Question 1

An investor with a diversified portfolio is generally less concerned about

Accepted Answer

A)  the diversifiable risk of potential new investments.
B)  rates of return of potential new investments.
C)  the nondiversifiable risk of potential new investments.
D)  recessions.E) B) and C)
F) A) and D)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements best reflects the concept of present value?

Accepted Answer

A)  "The savings bond I bought five years ago is now worth $1,000."
B)  "My $100 savings bond will be worth $200 in 10 years."
C)  "You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now."
D)  "The $5,000 in my savings account is worth less today than five years ago because of inflation."E) All of the above
F) None of the above

Question 4

If an asset has a risk-return combination that is below the Security Market Line (SML) , then this indicates that the asset's

Accepted Answer

A)  expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio.
B)  expected rate of return is higher than could be had from some combination of the risk-free asset and the market portfolio.
C)  price will rise as arbitrage proceeds in the market.
D)  risk will rise as arbitrage proceeds in the market.E) C) and D)
F) B) and C)

Question 5

The terms "economic investment" and "financial investment" can be used synonymously.

Accepted Answer

A) True 
 B)False

Question 6

In the accompanying graph, point Y represents the

Accepted Answer

A)  rate of return for the market portfolio.
B)  rate of return for the risk-free asset.
C)  risk premium for the market portfolio.
D)  compensation for time preference for a given asset.E) A) and B)
F) A) and C)

Question 7

Limited liability rules

Accepted Answer

A)  mean that bankrupt companies owe nothing to corporate bondholders.
B)  discourage investment in corporate stock.
C)  help prevent corporate fraud.
D)  encourage stock investing by limiting shareholder risk of loss.E) B) and C)
F) B) and D)

Question 8

Time value of money refers to the idea that a specific amount of money

Accepted Answer

A)  can be converted into other currencies in the foreign exchange market.
B)  is needed to purchase goods and services.
C)  is more valuable the sooner it is received.
D)  can buy less goods and services if inflation occurs over time.E) None of the above
F) A) and B)

Question 9

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

Question 10

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, Rick had instead paid $300,000, and his monthly profits were 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 same.E) A) and D)
F) C) and D)

Question 11

An index fund

Accepted Answer

A)  is a passively managed mutual fund.
B)  has higher trading costs than an actively managed mutual fund.
C)  has higher trading costs than a passively managed mutual fund.
D)  is an actively managed mutual fund.E) A) and B)
F) None of the above

Question 12

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) A) and D)
F) A) and C)

Question 13

The steeper the Security Market Line,

Accepted Answer

A)  the lower the risk premium.
B)  the more investors dislike risk.
C)  the less investors are concerned about risk.
D)  the greater the risk-free interest rate.E) B) and C)
F) C) and D)

Question 14

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

Question 15

Compound interest refers to the multiple interest rates an investor will be paid in a diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 16

The concept of time preference in financial investing rests on the belief that people

Accepted Answer

A)  are indifferent between present and future consumption.
B)  are patient.
C)  are impatient.
D)  intentionally consume 50 percent of assets in the present and 50 percent in the future.E) A) and C)
F) B) and C)

Question 17

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Accepted Answer

A) True 
 B)False

Question 18

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

Question 19

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Accepted Answer

A)  increase, and the rates of return would decrease relative to other companies.
B)  decrease, and the rates of return would increase relative to other companies.
C)  decrease, but the rates of return would stay the same relative to other companies.
D)  decrease, and the rates of return would decrease relative to other companies.E) All of the above
F) A) and B)

Question 20

(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 yearsE) A) and D)
F) None of the above

Exam 17: Part C: Financial Economics

In the accompanying graph, point Y represents the

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Correct Answer
verified

The concept of time preference in financial investing rests on the belief that people

Correct Answer
verified

Compound interest refers to the multiple interest rates an investor will be paid in a diversified portfolio.

Correct Answer
verified

Which of the following statements best reflects the concept of present value?

Correct Answer
verified

If an asset has a risk-return combination that is below the Security Market Line (SML) , then this indicates that the asset's

Correct Answer
verified

(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?

Correct Answer
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The steeper the Security Market Line,

Correct Answer
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A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Correct Answer
verified

The terms "economic investment" and "financial investment" can be used synonymously.

Correct Answer
verified

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, Rick had instead paid $300,000, and his monthly profits were reduced to $6,000, his expected rate of return would have

Correct Answer
verified

An index fund

Correct Answer
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An investor with a diversified portfolio is generally less concerned about

Correct Answer
verified

Correct Answer
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Limited liability rules

Correct Answer
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Time value of money refers to the idea that a specific amount of money

Correct Answer
verified

According to the concept of the time value of money,

Correct Answer
verified

For most financial assets, investors must be compensated for

Correct Answer
verified

Exam 17: Part C: Financial Economics

In the accompanying graph, point Y represents the

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If investors showed less of a preference for investing in war-related companies, then it would be expected that the stock prices for those companies would

Correct AnswerverifiedShow Answer

The concept of time preference in financial investing rests on the belief that people

Correct AnswerverifiedShow Answer

Compound interest refers to the multiple interest rates an investor will be paid in a diversified portfolio.

Correct AnswerverifiedShow Answer

Which of the following statements best reflects the concept of present value?

Correct AnswerverifiedShow Answer

If an asset has a risk-return combination that is below the Security Market Line (SML) , then this indicates that the asset's

Correct AnswerverifiedShow Answer

(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?

Correct AnswerverifiedShow Answer

The steeper the Security Market Line,

Correct AnswerverifiedShow Answer

A portfolio of many different stocks and bonds protects against nondiversifiable risk.

Correct AnswerverifiedShow Answer

The terms "economic investment" and "financial investment" can be used synonymously.

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, Rick had instead paid $300,000, and his monthly profits were reduced to $6,000, his expected rate of return would have

Correct AnswerverifiedShow Answer

An index fund

Correct AnswerverifiedShow Answer

An investor with a diversified portfolio is generally less concerned about

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Limited liability rules

Correct AnswerverifiedShow Answer

Time value of money refers to the idea that a specific amount of money

Correct AnswerverifiedShow Answer

According to the concept of the time value of money,

Correct AnswerverifiedShow Answer

For most financial assets, investors must be compensated for

Correct AnswerverifiedShow Answer

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