Question 1

Diversification in one's investments reduces:

Accepted Answer

A)   Idiosyncratic risk
B)   Pooling risk
C)   Systemic risk
D)   Time preference riskE) B) and D)
F) None of the above

Question 2

During the Financial Crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to:

Accepted Answer

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

Question 3

If stockholders sell their shares for more than they paid for those shares, the stockholders:

Accepted Answer

A)   Realize a share of equal profits
B)   Receive a dividend
C)   Realize a capital gain
D)   Obtain a mutual fundE) None of the above
F) All of the above

Question 4

The vertical intercept of the Security Market Line (SML)  shows the:

Accepted Answer

A)   Amount of arbitrage
B)   Risk-free interest rate
C)   Beta of the market portfolio
D)   Risk premium for the market portfolioE) B) and D)
F) A) and B)

Question 5

An asset with a beta of 0.5 has:

Accepted Answer

A)   5 percent more risk than the risk-free asset
B)   50 percent more risk than the risk-free asset
C)   Half the nondiversifiable risk as in a market portfolio
D)   5 times the nondiversifiable risk as in a market portfolioE) A) and D)
F) None of the above

Question 6

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 B)
F) A) and C)

Question 7

The Security Market Line (SML)  is upward-sloping, indicating that the:

Accepted Answer

A)   Beta of an investment increases as its risk level increases
B)   Average expected return on investments decreases as their risk level decreases
C)   Average expected return on the risk-free asset increases as its beta increases
D)   Average expected return of the market portfolio increases as its beta increasesE) B) and D)
F) B) and C)

Question 8

Equal shares of a firm's profit are paid out to stockholders as:

Accepted Answer

A)   Interest
B)   Dividends
C)   Capital gains
D)   Net earningsE) All of the above
F) A) and B)

Question 9

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is:

Accepted Answer

A)   34 percent
B)   32 percent
C)   30 percent
D)   12 percentE) All of the above
F) C) and D)

Question 10

Bankruptcy of a firm means that it:

Accepted Answer

A)   Earned less revenues than its total costs
B)   Cannot meet its contractual obligations to its stockholders
C)   Has a lot of debt owed to its bondholders
D)   Is unable to make timely promised payments on its debtE) A) and D)
F) B) and C)

Question 11

Rick recently purchased a convenience store for $500,000. He expects monthly profits to be $10,000 in the next year. If a recession had struck, and Rick had instead paid $300,000 while his monthly profits was reduced to $6,000, his expected rate of return would have:

Accepted Answer

A)   Increased by 2 percentage points
B)   Increased by 3 percentage points
C)   Decreased by 2 percentage points
D)   Remained the sameE) All of the above
F) A) and D)

Question 12

The compound interest formula states that if X dollars is invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)   Assets minus liabilities incurred to acquire the assets
B)   Benefits of an 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 B)
F) None of the above

Question 14

Which one of the following is a feature of all investments?

Accepted Answer

A)   The future payments are typically risky
B)   The periodic payments they provide are regular
C)   They typically are short term
D)   They give the investor a stream of future payments, not just one paymentE) A) and D)
F) None of the above

Question 15

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

Accepted Answer

A)   $10,000
B)   $10,600
C)   $11,236
D)   $11,910E) A) and D)
F) B) and C)

Question 16

Which of the following statements about stocks and bonds is true?

Accepted Answer

A)   Stocks pay interest while bonds pay dividends
B)   One can lose with stocks, but not with bonds
C)   The U.S. Federal government issues bonds, but not stocks
D)   Bonds are long term while stocks are short term investmentsE) All of the above
F) B) and C)

Question 17

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 18

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Accepted Answer

A) True 
 B)False

Question 19

Stock investors can earn a return from stocks only in the form of dividends.

Accepted Answer

A) True 
 B)False

Question 20

A bond that is currently selling at $1000 offers to pay $50 annually. What is the percentage rate of return on the bond?

Accepted Answer

A)   5 percent
B)   10 percent
C)   20 percent
D)   50 percentE) A) and B)
F) All of the above

Exam 17: Financial Economics

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

Correct AnswerverifiedShow Answer

Which one of the following is a feature of all investments?

Correct AnswerverifiedShow Answer

Which of the following statements about stocks and bonds is true?

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

An asset with a beta of 0.5 has:

Correct AnswerverifiedShow Answer

Diversification in one's investments reduces:

Correct AnswerverifiedShow Answer

The vertical intercept of the Security Market Line (SML) shows the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The compound interest formula states that if X dollars is invested today at an interest rate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.

Correct AnswerverifiedShow Answer

The average expected rate of return on an asset can be fully understood as the rate that compensates for risk.

Correct AnswerverifiedShow Answer

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is:

Correct AnswerverifiedShow Answer

Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

Correct AnswerverifiedShow Answer

A bond that is currently selling at $1000 offers to pay $50 annually. What is the percentage rate of return on the bond?

Correct AnswerverifiedShow Answer

Equal shares of a firm's profit are paid out to stockholders as:

Correct AnswerverifiedShow Answer

Bankruptcy of a firm means that it:

Correct AnswerverifiedShow Answer

The Security Market Line (SML) is upward-sloping, indicating that the:

Correct AnswerverifiedShow Answer

Rick recently purchased a convenience store for $500,000. He expects monthly profits to be $10,000 in the next year. If a recession had struck, and Rick had instead paid $300,000 while his monthly profits was reduced to $6,000, his expected rate of return would have:

Correct AnswerverifiedShow Answer

During the Financial Crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to:

Correct AnswerverifiedShow Answer

Stock investors can earn a return from stocks only in the form of dividends.

Correct AnswerverifiedShow Answer

If stockholders sell their shares for more than they paid for those shares, the stockholders:

Correct AnswerverifiedShow Answer

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