Question 1

If an asset has a risk-return combination that is above the Security Market Line (SML) , then arbitrage will make that asset's:

Accepted Answer

A)   Beta increase
B)   Beta decrease
C)   Average expected return increase
D)   Average expected return decreaseE) None of the above
F) C) and D)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Assume that there are two investments very similar in all respects, but Investment X has a higher rate of return than does Investment Y. As a result of the arbitrage process, the price of Investment:

Accepted Answer

A)   X will fall and its rate of return will fall
B)   Y will rise and its rate of return will fall
C)   X will fall and its rate of return will rise
D)   Y will fall and its rate of return will riseE) C) and D)
F) B) and D)

Question 4

The Security Market line (SML)  shows how the average expected rates of return on assets vary with:

Accepted Answer

A)   Stock price
B)   Dividend payment
C)   Risk level
D)   Time preferenceE) A) and B)
F) C) and D)

Question 5

If investors started to prefer investing in more ethical 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)   Increase, and the rates of return would increase relative to other companies
C)   Increase, 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 D)
F) B) and C)

Question 6

A bank account pays 4% interest per year. If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Accepted Answer

A)   $3,122
B)   $3,246
C)   $3,600
D)   $4,206E) B) and C)
F) All of the above

Question 7

Refer to the graph above. The risk premium for an asset with a beta equal to X would be:

Accepted Answer

A)   Z
B)   A plus B
C)   Z minus B
D)   Z minus AE) None of the above
F) C) and D)

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

A bond pays a coupon (or interest)  rate of 5 percent each year for five years, with a future (face)  value of $200. If the bond was sold today, what would be the present value of the bond?

Accepted Answer

A)   $200
B)   $157
C)   $150
D)   $145E) A) and B)
F) A) and C)

Question 10

The correct formula that relates present value (PV)  to future value (FV) , if interest rate is i% per year over n years is:

Accepted Answer

A)   PV = FV (1 + i) n
B)   FV = PV (i) n
C)   PV = FV/(1 + i) n
D)   FV = PV (1 + i)  (n) E) All of the above
F) B) and C)

Question 11

Other factors constant, the future value will be smaller:

Accepted Answer

A)   The larger is its present value
B)   The higher is the interest rate
C)   The shorter is the time period t
D)   The larger is the number of periodsE) B) and D)
F) C) and D)

Question 12

Which of the following is a popular type of investment?

Accepted Answer

A)   Dividends
B)   Portfolios
C)   Mutual funds
D)   Capital gainsE) None of the above
F) C) and D)

Question 13

The Fed can regularly influence and change the risk-free rate of financial investments through its:

Accepted Answer

A)   Open market operations
B)   Quantitative easing
C)   Required reserve ratio
D)   Bank supervisionE) C) and D)
F) A) and B)

Question 14

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are:

Accepted Answer

A)   Significantly higher than those of index funds with similar risk
B)   Significantly lower than those of index funds with similar risk
C)   About the same as those of index funds with similar risk
D)   More volatile than those of index funds with similar riskE) All of the above
F) C) and D)

Question 15

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 marketE) A) and B)
F) B) and C)

Question 16

Risk in finance means:

Accepted Answer

A)   Mostly positive outcomes
B)   Mostly negative outcomes
C)   Either positive or negative outcomes
D)   The same thing as risk in health scienceE) A) and B)
F) A) and C)

Question 17

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Accepted Answer

A) True 
 B)False

Question 18

Economic investment refers to:

Accepted Answer

A)   Buying a financial asset for a gain
B)   Selling a financial asset for a gain
C)   Postponing purchases of goods and services
D)   Making new additions to a firm's stock of capitalE) A) and D)
F) A) and B)

Question 19

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 firmsE) B) and D)
F) A) and D)

Question 20

What does the 'beta' of an asset measure?

Accepted Answer

A)   How the nondiversifiable risk compares with diversifiable risk for an asset
B)   How the expected return compares with the diversifiable risk of a given asset
C)   How the expected return compares with the nondiversifiable risk of the market portfolio
D)   How the nondiversifiable risk of a given asset compares with that of the market portfolioE) A) and C)
F) A) and D)

Exam 17: Financial Economics

Refer to the graph above. The risk premium for an asset with a beta equal to X would be:

Correct AnswerverifiedShow Answer

The correct formula that relates present value (PV) to future value (FV) , if interest rate is i% per year over n years is:

Correct AnswerverifiedShow Answer

The Security Market line (SML) shows how the average expected rates of return on assets vary with:

Correct AnswerverifiedShow Answer

Assume that there are two investments very similar in all respects, but Investment X has a higher rate of return than does Investment Y. As a result of the arbitrage process, the price of Investment:

Correct AnswerverifiedShow Answer

What does the 'beta' of an asset measure?

Correct AnswerverifiedShow Answer

Other factors constant, the future value will be smaller:

Correct AnswerverifiedShow Answer

A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200. If the bond was sold today, what would be the present value of the bond?

Correct AnswerverifiedShow Answer

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are:

Correct AnswerverifiedShow Answer

If an asset has a risk-return combination that is above the Security Market Line (SML) , then arbitrage will make that asset's:

Correct AnswerverifiedShow Answer

Which of the following is a popular type of investment?

Correct AnswerverifiedShow Answer

A bank account pays 4% interest per year. If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A mutual fund company uses the funds of its investors to:

Correct AnswerverifiedShow Answer

Risk in finance means:

Correct AnswerverifiedShow Answer

If investors started to prefer investing in more ethical companies, then it would be expected that the stock prices for those companies would:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Economic investment refers to:

Correct AnswerverifiedShow Answer

If investors have two identical assets that have different rates of return, the investors will sell the asset with the higher rate of return to buy the asset with the lower rate of return.

Correct AnswerverifiedShow Answer

The Fed can regularly influence and change the risk-free rate of financial investments through its:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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