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148.
Refer to the graph. If a financial asset's average expected rate of return and beta put it at point F,
149.
Refer to the graph. Consider asset D. We would expect arbitrage to
150.
Refer to the graph. Each labeled point represents a different asset. For which of these assets
would we expect arbitrage to cause movement to a different point?
151.
Refer to the graph. Each labeled point represents a different asset. For which of these assets
would we not expect arbitrage to change the average expected rate of return?
152.
Refer to the graph. Consider an asset represented by point F. The process of arbitrage will draw
investors to the higher rates of return,
153.
Arbitrage causes all financial assets
154.
Refer to the graph. Which of the following would best be explained by an expansionary
monetary policy?
37-67
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
to move all assets onto the Security Market Line.
Test Bank: I
T o p i c : The Security Market Line
Type: Graph
155.
Refer to the graph. An increase in the Security Market Line from SML1 to SML2 and an
increase in the average expected rate of return of asset A from Y1 to Y2 would be explained by
156.
Refer to the graph. A movement of the Security Market Line from SML2 to SML1 and of the
highlighted asset from A2 to A1 would be caused by
157.
(Consider This) The increased popularity of mutual funds
158.
(Consider This) According to critics, growth in the popularity of mutual funds has
159.
(Last Word) Actively managed funds
37-70
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
T o p i c : Calculating Investment Returns
160.
(Last Word) Before being adjusted for costs,
161.
(Last Word) Before trading costs and management fees are taken into account, passively
managed funds outperform actively managed funds by about percent per year.
162.
(Last Word) Passively managed funds produce higher rates of return for investors than
actively managed funds because
37-71
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D.
actively managed funds are taxed, while passively managed funds are not taxable.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-04 Relate how percentage rates of return provide a common
framework for comparing assets and explain why asset prices and rates of return are inversely
related.
Test Bank: I
T o p i c : Calculating Investment Returns
True / False Questions
163.
The two most important investor preferences are a desire for high rates of return and a
dislike of inflation.
164.
Arbitrage equates rates of return across assets of all risk levels.
165.
Average expected rates of return and levels of risk are positively related.
37-72
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-07 Convey why investment decisions are determined primarily by
investment returns and nondiversifiable risk and how investment returns compensate for being
patient and for bearing nondiversifiable risk.
Test Bank: I
T o p i c : Comparing Risky Investments
166.
Economic investment refers to the buying or selling of any asset in expectation of a
financial gain.
167.
Compound interest refers to the multiple interest rates an investor will be paid in a
diversified portfolio.
168.
A 10 percent rate of interest will increase the value of an asset more quickly if the interest
is compounded.
37-73
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-02 Explain the time value of money and how compound interest can be
used to calculate the present value of any future amount of money.
Test Bank: I
T o p i c : Present Value
169.
Future value measures the present-day value of returns or costs expected to arrive in the
future.
170.
The present value of a stream of lottery payments is less than the size of the stated jackpot.
171.
When a company declares bankruptcy, stockholders are the first to be paid when company
assets are sold.
37-74
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 37-03 Identify and distinguish between the most common financial
investments: stocks, bonds, and mutual funds.
Test Bank: I
T o p i c : Some Popular Investments
172.
Payments to holders of corporate bonds are known as dividends.
173.
Index funds are an example of passively managed funds.
174.
Actively managed funds consistently outperform index funds.
175.
An asset's price and rate of return are directly related.
177.
A portfolio of many different stocks and bonds protects against nondiversifiable risk.
178.
The beta of an investment measures the probability-weighted expected rate of return of a
portfolio.
37-76
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-07 Convey why investment decisions are determined primarily by
investment returns and nondiversifiable risk and how investment returns compensate for being
patient and for bearing nondiversifiable risk.
Test Bank: I
T o p i c : Comparing Risky Investments
179.
The risk-free interest rate is the rate on long-term U.S. government bonds.
180.
The fact that people prefer to consume in the present rather than the future is referred to as
time preference.
181.
Short-term U.S. government bonds are considered to be risk-free.
37-77
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-07 Convey why investment decisions are determined primarily by
investment returns and nondiversifiable risk and how investment returns compensate for being
patient and for bearing nondiversifiable risk.
Test Bank: I
T o p i c : Comparing Risky Investments
182.
The Security Market Line depicts the inverse relationship between the average expected
rates of return and risk levels of financial assets.
183.
The risk premium is the rate that compensates for risk.
184.
The Security Market Line shows the positive relationship between the average expected
rates of return and levels of diversifiable risk of financial assets.
37-78
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-08 Explain how the Security Market Line illustrates the compensation
that investors receive for time preference and nondiversifiable risk and why arbitrage will tend
to move all assets onto the Security Market Line.
Test Bank: I
T o p i c : The Security Market Line
185.
A change in investors' feelings about risk will change the intercept (and therefore shift) the
Security Market Line.
186.
The market portfolio, by definition, has a beta = 0.
187.
If investors are reasonably tolerant of risk, the Security Market Line will be relatively flat.
37-79
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-08 Explain how the Security Market Line illustrates the compensation
that investors receive for time preference and nondiversifiable risk and why arbitrage will tend
to move all assets onto the Security Market Line.
Test Bank: I
T o p i c : The Security Market Line
188.
Arbitrage will cause a shift in the Security Market Line.
189.
Because of arbitrage, any given financial asset will be expected to return to the Security
Market Line.
190.
An expansionary monetary policy will shift the Security Market Line down.
37-80
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficulty : 02 Medium
Learning Objective: 37-08 Explain how the Security Market Line illustrates the compensation
that investors receive for time preference and nondiversifiable risk and why arbitrage will tend
to move all assets onto the Security Market Line.
Test Bank: I
T o p i c : The Security Market Line
191.
Index funds consistently beat actively managed funds because actively managed funds incur
greater management costs.
Multiple Choice Questions
192.
Economic investment refers to
193.
Financial investment refers to
