Question 1

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Accepted Answer

A) True 
 B)False

Question 2

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) None of the above
F) A) and B)

Question 3

If i is the interest rate and X is the number of dollars to be received after t years,the formula to calculate the present value of a future payment is:

Accepted Answer

A)   (1 + i) tX
B)   X/(1 + i) t
C)   it/(1 + X) 
D)   (X/i) tE) None of the above
F) C) and D)

Question 4

A horizontal Security Market Line would imply that investors:

Accepted Answer

A)   are unconcerned about risk and require no additional compensation for risk.
B)   view all financial assets as equally risky.
C)   greatly dislike risk and must be compensated for it.
D)   prefer assets with greater risk.E) None of the above
F) A) and D)

Question 5

Bonds represent:

Accepted Answer

A)   a claim on company dividends.
B)   ownership of a company.
C)   all financial assets guaranteed to pay interest.
D)   loans to governments and corporations.E) A) and D)
F) A) and B)

Question 6

Which of the following is both an economic and a financial investment?

Accepted Answer

A)   Government building a new road.
B)   Boeing Corporation building a new factory.
C)   A private citizen buying corporate stock.
D)   The Federal Reserve buying bonds from commercial banks.E) A) and B)
F) B) and C)

Question 7

An asset's price and rate of return:

Accepted Answer

A)   are independent of each other.
B)   can be either inversely or directly related.
C)   are inversely related.
D)   are directly related.E) A) and C)
F) B) and C)

Question 8

The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversifiable risk of financial assets.

Accepted Answer

A) True 
 B)False

Question 9

The risk-free interest rate is determined primarily by the:

Accepted Answer

A)   largest commercial banks.
B)   Internal Revenue Service.
C)   U.S.Treasury.
D)   Federal Reserve.E) B) and C)
F) A) and D)

Question 10

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received,from company profits,$1 for each share he owns. Refer to the information given.Indy should necessarily sell his stock if:

Accepted Answer

A)   the price falls below $20 per share.
B)   he expects the sum of future capital gains and dividends to be negative.
C)   the company stops paying dividends.
D)   any of these circumstances occur.E) A) and B)
F) B) and C)

Question 11

The intercept of the Security Market Line at any point in time is determined primarily by:

Accepted Answer

A)   the prime interest rate.
B)   Federal Reserve monetary policy.
C)   the average beta of the market.
D)   investor tolerance of risk.E) A) and B)
F) A) and C)

Question 12

Short-term U.S.government bonds are considered to be risk-free.

Accepted Answer

A) True 
 B)False

Question 13

Passively managed funds produce higher rates of return for investors than actively managed funds because:

Accepted Answer

A)   trading and management costs are higher with actively managed funds.
B)   passively managed funds invest in riskier assets that have higher rates of return.
C)   actively managed funds invest in riskier assets that have not reached expected rates of return.
D)   actively managed funds are taxed,while passively managed funds are not taxable.E) B) and D)
F) All of the above

Question 14

The risk-free interest rate is the rate on long-term U.S.government bonds.

Accepted Answer

A) True 
 B)False

Question 15

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

Accepted Answer

A)   Practically zero percent.
B)   1 percent.
C)   50 percent.
D)   $1.E) None of the above
F) A) and B)

Question 16

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

Question 17

Debt contracts (also called instruments) issued by government and corporations are known as:

Accepted Answer

A)   bonds.
B)   stocks.
C)   real assets.
D)   federally insured deposits.E) B) and D)
F) A) and B)

Question 18

An investment with a beta of 4.0 means that the investment has four times the:

Accepted Answer

A)   average expected rate of return of the market portfolio.
B)   risk of all similar investments.
C)   level of nondiversifiable risk as the market portfolio.
D)   level of diversifiable risk as the market portfolio.E) B) and C)
F) C) and D)

Question 19

The average expected rate of return on most financial assets is the sum of the rates that compensate for:

Accepted Answer

A)   nondiversifiable risk and time preference.
B)   diversifiable risk and time preference.
C)   nondiversifiable and diversifiable risk.
D)   nondiversifiable and diversifiable risk,and time preference.E) None of the above
F) A) and B)

Question 20

Limited liability rules:

Accepted Answer

A)   mean that bankrupt companies owe nothing to corporate bondholders.
B)   discourage investment in corporate stock.
C)   help prevent corporate fraud.
D)   encourage stock investing by limiting shareholder risk of loss.E) None of the above
F) A) and B)

Exam 36: Financial Economics

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.Every year he has received,from company profits,$1 for each share he owns. Refer to the information given.Indy should necessarily sell his stock if:

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Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying $100.What is Bobbie's average expected rate of return on this "investment?"

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If i is the interest rate and X is the number of dollars to be received after t years,the formula to calculate the present value of a future payment is:

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Bonds represent:

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Limited liability rules:

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The risk-free interest rate is the rate on long-term U.S.government bonds.

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Which of the following is both an economic and a financial investment?

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Passively managed funds produce higher rates of return for investors than actively managed funds because:

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A stockholder owning 5 percent of a company's stock:

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An investment with a beta of 4.0 means that the investment has four times the:

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The risk-free interest rate is determined primarily by the:

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The intercept of the Security Market Line at any point in time is determined primarily by:

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

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Debt contracts (also called instruments) issued by government and corporations are known as:

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Short-term U.S.government bonds are considered to be risk-free.

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An asset's price and rate of return:

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The average expected rate of return on most financial assets is the sum of the rates that compensate for:

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A horizontal Security Market Line would imply that investors:

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A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Correct AnswerverifiedShow Answer

The Security Market Line shows the positive relationship between the average expected rates of return and levels of diversifiable risk of financial assets.

Correct AnswerverifiedShow Answer

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