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

Accepted Answer

A)  (1 + i) tX
B)  X/(1 + i) t
C)  (1 + X) it
D)  (X + i) tE) A) and C)
F) B) and C)

Question 7

The risk premium of a financial asset is the

Accepted Answer

A)  additional price that must be paid for riskier investments.
B)  rate that compensates for risk.
C)  rate that compensates for the risk of inflation.
D)  same as the discount rate.E) B) and D)
F) None of the above

Question 8

Alma recently purchased a Mexican restaurant for $450,000, from which she expects to earn a monthly profit of $1,500.Her expected annual rate of return is

Accepted Answer

A)  4 percent.
B)  6 percent.
C)  8 percent.
D)  10 percent.E) A) and B)
F) All of the above

Question 9

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

Accepted Answer

A) True 
 B)False

Question 10

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Accepted Answer

A)  future value
B)  present value
C)  time preference
D)  market portfolioE) A) and D)
F) A) and C)

Question 11

A manufacturing firm takes out a $500,000 loan to expand its plant.The loan has an annual interest rate of 7 percent.What would be the total compounded interest on the loan at the end of five years, excluding the principal?

Accepted Answer

A)  $175,000
B)  $35,075
C)  $150,750
D)  $201,275E) B) and C)
F) A) and C)

Question 12

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 C)
F) B) and C)

Question 13

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S.government bonds.

Accepted Answer

A) True 
 B)False

Question 14

Les buys a bond for $5,000.Every year that he holds the bond, he will receive interest payments of $250.The interest rate on the bond

Accepted Answer

A)  is 2 percent.
B)  is 5 percent.
C)  is 20 percent.
D)  cannot be determined.E) A) and B)
F) B) and C)

Question 15

If the Fed raises the interest rates on short-term U.S.government bonds, then the Security Market Line shifts

Accepted Answer

A)  downward as the risk-free interest rate increases.
B)  downward as the risk-free interest rate decreases.
C)  upward as the risk-free interest rate increases.
D)  upward as the risk-free interest rate decreases.E) A) and B)
F) None of the above

Question 16

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) B) and D)
F) A) and D)

Question 17

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

Accepted Answer

A) True 
 B)False

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 flatter.E) A) and C)
F) C) and D)

Question 19

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 index.E) A) and B)
F) None of the above

Question 20

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) A) and C)
F) B) and C)

Exam 17: C: Financial Economics

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

Alma recently purchased a Mexican restaurant for $450,000, from which she expects to earn a monthly profit of $1,500.Her expected annual rate of return is

Correct AnswerverifiedShow Answer

The risk premium of a financial asset is the

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What concept would be most consistent with the observation that people tend to be impatient and typically prefer to consume things in the present rather than the future?

Correct AnswerverifiedShow Answer

If an asset has a risk-return combination that is above the Security Market Line (SML) , then arbitrage will make that asset's

Correct AnswerverifiedShow Answer

The beta for an asset considered to be risk-free

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

For heavily traded assets like stocks and bonds, arbitrage

Correct AnswerverifiedShow Answer

If the Fed raises the interest rates on short-term U.S.government bonds, then the Security Market Line shifts

Correct AnswerverifiedShow Answer

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

Correct AnswerverifiedShow Answer

A mutual fund company uses the funds of its investors to

Correct AnswerverifiedShow Answer

According to the concept of the time value of money,

Correct AnswerverifiedShow Answer

Which of the following would be the best brief definition of present value?

Correct AnswerverifiedShow Answer

Mutual fund managers tend to focus on the long-term performance of the corporations in whose securities they are invested, rather than their short-term quarterly performance.

Correct AnswerverifiedShow Answer

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S.government bonds.

Correct AnswerverifiedShow Answer

A manufacturing firm takes out a $500,000 loan to expand its plant.The loan has an annual interest rate of 7 percent.What would be the total compounded interest on the loan at the end of five years, excluding the principal?

Correct AnswerverifiedShow Answer

Les buys a bond for $5,000.Every year that he holds the bond, he will receive interest payments of $250.The interest rate on the bond

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?

Correct AnswerverifiedShow Answer

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