Question 1

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 B)

Question 2

Owners of stock can receive ___________ from their shares;sellers of stock can receive ___________ from selling their shares.

Accepted Answer

A)   capital gains;dividends
B)   dividends;capital gains
C)   interest;dividends
D)   interest;capital gainsE) A) and C)
F) B) and C)

Question 3

The market portfolio,by definition,has a beta = 0.

Accepted Answer

A) True 
 B)False

Question 4

What are the two most important factors influencing investor preferences?

Accepted Answer

A)   The desire for high rates of return and the thrill of uncertainty.
B)   The desire for high rates of return and dislike of risk and uncertainty.
C)   An equal balance between stocks and bonds,and high rates of return.
D)   Stable rates of return and balance between private and public sector financial assets.E) A) and D)
F) A) and C)

Question 5

Isaiah just purchased a house built in 1986.His purchase would be considered:

Accepted Answer

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

Question 6

Which of the following is a difference between stocks and bonds?

Accepted Answer

A)   Bonds represent ownership;stocks represent debt.
B)   Bonds make interest payments;stocks pay dividends.
C)   Stock payouts are predictable;bond payouts are not.
D)   All of these are differences between stocks and bonds.E) A) and B)
F) A) and C)

Question 7

Arbitrage equalizes rates of return across assets of a given beta.

Accepted Answer

A) True 
 B)False

Question 8

Suppose that some people invest $1,000 today in a financial asset that will make one future payment.The longer they must wait for the future payment,the:

Accepted Answer

A)   higher the future payment they will expect to receive.
B)   lower the future payment they will expect to receive.
C)   lower the risk of not receiving that future payment.
D)   more they will want to invest.E) A) and C)
F) A) and D)

Question 9

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Accepted Answer

A)   5.2.
B)   6.8.
C)   8.3.
D)   10.E) A) and C)
F) B) and C)

Question 10

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 rate of expected rate of inflation.E) A) and B)
F) All of the above

Question 11

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 12

The idea that money has "time value" refers to the fact that:

Accepted Answer

A)   people prefer to receive a given sum of money in the future rather than in the present.
B)   money can be used to purchase the services of labor,as measured in hourly units.
C)   a specific amount of money is more valuable to a person the sooner it is received.
D)   compound interest converts future dollars into a greater amount of current dollars.E) B) and C)
F) B) and D)

Question 13

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years.How much will be required to pay off the loan at the end of the five years?

Accepted Answer

A)   $401.47.
B)   $390.
C)   $393.54.
D)   $408.75.E) All of the above
F) None of the above

Question 14

A change in investors' feelings about risk will change the intercept (and therefore shift)the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 15

For any given financial asset,risk levels and average expected rates of return are:

Accepted Answer

A)   independent of each other.
B)   negatively related because assets with higher average expected rates of return sell for higher prices,which are inversely related to risk.
C)   positively related because both are inversely related to the rate of inflation.
D)   positively related because investors must be compensated for taking greater risks.E) All of the above
F) A) and B)

Question 16

At the end of 2012,U.S.households and nonprofit organizations held approximately __________ in mutual funds.

Accepted Answer

A)   $787 billion
B)   $6 trillion
C)   $5.3 trillion
D)   $15.7 trillionE) All of the above
F) A) and D)

Question 17

An investment's average expected rate of return is the:

Accepted Answer

A)   probability-weighted average of the investment's possible future rates of return.
B)   simple average of the investment's possible future rates of return.
C)   probability-weighted average of all past rates of return.
D)   simple average of the rates of return of all similar investments.E) A) and C)
F) C) and D)

Question 18

Suppose that Clint wins the lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million,or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration,should Clint take his winnings as a lump sum?

Accepted Answer

A)   Yes,but only if rapid inflation is expected over the next 30 years.
B)   Yes,but only if deflation is expected over the next 30 years.
C)   No,the rate of return will always be higher with the 30 annual payments.
D)   Yes,if he can invest in financial assets that will yield greater returns than the interest rate implicit in the annual payments.E) A) and D)
F) All of the above

Question 19

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

Accepted Answer

A) True 
 B)False

Question 20

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 D)
F) A) and C)

Exam 36: Financial Economics

Arbitrage equalizes rates of return across assets of a given beta.

Correct AnswerverifiedShow Answer

The fact that people prefer to consume in the present rather than the future is referred to as time preference.

Correct AnswerverifiedShow Answer

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded interest rate of 5 percent.In about how many years will her investment be worth $150?

Correct AnswerverifiedShow Answer

Isaiah just purchased a house built in 1986.His purchase would be considered:

Correct AnswerverifiedShow Answer

An investor with a diversified portfolio is generally less concerned about:

Correct AnswerverifiedShow Answer

An investment's average expected rate of return is the:

Correct AnswerverifiedShow Answer

What are the two most important factors influencing investor preferences?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The idea that money has "time value" refers to the fact that:

Correct AnswerverifiedShow Answer

Suppose that Clint wins the lottery jackpot of $300 million.He can receive it over the next 30 years in annual payments of $10 million,or he can receive a lump sum of $100 million immediately.Assuming that taxes are not a consideration,should Clint take his winnings as a lump sum?

Correct AnswerverifiedShow Answer

At the end of 2012,U.S.households and nonprofit organizations held approximately __________ in mutual funds.

Correct AnswerverifiedShow Answer

Before being adjusted for costs:

Correct AnswerverifiedShow Answer

Which of the following is a difference between stocks and bonds?

Correct AnswerverifiedShow Answer

Suppose that some people invest $1,000 today in a financial asset that will make one future payment.The longer they must wait for the future payment,the:

Correct AnswerverifiedShow Answer

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years.How much will be required to pay off the loan at the end of the five years?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Owners of stock can receive ___________ from their shares;sellers of stock can receive ___________ from selling their shares.

Correct AnswerverifiedShow Answer

For any given financial asset,risk levels and average expected rates of return are:

Correct AnswerverifiedShow Answer

The market portfolio,by definition,has a beta = 0.

Correct AnswerverifiedShow Answer

A change in investors' feelings about risk will change the intercept (and therefore shift)the Security Market Line.

Correct AnswerverifiedShow Answer

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Owners of stock can receive _ from their shares;sellers of stock can receive _ from selling their shares.

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