978-1259723223 Test Bank TBChap037 Part 6

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C. 25 percent.

D. 30 percent.

246.

Burt bought a house for $250,000 and plans to rent it out for $2,000 per month. His

expected annual rate of return from renting the house is approximately

247.

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual

coupons. His expected rate of return per year on the bond is

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framework for comparing assets and explain why asset prices and rates of return are inversely

related.

Test Bank: II

To pic: Calculating Investment Returns

248.

Alma recently purchased a Mexican restaurant for $450,000, from which she expects to

earn a monthly profit of $1,500. Her expected annual rate of return is

249.

Susan recently purchased a home for $150,000. She plans to rent it out for $1,000 per

month for a year. Had the house cost $200,000 instead, her expected rate of return would have

250.

Rick recently purchased a convenience store for $500,000. He expects monthly profits to be

$10,000 in the next year. If a recession had struck, Rick had instead paid $300,000, and his

monthly profits were reduced to $6,000, his expected rate of return would have

251.

If the demand for an asset increases, its price will

252.

The buying and selling activities that tend to equalize the rates of return on identical or

nearly identical assets is called

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D i f fi c u l t y : 01 Easy

Learning Objective: 37-05 Define and utilize the concept of arbitrage.

Test Bank: II

To pic: Arbitrage

253.

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2

has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher

return, the investor is engaging in

254.

Assume that two firms (Firm A and Firm B) are similar in all respects, but Firm A‘s stock

has a higher rate of return than Firm B‘s stock. Arbitrage will occur as investors

255.

Assume that there are two investments 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

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C.

X will fall and its rate of return will rise.

D. Y will fall and its rate of return will rise.

256.

If we observe that many investors are selling Bond A and buying a similar Bond B, this

suggests that the expected returns on

257.

Risk in finance means that an asset

258.

Risk in finance means

259.

The underlying cause of risk in finance is

260.

A strategy that attempts to reduce the overall risk of an entire investment portfolio by

investing in a variety of assets is called

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explain the difference between diversifiable and nondiversifiable risk.

Test Bank: II

To pic: Risk

261.

An investor wants to invest in the oil industry but does not know which major companies

will produce the greatest return. As a result, the investor buys shares in several oil companies.

By buying several companies to reduce risk, the investor is seeking to reduce

262.

The type of risk that pushes the returns from all investment in the same direction at the

same time is

263.

Investors face the risk that the economy could go into another recession. This risk is

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D. time preference.

264.

“Do not put all your eggs in one basket” is advice that seeks to reduce

265.

Diversification in one’s investments reduces

266.

Investment risks vary across different countries. The International Country Risk Guide in

2015 ranked which of the following countries to have the least composite risk?

267.

Investors evaluate an investment by estimating its average expected rate of return, and this

estimation process assigns higher weights to

268.

The average expected rate of return is a

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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: II

To pic: Comparing Risky Investments

269.

Which of the following statements best describes the relationship between risk and the

average expected return of investments?

270.

Which of the following statements best describes the relationship between asset prices and

average expected returns?

271.

If an investor owns a well-diversified portfolio, then

272.

If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to

return 15 percent a year, then its average expected rate of return is

273.

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10

percent, then its average expected rate of return is

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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: II

To pic: Comparing Risky Investments

274.

If an investment is equally likely to return 10 percent per year or 15 percent a year, then its

average expected rate of return is

275.

The so-called market portfolio used as a benchmark in financial economics is

276.

What does the “beta” of an asset measure?

277.

An asset with a beta of 0.5 has

278.

One asset has a beta of 1.5 and another asset has a beta of 0.75. The difference in beta

means that the asset with a beta of 0.75 has

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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: II

To pic: Comparing Risky Investments

279.

The market portfolio would have a beta of

280.

The so-called risk-free rate essentially measures the investors’

281.

What is considered to be the best measure of the risk-free interest rate?

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B.

the rate of return on a corporate stock index fund

C.

the rate of return on the Standard and Poor’s 500

D. the rate of return on short-term U.S. government bonds

282.

People tend to be impatient, and they typically prefer to

283.

What concept would be most consistent with the observation that people tend to be

impatient and typically prefer to consume things in the present rather than the future?

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patient and for bearing nondiversifiable risk.

Test Bank: II

To pic: Comparing Risky Investments

284.

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

are payments solely for

285.

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

through its

286.

The expected rate of return from an investment is

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C. the rate that compensates for time preference plus the rate that compensates for risk.

D. the rate that compensates for time preference minus the rate that compensates for risk.

287.

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

vary with

288.

The vertical intercept of the Security Market Line (SML) shows the

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to move all assets onto the Security Market Line.

Test Bank: II

To pic: The Security Market Line

289.

The Security Market Line (SML) is upward-sloping, indicating that the

290.

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

this indicates that the asset’s

291.

If an asset has a risk-return combination that is above the Security Market Line (SML), then

arbitrage will make that asset’s

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A.

beta increase.

B.

beta decrease.

C.

average expected return increase.

D. average expected return decrease.

292.

In the accompanying graph, bracket A represents the