Question 1

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 banksE) None of the above
F) A) and B)

Question 2

Kelly buys a share of stock for $20 that she sells a year later for $15.Kelly's rate of return is

Accepted Answer

A)  positive 33 percent.
B)  negative 33.3 percent.
C)  negative 25 percent.
D)  negative 75 percent.E) B) and D)
F) B) and C)

Question 3

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Accepted Answer

A)  capital gains; dividends
B)  dividends; capital gains
C)  interest; dividends
D)  interest; capital gainsE) A) and D)
F) A) and C)

Question 4

If investors are reasonably tolerant of risk, the Security Market Line will be relatively flat.

Accepted Answer

A) True 
 B)False

Question 5

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

Question 6

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

Question 7

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

Accepted Answer

A)  5 times the nondiversifiable risk of the market portfolio.
B)  5 times the nondiversifiable risk of Y.
C)  2.5 times the nondiversifiable risk of Y.
D)  2.5 times the diversifiable risk of the market portfolio.E) C) and D)
F) B) and D)

Question 8

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 9

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

Question 10

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

Question 11

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.E) All of the above
F) B) and D)

Question 12

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 investment.E) B) and D)
F) A) and D)

Question 13

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 return.E) B) and D)
F) A) and B)

Question 14

Arbitrage will cause a shift in the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 15

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 bondsE) None of the above
F) A) and C)

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.E) All of the above
F) B) and D)

Question 17

Stocks represent a debt, and buyers of stock expect to earn interest.

Accepted Answer

A) True 
 B)False

Question 18

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) None of the above
F) A) and B)

Question 19

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

Question 20

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 percent.E) All of the above
F) A) and C)

Exam 37: Financial Economics

For heavily traded assets like stocks and bonds, arbitrage

Correct AnswerverifiedShow Answer

The beta for an asset considered to be risk-free

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

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

Correct AnswerverifiedShow Answer

If a corporation goes bankrupt,

Correct AnswerverifiedShow Answer

If an investor owns a well-diversified portfolio, then

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Stocks represent a debt, and buyers of stock expect to earn interest.

Correct AnswerverifiedShow Answer

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5.From this we can conclude that X has

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

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

Correct AnswerverifiedShow Answer

If investors are reasonably tolerant of risk, the Security Market Line will be relatively flat.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Kelly buys a share of stock for $20 that she sells a year later for $15.Kelly's rate of return is

Correct AnswerverifiedShow Answer

Arbitrage will cause a shift in the Security Market Line.

Correct AnswerverifiedShow Answer

What is the difference between economic and financial investments?

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

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