Question 1

Economic investment refers to the buying or selling of any asset in expectation of a financial gain.

Accepted Answer

A) True 
 B)False

Question 2

Terri buys a house for $200,000 and expects to sell it in three years for $300,000.Her expected percentage rate of return over that three-year period is

Accepted Answer

A)  25 percent.
B)  33 percent.
C)  50 percent.
D)  67 percent.E) A) and C)
F) B) and C)

Question 3

In general, risk levels and average expected rates of return are

Accepted Answer

A)  not related.
B)  inversely related.
C)  directly related.
D)  as often inversely related as they are directly related.E) None of the above
F) B) and D)

Question 4

At the end of 2015, U.S.households and nonprofit organizations held approximately in mutual funds.

Accepted Answer

A)  $5.3 billion
B)  $6 trillion
C)  $8.1 trillion
D)  $70 trillionE) A) and B)
F) A) and C)

Question 5

(Consider This)  According to critics, growth in the popularity of mutual funds has

Accepted Answer

A)  significantly increased market risk for investors.
B)  created more macroeconomic instability.
C)  led corporate management and fund managers to focus more on short-run share prices than long-run investor returns.
D)  discouraged average citizens from investing in stock and bond markets.E) B) and C)
F) A) and C)

Question 6

The risk-free market rate is essentially the rate of return that compensates solely for time preference.

Accepted Answer

A) True 
 B)False

Question 7

The limited liability rule means that if a corporation goes bankrupt,

Accepted Answer

A)  shareholders are responsible for all the debts of the firm.
B)  bondholders are responsible for all the debts of the firm.
C)  shareholders can only lose the amount they invested.
D)  bondholders only lose the face value of the bond.E) A) and C)
F) A) and D)

Question 8

Refer to the graph. A movement of the Security Market Line from SML2 to SML1 and of the highlighted asset from A2 to A1 would be caused by A) expansionary monetary policy and arbitrage, respectively. B) arbitrage and expansionary monetary policy, respectively. C) restrictive monetary policy and arbitrage, respectively. D) arbitrage and restrictive monetary policy, respectively." class="answers-bank-image d-inline" rel="preload" > Refer to the graph. A movement of the Security Market Line from SML2 to SML1 and of the highlighted asset from A2 to A1 would be caused by

Accepted Answer

A)  expansionary monetary policy and arbitrage, respectively.
B)  arbitrage and expansionary monetary policy, respectively.
C)  restrictive monetary policy and arbitrage, respectively.
D)  arbitrage and restrictive monetary policy, respectively.E) B) and C)
F) None of the above

Question 9

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

Accepted Answer

A)  $205
B)  $210
C)  $240
D)  $300E) None of the above
F) B) and C)

Question 10

Arbitrage causes an equalization of the when assets are identical or nearly identical.

Accepted Answer

A)  levels of risk of assets
B)  rates of return of assets
C)  time when payments are made from assets
D)  prices of assetsE) B) and C)
F) A) and B)

Question 11

The so-called risk-free rate essentially measures the investors'

Accepted Answer

A)  risk aversion.
B)  risk preference.
C)  time preference.
D)  expected rate of return.E) A) and B)
F) A) and D)

Question 12

What do bonds represent?

Accepted Answer

A)  shares of ownership in a corporation and a guaranteed stream of profits
B)  shares of ownership in a corporation and an entitlement to its future profits
C)  debt contracts with corporations or governments and regular interest payments on the loan
D)  debt contracts with corporations or governments and some unspecified interest payments on the loanE) All of the above
F) B) and D)

Question 13

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

Accepted Answer

A)  $38,050
B)  $39,516
C)  $40,323
D)  $42,108E) B) and D)
F) B) and C)

Question 14

Alma recently purchased a Mexican restaurant for $450,000, from which she expects to earn a monthly profit of $1,500.Her expected annual rate of return is

Accepted Answer

A)  4 percent.
B)  6 percent.
C)  8 percent.
D)  10 percent.E) None of the above
F) A) and D)

Question 15

A mutual fund company uses the funds of its investors to

Accepted Answer

A)  produce goods and services for consumers.
B)  buy stocks and bonds.
C)  build factories and other infrastructure.
D)  buy capital and other resources for other firms.E) C) and D)
F) B) and D)

Question 16

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

Accepted Answer

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

Question 17

(Last Word)  Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about percent per year.

Accepted Answer

A)  5
B)  1
C)  zero
D)  3E) None of the above
F) B) and D)

Question 18

Portfolio diversification eliminates all of the from a portfolio.

Accepted Answer

A)  risk
B)  diversifiable risk
C)  nondiversifiable risk
D)  risk from business cycle fluctuationsE) B) and D)
F) B) and C)

Question 19

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

Accepted Answer

A)  interest.
B)  dividends.
C)  capital gains.
D)  net earnings.E) A) and B)
F) A) and C)

Question 20

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

Exam 17: Part C: Financial Economics

Refer to the graph. A movement of the Security Market Line from SML2 to SML1 and of the highlighted asset from A2 to A1 would be caused by

Correct AnswerverifiedShow Answer

Portfolio diversification eliminates all of the from a portfolio.

Correct AnswerverifiedShow Answer

(Last Word) Before trading costs and management fees are taken into account, passively managed funds outperform actively managed funds by about percent per year.

Correct AnswerverifiedShow Answer

Alma recently purchased a Mexican restaurant for $450,000, from which she expects to earn a monthly profit of $1,500.Her expected annual rate of return is

Correct AnswerverifiedShow Answer

Arbitrage causes an equalization of the when assets are identical or nearly identical.

Correct AnswerverifiedShow Answer

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of one year?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Terri buys a house for $200,000 and expects to sell it in three years for $300,000.Her expected percentage rate of return over that three-year period is

Correct AnswerverifiedShow Answer

A mutual fund company uses the funds of its investors to

Correct AnswerverifiedShow Answer

Economic investment refers to the buying or selling of any asset in expectation of a financial gain.

Correct AnswerverifiedShow Answer

The so-called risk-free rate essentially measures the investors'

Correct AnswerverifiedShow Answer

(Consider This) According to critics, growth in the popularity of mutual funds has

Correct AnswerverifiedShow Answer

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in

Correct AnswerverifiedShow Answer

How do actively managed funds differ from passively managed funds?

Correct AnswerverifiedShow Answer

The risk-free market rate is essentially the rate of return that compensates solely for time preference.

Correct AnswerverifiedShow Answer

In general, risk levels and average expected rates of return are

Correct AnswerverifiedShow Answer

The limited liability rule means that if a corporation goes bankrupt,

Correct AnswerverifiedShow Answer

You would like to have $50,000 for a new car in six years.If you deposit money today in a bank CD that pays 4 percent per year, how much must your deposit be?

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What do bonds represent?

Correct AnswerverifiedShow Answer

At the end of 2015, U.S.households and nonprofit organizations held approximately in mutual funds.

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