Question 1

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Accepted Answer

A) True 
 B)False

Question 2

Risk in finance means that an asset:

Accepted Answer

A)   Does not pay dividends
B)   Does not pay capital gains
C)   Has a present value that is negative
D)   Has future payments that are uncertainE) All of the above
F) C) and D)

Question 3

Which one of the following is an example of a financial investment but not an economic investment?

Accepted Answer

A)   A renovation of a shopping mall
B)   An addition to a petroleum refinery
C)   Building a new store
D)   Buying gold to sell later at a higher priceE) B) and C)
F) None of the above

Question 4

Refer to the graph above. The bracket B represents the:

Accepted Answer

A)   Amount of arbitrage for this asset
B)   Rate of return for the market portfolio
C)   Risk premium for an asset's risk level
D)   Compensation for time preference for an assetE) B) and D)
F) A) and D)

Question 5

An investor wants to invest in the oil industry, but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By buying several companies to reduce risk, the investor is seeking to reduce:

Accepted Answer

A)   Systemic risk
B)   The risk premium
C)   Idiosyncratic risk
D)   Nondiversifiable riskE) A) and B)
F) A) and C)

Question 6

The present value model of investment states that an asset's current price should be equal to the:

Accepted Answer

A)   Sum of the present values of all of its future payments or earnings
B)   Sum of all of its future payments or earnings times the number of years of its life
C)   Life of the asset times the present values of all of its future payments or earnings
D)   Present values of all of its future payments or earnings divided by its life in yearsE) A) and D)
F) A) and C)

Question 7

Which one of the following is an example of an economic investment?

Accepted Answer

A)   Putting money in a bank CD
B)   Buying a corporate bond or stock
C)   Purchasing shares of a mutual fund
D)   Building a new bank officeE) B) and D)
F) None of the above

Question 8

You deposit $5,000 in a 5-year bank CD that pays 3% interest per year. How much will you get from this deposit be at maturity?

Accepted Answer

A)   $5,155
B)   $5,751
C)   $5,796
D)   $6,500E) None of the above
F) All of the above

Question 9

Compound interest describes increases in value when interest is paid, or compounded, on:

Accepted Answer

A)   Only the original amount invested
B)   Only the previously accumulated interest payments
C)   The original amount invested and previously accumulated interest payments
D)   The original amount invested minus any previously accumulated interest paymentsE) B) and D)
F) All of the above

Question 10

Xavier is a baseball player negotiating a contract to play for a team for one year. He is usually paid $10 million a year for playing, but the salary caps for his team means that he will have to be paid $5 million this year and the remainder next year. If the interest rate is 8 percent, how much should that remaining amount be next year?

Accepted Answer

A)   $5.0 million
B)   $5.1 million
C)   $5.4 million
D)   $6.1 millionE) A) and B)
F) B) and D)

Question 11

A recession in an economy would be an example of a diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 12

If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

Accepted Answer

A) True 
 B)False

Question 13

Other factors constant, the present value will be larger:

Accepted Answer

A)   The smaller is the future value
B)   The higher is the interest rate
C)   The larger is the number of periods t
D)   The shorter is the time period tE) C) and D)
F) None of the above

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 percentE) A) and B)
F) A) and C)

Question 15

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S. government bonds.

Accepted Answer

A) True 
 B)False

Question 16

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 fundE) All of the above
F) A) and C)

Question 17

Stockholders of a company can benefit from either capital gains or dividends when the company is profitable.

Accepted Answer

A) True 
 B)False

Question 18

Assume that two firms (Firm A and Firm B)  are very 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 stockE) A) and B)
F) A) 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 companiesE) B) and C)
F) None of the above

Question 20

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Accepted Answer

A) True 
 B)False

Exam 17: Financial Economics

Other factors constant, the present value will be larger:

Correct Answer
verified

The present value model of investment states that an asset's current price should be equal to the:

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

A recession in an economy would be an example of a diversifiable risk.

Correct Answer
verified

An index fund:

Correct Answer
verified

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Correct Answer
verified

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Correct Answer
verified

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S. government bonds.

Correct Answer
verified

Correct Answer
verified

Which one of the following is an example of an economic investment?

Correct Answer
verified

Refer to the graph above. The bracket B represents the:

Correct Answer
verified

Risk in finance means that an asset:

Correct Answer
verified

Compound interest describes increases in value when interest is paid, or compounded, on:

Correct Answer
verified

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 Answer
verified

You deposit $5,000 in a 5-year bank CD that pays 3% interest per year. How much will you get from this deposit be at maturity?

Correct Answer
verified

Stockholders of a company can benefit from either capital gains or dividends when the company is profitable.

Correct Answer
verified

Which one of the following is an example of a financial investment but not an economic investment?

Correct Answer
verified

If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

Correct Answer
verified

An investor wants to invest in the oil industry, but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By buying several companies to reduce risk, the investor is seeking to reduce:

Correct Answer
verified

Assume that two firms (Firm A and Firm B) are very 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 Answer
verified

Exam 17: Financial Economics

Other factors constant, the present value will be larger:

Correct AnswerverifiedShow Answer

The present value model of investment states that an asset's current price should be equal to the:

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

A recession in an economy would be an example of a diversifiable risk.

Correct AnswerverifiedShow Answer

An index fund:

Correct AnswerverifiedShow Answer

Bonds issued by the Federal government are riskier than bonds issued by corporations.

Correct AnswerverifiedShow Answer

Arbitrage activities will make the price of the asset with the higher initial return increase, while the price of the asset with the lower return will decrease.

Correct AnswerverifiedShow Answer

The so-called risk-free rate in financial markets is indicated by the rate of return on short-term U.S. government bonds.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following is an example of an economic investment?

Correct AnswerverifiedShow Answer

Refer to the graph above. The bracket B represents the:

Correct AnswerverifiedShow Answer

Risk in finance means that an asset:

Correct AnswerverifiedShow Answer

Compound interest describes increases in value when interest is paid, or compounded, on:

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

You deposit $5,000 in a 5-year bank CD that pays 3% interest per year. How much will you get from this deposit be at maturity?

Correct AnswerverifiedShow Answer

Stockholders of a company can benefit from either capital gains or dividends when the company is profitable.

Correct AnswerverifiedShow Answer

Which one of the following is an example of a financial investment but not an economic investment?

Correct AnswerverifiedShow Answer

If an asset has a beta of 1.5, it has 50 percent more nondiversifiable risk than the market portfolio.

Correct AnswerverifiedShow Answer

An investor wants to invest in the oil industry, but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By buying several companies to reduce risk, the investor is seeking to reduce:

Correct AnswerverifiedShow Answer

Assume that two firms (Firm A and Firm B) are very 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

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