Question 1

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Accepted Answer

A)  believe the rate of return they could find in other financial assets is less than that implied in the extended payout.
B)  sacrifice free money and are making an economically irrational decision.
C)  prefer immediate to delayed returns.
D)  are only making a rational economic decision if there is rapid inflation.E) A) and B)
F) None of the above

Question 2

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) C) and D)

Question 3

Index funds are an example of passively managed funds.

Accepted Answer

A) True 
 B)False

Question 4

The expected rate of return from an investment is

Accepted Answer

A)  the rate that compensates for time preference only.
B)  the rate that compensates for risk only.
C)  the rate that compensates for time preference plus the rate that compensates for risk.
D)  the rate that compensates for time preference minus the rate that compensates for risk.E) B) and C)
F) A) and B)

Question 5

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Accepted Answer

A)  8 percent.
B)  10.4 percent.
C)  12.2 percent.
D)  24 percent.E) C) and D)
F) B) and D)

Question 6

Which of the following statements is true about buying an old factory?

Accepted Answer

A)  It is a financial investment but not an economic investment.
B)  It is an economic investment but not a financial investment.
C)  It is both an economic and a financial investment.
D)  It is neither an economic nor a financial investment.E) A) and C)
F) A) and B)

Question 7

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

Accepted Answer

A)  Issuers of stocks can default on their stock obligations.
B)  Investing in stocks involves less risk because the future payments are less uncertain.
C)  In case of bankruptcy, bondholders get paid first ahead of stockholders.
D)  Bankruptcy occurs when the issuing firm is unable to fulfill its stock obligations.E) A) and B)
F) B) and C)

Question 8

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

Question 9

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) None of the above
F) All of the above

Question 10

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

Question 11

The present value of a future amount of money will be greater the

Accepted Answer

A)  greater the interest rate.
B)  less the amount of time before the future payment is received.
C)  more the amount of time before the future payment is received.
D)  greater the expected rate of inflation.E) A) and D)
F) C) and D)

Question 12

(Last Word)  Before being adjusted for costs,

Accepted Answer

A)  actively managed funds outperform index funds.
B)  actively managed funds and index funds perform about the same.
C)  index funds outperform actively managed funds.
D)  arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds.E) None of the above
F) A) and C)

Question 13

Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return

Accepted Answer

A)  is 0.5 percent.
B)  is 5 percent.
C)  is 6 percent.
D)  cannot be determined until she sells the house.E) None of the above
F) B) and D)

Question 14

Arbitrage will cause a shift in the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 15

Nondiversifiable risk refers to potential losses from

Accepted Answer

A)  random fluctuations in specific stocks.
B)  bad company policies.
C)  portfolio management fraud.
D)  events that move all investments in the same direction.E) A) and B)
F) A) and C)

Question 16

The vertical intercept of the Security Market Line is determined by the

Accepted Answer

A)  beta of the market portfolio.
B)  discount rate.
C)  risk-free interest rate.
D)  risk premium.E) B) and D)
F) B) and C)

Question 17

A stockholder owning 5 percent of a company's stock

Accepted Answer

A)  is guaranteed to receive 5 percent of the company's yearly profits.
B)  is personally responsible for 5 percent of the debts if the company goes bankrupt.
C)  has 5 percent of her personal assets vulnerable if the company goes bankrupt.
D)  gets 5 percent of the votes at the shareholders' meetings.E) B) and C)
F) A) and B)

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

The so-called market portfolio used as a benchmark in financial economics is

Accepted Answer

A)  the lowest risk portfolio.
B)  the most diversified portfolio.
C)  the portfolio with the highest expected return.
D)  the portfolio with zero systemic risk.E) A) and B)
F) A) and C)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 17: C: Financial Economics

The present value of a future amount of money will be greater the

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Arbitrage will cause a shift in the Security Market Line.

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

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Nondiversifiable risk refers to potential losses from

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

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(Last Word) Before being adjusted for costs,

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Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Correct AnswerverifiedShow Answer

The expected rate of return from an investment is

Correct AnswerverifiedShow Answer

Lottery winners who take the lump-sum payouts instead of payments spread out over many years

Correct AnswerverifiedShow Answer

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

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Index funds are an example of passively managed funds.

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An index fund

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Katie buys a house for $200,000 and rents it for $1,000 per month.Katie's annual rate of return

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The vertical intercept of the Security Market Line is determined by the

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Which of the following statements is true about buying an old factory?

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In the accompanying graph, point Y represents the

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

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The so-called market portfolio used as a benchmark in financial economics is

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

A stockholder owning 5 percent of a company's stock

Correct AnswerverifiedShow Answer

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