Question 1

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 B)
F) All of the above

Question 2

Index funds:

Accepted Answer

A)   are passively managed.
B)   are actively managed.
C)   may be either passively or actively managed.
D)   are neither passively nor actively managed.E) All of the above
F) C) and D)

Question 3

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

Question 4

Which of the following financial assets is considered to be essentially risk-free?

Accepted Answer

A)   Gold.
B)   Stock in Fortune 500 companies.
C)   Real estate.
D)   Short-term U.S.government bonds.E) A) and C)
F) None of the above

Question 5

When shares of stock are sold for more than they are purchased,the difference received by the seller is referred to as:

Accepted Answer

A)   a dividend.
B)   a capital gain.
C)   interest.
D)   economic profit.E) B) and C)
F) C) and D)

Question 6

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received,from company profits,$1 for each share he owns. Refer to the information given.If Indy holds his shares for five years,he:

Accepted Answer

A)   will have received $500 in dividends.
B)   will earn a capital gain of $500.
C)   will receive $500 in interest.
D)   should sell the stock to maximize the return on his investment.E) None of the above
F) B) and C)

Question 7

Which institution is least likely to default on a bond?

Accepted Answer

A)   Local government.
B)   Small corporation.
C)   U.S.federal government.
D)   Large corporation.E) C) and D)
F) A) and D)

Question 8

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

Question 9

The Standard and 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.E) A) and B)
F) A) and C)

Question 10

Which of the following is common to all investments?

Accepted Answer

A)   The payment of interest.
B)   Some price must be paid to acquire them.
C)   Owners are guaranteed future payments.
D)   Government insurance backs them.E) All of the above
F) A) and B)

Question 11

Portfolio diversification:

Accepted Answer

A)   reduces the likelihood that the entire amount invested will be lost.
B)   eliminates all risk of loss.
C)   ensures that investors will receive a positive rate of return.
D)   provides the maximum possible rate of return from an investment portfolio.E) A) and C)
F) A) and B)

Question 12

Arbitrage will cause a shift in the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 13

(Advanced analysis) Susie has $500 invested in a financial asset earning an annually compounded interest rate of 8 percent.If Susie plans to cash in the asset when it is worth $700,about how long will she have to wait?

Accepted Answer

A)   4.4 years.
B)   5 years.
C)   6.1 years.
D)   8 years.E) C) and D)
F) B) and D)

Question 14

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately:

Accepted Answer

A)   1.3 percent.
B)   2 percent.
C)   5 percent.
D)   20 percent.E) All of the above
F) A) and B)

Question 15

Lee buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately:

Accepted Answer

A)   4 percent.
B)   8 percent.
C)   12.5 percent.
D)   25 percent.E) B) and D)
F) A) and D)

Question 16

Payments to holders of corporate bonds are known as dividends.

Accepted Answer

A) True 
 B)False

Question 17

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) B) and C)
F) C) and D)

Question 18

Peter is saving money for a vacation he wants to take five years from now.If the trip will cost $1,000 and he puts his money into a savings account paying 4 percent interest,compounded annually,how much would Peter need to deposit today to reach his goal without making further deposits?

Accepted Answer

A)   $961.54.
B)   $923.75.
C)   $867.81.
D)   $821.93.E) All of the above
F) B) and C)

Question 19

The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as:

Accepted Answer

A)   hedging the market.
B)   passive fund management.
C)   arbitrage.
D)   portfolio balancing.E) A) and B)
F) A) and C)

Question 20

Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should:

Accepted Answer

A)   not affect their rates of return.
B)   increase the return on the asset with the higher rate of return as the demand for it increases.
C)   increase the gap between the two rates of return.
D)   eventually equalize their rates of return.E) A) and B)
F) None of the above

Exam 36: Financial Economics

Payments to holders of corporate bonds are known as dividends.

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(Advanced analysis) Susie has $500 invested in a financial asset earning an annually compounded interest rate of 8 percent.If Susie plans to cash in the asset when it is worth $700,about how long will she have to wait?

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Lee buys a bond for $10,000 and receives interest payments of $400 every six months.The interest rate on the bond is approximately:

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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

The risk premium of a financial asset is the:

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

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Which institution is least likely to default on a bond?

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Index funds:

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Which of the following is common to all investments?

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Peter is saving money for a vacation he wants to take five years from now.If the trip will cost $1,000 and he puts his money into a savings account paying 4 percent interest,compounded annually,how much would Peter need to deposit today to reach his goal without making further deposits?

Correct AnswerverifiedShow Answer

Mark buys a bond for $8,000 and receives interest payments of $100 every three months.The interest rate on the bond is approximately:

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Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received,from company profits,$1 for each share he owns. Refer to the information given.If Indy holds his shares for five years,he:

Correct AnswerverifiedShow Answer

The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as:

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How do actively managed funds differ from passively managed funds?

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Which of the following financial assets is considered to be essentially risk-free?

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Suppose two corporate bonds with similar risk pay different rates of return.The process of arbitrage should:

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Arbitrage will cause a shift in the Security Market Line.

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The Standard and Poor's 500 Index measures prices of the 500:

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When shares of stock are sold for more than they are purchased,the difference received by the seller is referred to as:

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Portfolio diversification:

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