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37-101
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-102
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-104
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-105
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-107
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-108
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-110
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: 37-07 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
37-112
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: 37-07 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
37-114
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: 37-07 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?
37-115
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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?
37-116
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-117
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-118
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: 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
37-119
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
