Question 1

Mutual fund managers tend to focus on the long-term performance of the corporations in whose securities they are invested, rather than their short-term quarterly performance.

Accepted Answer

A) True 
 B)False

Question 2

The risk premium is the rate that compensates for risk.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  $961.54
B)  $923.75
C)  $867.81
D)  $821.93E) A) and B)
F) A) and D)

Question 4

(Advanced analysis)  Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Accepted Answer

A)  4.8 percent
B)  5.2 percent
C)  5.7 percent
D)  6.2 percentE) A) and D)
F) All of the above

Question 5

Ownership of a single corporation is represented by what investment?

Accepted Answer

A)  stock
B)  bonds
C)  mutual funds
D)  commercial paperE) C) and D)
F) None of the above

Question 6

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

Question 7

In the accompanying graph, bracket A represents the

Accepted Answer

A)  rate of return for an asset.
B)  rate of return for the risk-free asset.
C)  risk premium for an asset with a certain risk level.
D)  compensation for time preference for an asset with a certain risk level.E) All of the above
F) C) and D)

Question 8

The risk-free interest rate is determined primarily by the

Accepted Answer

A)  largest commercial banks.
B)  Internal Revenue Service.
C)  U.S.Treasury.
D)  Federal Reserve.E) All of the above
F) B) and D)

Question 9

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

Question 10

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

Question 11

Assume that two firms (Firm A and Firm B)  are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock.Arbitrage will occur as investors

Accepted Answer

A)  sell Firm A's stock and buy Firm B's stock.
B)  buy Firm A's stock and buy Firm B's stock also.
C)  sell Firm A's stock and sell Firm B's stock also.
D)  buy Firm A's stock and sell Firm B's stock.E) None of the above
F) All of the above

Question 12

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 increases.E) C) and D)
F) All of the above

Question 13

Alex wants to borrow $1,000 from Kara.If he repays the loan in one year, Kara will require him to pay 5 percent interest on the loan.If Alex wants to repay the loan over three years, but Kara strongly prefers present to future consumption, we would expect the interest rate on a three-year loan to be

Accepted Answer

A)  lower than for a one-year loan.
B)  greater than for a one-year loan.
C)  the same as for a one-year loan.
D)  higher if Kara expected there to be no inflation over the loan repayment period.E) C) and D)
F) A) and B)

Question 14

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  assets minus liabilities incurred to acquire the assets
B)  benefits of an investment 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 D)
F) None of the above

Question 16

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000.Thea's per-year rate of return is

Accepted Answer

A)  4.8 percent.
B)  14.8 percent.
C)  20 percent.
D)  29.6 percent.E) A) and B)
F) B) and D)

Question 17

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) None of the above
F) C) and D)

Question 18

Refer to the graph.Which of the three Security Market Lines depicts the situation where investors most dislike risk?

Accepted Answer

A)  line A
B)  line B
C)  line C
D)  It cannot be determined from the graph.E) All of the above
F) None of the above

Question 19

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

Accepted Answer

A)  10 percent.
B)  20 percent.
C)  25 percent.
D)  30 percent.E) A) and B)
F) All of the above

Question 20

An investment's rate of return is positively related to the price paid for it.

Accepted Answer

A) True 
 B)False

Exam 17: Part C: Financial Economics

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

Correct AnswerverifiedShow Answer

In the accompanying graph, bracket A represents the

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the difference between economic and financial investments?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An investment's rate of return is positively related to the price paid for it.

Correct AnswerverifiedShow Answer

The two most important investor preferences are a desire for high rates of return and a dislike of inflation.

Correct AnswerverifiedShow Answer

The risk-free interest rate is determined primarily by the

Correct AnswerverifiedShow Answer

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000.Thea's per-year rate of return is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Ownership of a single corporation is represented by what investment?

Correct AnswerverifiedShow Answer

The risk premium is the rate that compensates for risk.

Correct AnswerverifiedShow Answer

Refer to the graph.Which of the three Security Market Lines depicts the situation where investors most dislike risk?

Correct AnswerverifiedShow Answer

The risk premium of a financial asset is the

Correct AnswerverifiedShow Answer

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years.If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

Correct AnswerverifiedShow Answer

Assume that two firms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock.Arbitrage will occur as investors

Correct AnswerverifiedShow Answer

Mutual fund managers tend to focus on the long-term performance of the corporations in whose securities they are invested, rather than their short-term quarterly performance.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Shawna bought an antique table for $200 last year and is now selling it for $250.Her rate of return on the table is

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

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