Question 1

Why do investors engage in arbitrage?

Accepted Answer

Investors engage in arbitrage because it...

Question 2

(Last Word) What are two main reasons that actively managed funds perform poorly relative to index
funds?

Accepted Answer

One reason is that arbitrage makes it vi...

Question 3

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) All of the above

Question 4

What does the Security Market Line show?

Accepted Answer

The Security Market Line shows the relat...

Question 5

Short-term U.S. government securities are practically risk-free, and thus their rates of return are payments solely for

Accepted Answer

A)   diversiﬁable risk.
B)   time preference.
C)   idiosyncratic risk.
D)   pure proﬁt.E) B) and C)
F) A) and C)

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Mutual fund managers tend to focus on the long-term performance of the corporations in whose
securities they are invested, rather than their short-term quarterly performance.

Accepted Answer

A) True 
 B)False

Question 8

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 periods.E) None of the above
F) All of the above

Question 9

Index funds are a portfolio of

Accepted Answer

A)   bonds with rates of return ﬁxed at 2 percentage points above the rate of inﬂation.
B)   mutual funds that track different indexes.
C)   stocks or bonds that exactly match a particular index.
D)   stocks guaranteed rates of return in excess of growth in the GDP price index.E) None of the above
F) B) and D)

Question 10

When shares of stock are sold for more than the price at which they were purchased, the difference received by the seller is referred to as

Accepted Answer

A)   a dividend.
B)   a capital gain.
C)   interest.
D)   economic proﬁt.E) B) and D)
F) B) and C)

Question 11

Diversiﬁable risk refers to risk

Accepted Answer

A)   faced by a portfolio in general.
B)   that can be reduced with appropriate ﬁscal and monetary policy.
C)   posed by business cycle ﬂuctuations.
D)   speciﬁc to a particular investment.E) None of the above
F) All of the above

Question 12

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000. Thea's per-year rate of return is

Accepted Answer

A)   4.8 percent.
B)   14.8 percent.
C)   20 percent.
D)   29.6 percent.E) A) and B)
F) A) and C)

Question 13

Which of the following statements best describes the relationship between asset prices and average expected returns?

Accepted Answer

A)   More risky assets will have similar prices to less risky assets.
B)   Less risky assets will have lower prices than more risky assets.
C)   Less risky assets will have higher prices than more risky assets.
D)   More risky assets will have higher prices than less risky assets.E) A) and B)
F) B) and C)

Question 14

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

Question 15

Arbitrage will cause a shift in the Security Market Line.

Accepted Answer

A) True 
 B)False

Question 16

(Consider This)  The increased popularity of mutual funds

Accepted Answer

A)   means that far more shares of corporate stock are owned by fund companies than individuals.
B)   has greatly reduced diversiﬁcation.
C)   causes corporations to focus more on long-run proﬁtability.
D)   has increased overall market risk.E) B) and D)
F) A) and B)

Question 17

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year. The current market interest rate is 5 percent. What is the present value of this
Promotional budget?

Accepted Answer

A)   $175,146
B)   $185,123
C)   $190,476
D)   $200,000E) None of the above
F) A) and D)

Question 18

If an amount $AAA today earns interest at a rate of i percent per year, then the accumulated amount at the end of n years will be

Accepted Answer

A)    $AAA×n×i\$ A A A 	imes n 	imes i$AAA×n×i 
B)    $AAA×in\$ A A A 	imes i ^ { n }$AAA×in 
C)    ($AA
A)  n×(1+i) ( \$ A A A )  ^ { n } 	imes ( 1 + i ) ($AA
A)  n×(1+i)  
D)    $AAA×(1+i) n\$ A A A 	imes ( 1 + i )  ^ { n }$AAA×(1+i) nE) A) and C)
F) C) and D)

Question 19

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

Question 20

Suppose stock A sells for $30 per share and pays dividends of $1 per share per year. Stock B sells for $40 per share and pays dividends of $2 per share per year. Through the process of arbitrage,
We would expect the price of

Accepted Answer

A)   stock A to fall and/or the price of stock B to rise.
B)   stock A to rise and/or the price of stock B to fall.
C)   both stocks to rise or fall together.
D)   neither stock to change.E) C) and D)
F) A) and C)

Exam 17: Financial Economics

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

Correct AnswerverifiedShow Answer

Orange Computers, Inc., is planning to spend $200,000 on the promotion of its new portable music player next year. The current market interest rate is 5 percent. What is the present value of this Promotional budget?

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Which of the following statements best describes the relationship between asset prices and average expected returns?

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Diversiﬁable risk refers to risk

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

Correct AnswerverifiedShow Answer

Arbitrage will cause a shift in the Security Market Line.

Correct AnswerverifiedShow Answer

Suppose stock A sells for $30 per share and pays dividends of $1 per share per year. Stock B sells for $40 per share and pays dividends of $2 per share per year. Through the process of arbitrage, We would expect the price of

Correct AnswerverifiedShow Answer

If an amount $AAA today earns interest at a rate of i percent per year, then the accumulated amount at the end of n years will be

Correct AnswerverifiedShow Answer

What does the Security Market Line show?

Correct AnswerverifiedThe Security Market Line shows the relat...View AnswerShow Answer

Short-term U.S. government securities are practically risk-free, and thus their rates of return are payments solely for

Correct AnswerverifiedShow Answer

Mutual fund managers tend to focus on the long-term performance of the corporations in whose securities they are invested, rather than their short-term quarterly performance.

Correct AnswerverifiedShow Answer

Index funds are a portfolio of

Correct AnswerverifiedShow Answer

Why do investors engage in arbitrage?

Correct AnswerverifiedInvestors engage in arbitrage because it...View AnswerShow Answer

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

(Last Word) What are two main reasons that actively managed funds perform poorly relative to index funds?

Correct AnswerverifiedOne reason is that arbitrage makes it vi...View AnswerShow Answer

(Consider This) The increased popularity of mutual funds

Correct AnswerverifiedShow Answer

When shares of stock are sold for more than the price at which they were purchased, the difference received by the seller is referred to as

Correct AnswerverifiedShow Answer

Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at the end of those two years for $300,000. Thea's per-year rate of return is

Correct AnswerverifiedShow Answer

Other factors constant, the future value will be smaller,

Correct AnswerverifiedShow Answer

What are the two most important factors inﬂuencing investor preferences?

Correct AnswerverifiedShow Answer

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The Security Market Line shows the relat...
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Investors engage in arbitrage because it...
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One reason is that arbitrage makes it vi...
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