Question 1

Arbitrage occurs when

Accepted Answer

A)   bond and stock rates of return equalize.
B)   investors try to proﬁt from selling a lower rate of return asset to buy one that is nearly identical but with a higher rate of return.
C)   rates of return across all stocks equalize.
D)   investors move from lower to higher rate of return assets, regardless of the comparability of the assets.E) A) and B)
F) All of the above

Question 2

For most ﬁnancial assets, investors must be compensated for

Accepted Answer

A)   nondiversiﬁable and diversiﬁable risk.
B)   diversiﬁable risk and time preference.
C)   nondiversiﬁable risk and time preference.
D)   nondiversiﬁable and diversiﬁable risk, and time preference.E) A) and B)
F) B) and C)

Question 3

Which one of the following would best describe a mutual fund?

Accepted Answer

A)   an investment that is available at many banks and is FDIC insured
B)   a company that manages a portfolio that is purchased by pooling the money of its investors
C)   a debt contract that is issued by a company and offers interest payment on the loan
D)   ownership of shares in a corporation with no guarantee the company will be proﬁtableE) B) and D)
F) A) and B)

Question 4

Tracy won a $100 million jackpot. She can receive the jackpot as a $5 million payment each year for 20 years, or she can ask to receive the present value of all those payments all at once now. Assume
An annual interest rate of 5 percent. If she decides to take the present value payment, about how
Much will she receive?

Accepted Answer

A)   $52.1 million
B)   $62.3 million
C)   $71.4 million
D)   $78.6 millionE) B) and C)
F) A) and D)

Question 5

The Security Market Line depicts the relationship between the

Accepted Answer

A)   average expected rate of return on stocks and the average expected rate of return on bonds.
B)   average expected rate of return of a ﬁnancial asset and the discount rate.
C)   risk level of a ﬁnancial asset and the prime interest rate.
D)   average expected rate of return and risk level of a ﬁnancial asset.E) A) and C)
F) A) and B)

Question 6

How do actively managed funds differ from passively managed funds?

Accepted Answer

A)   Managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns.
B)   Actively managed funds focus on stocks; passively managed funds focus on bonds.
C)   Actively managed funds necessarily contain a greater variety of stocks or bonds than does a passively managed fund.
D)   Actively managed funds consistently outperform passively managed funds.E) A) and C)
F) All of the above

Question 7

The buying and selling process that leads proﬁt-seeking investors to equalize average expected rates of return from identical assets is known as

Accepted Answer

A)   diversiﬁcation.
B)   arbitrage.
C)   hedging.
D)   securitization.E) A) and C)
F) C) and D)

Question 8

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 9

A bond that pays annual interest (or coupons)  and a face value at maturity will fetch a price today that is equal to the

Accepted Answer

A)   future value of its annual coupons and face value.
B)   future value of its annual coupons minus its face value.
C)   present value of its annual coupons and face value.
D)   present value of its annual coupons minus its face vale.E) None of the above
F) B) and C)

Question 10

Nondiversiﬁable risk refers to potential losses from

Accepted Answer

A)   random ﬂuctuations in speciﬁc stocks.
B)   bad company policies.
C)   portfolio management fraud.
D)   events that move all investments in the same direction.E) C) and D)
F) A) and B)

Question 11

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

Question 12

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made during the period, after two years the borrower will owe

Accepted Answer

A)   $10,000.
B)   $10,600.
C)   $11,236.
D)   $11,910.E) None of the above
F) B) and C)

Question 13

The line that depicts the relationship between the average expected rate of return and the risk level of a ﬁnancial asset is known as the

Accepted Answer

A)   Beta Line.
B)   Security Market Line.
C)   Risk Premium Line.
D)   Risk-Return Line.E) A) and C)
F) B) and C)

Question 14

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Accepted Answer

A)   pooling.
B)   arbitrage.
C)   diversiﬁcation.
D)   weighted average.E) None of the above
F) A) and B)

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

Bonds represent

Accepted Answer

A)   a claim on company dividends.
B)   ownership of a company.
C)   all ﬁnancial assets guaranteed to pay interest.
D)   loans to governments and corporations.E) A) and B)
F) A) and C)

Question 18

Actively managed funds consistently outperform index funds.

Accepted Answer

A) True 
 B)False

Question 19

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.E) None of the above
F) B) and C)

Question 20

Investment returns

Accepted Answer

A)   are always positive.
B)   are only received when an asset is sold.
C)   are only received when there is a stream of multiple payments generated by the asset.
D)   can be received either through the sale of an asset or as a stream of payments.E) A) and B)
F) B) and C)

Exam 17: Financial Economics

Investment returns

Correct Answer
verified

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made during the period, after two years the borrower will owe

Correct Answer
verified

The line that depicts the relationship between the average expected rate of return and the risk level of a ﬁnancial asset is known as the

Correct Answer
verified

How do actively managed funds differ from passively managed funds?

Correct Answer
verified

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

Correct Answer
verified

Actively managed funds consistently outperform index funds.

Correct Answer
verified

For most ﬁnancial assets, investors must be compensated for

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Nondiversiﬁable risk refers to potential losses from

Correct Answer
verified

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Correct Answer
verified

Bonds represent

Correct Answer
verified

Arbitrage occurs when

Correct Answer
verified

The Security Market Line depicts the relationship between the

Correct Answer
verified

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

Correct Answer
verified

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 Answer
verified

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 Answer
verified

Which one of the following would best describe a mutual fund?

Correct Answer
verified

The buying and selling process that leads proﬁt-seeking investors to equalize average expected rates of return from identical assets is known as

Correct Answer
verified

Exam 17: Financial Economics

Investment returns

Correct AnswerverifiedShow Answer

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made during the period, after two years the borrower will owe

Correct AnswerverifiedShow Answer

The line that depicts the relationship between the average expected rate of return and the risk level of a ﬁnancial asset is known as the

Correct AnswerverifiedShow Answer

How do actively managed funds differ from passively managed funds?

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

Actively managed funds consistently outperform index funds.

Correct AnswerverifiedShow Answer

For most ﬁnancial assets, investors must be compensated for

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

Nondiversiﬁable risk refers to potential losses from

Correct AnswerverifiedShow Answer

A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the

Correct AnswerverifiedShow Answer

Bonds represent

Correct AnswerverifiedShow Answer

Arbitrage occurs when

Correct AnswerverifiedShow Answer

The Security Market Line depicts the relationship between the

Correct AnswerverifiedShow Answer

A strategy that attempts to reduce the overall risk of an entire investment portfolio by investing in a variety of assets is called

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

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

Which one of the following would best describe a mutual fund?

Correct AnswerverifiedShow Answer

The buying and selling process that leads proﬁt-seeking investors to equalize average expected rates of return from identical assets is known as

Correct AnswerverifiedShow Answer

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