Chapter 17 – Financial Economics
60. Karen holds a $100 bond that pays $10 per year in interest. The minimum price Karen
would have to be offered before she would sell the bond:
61. Mark buys a bond for $8000 and receives interest payments of $100 every 3 months. The
interest rate on the bond is approximately:
62. “Default” occurs when:
Chapter 17 – Financial Economics
63. Which institution is least likely to default on a bond?
64. The U.S. Federal government is unlikely to default on its bond payments because:
65. Bond payments are generally more predictable than stocks because:
Chapter 17 – Financial Economics
66. The largest mutual fund, as of February 2010, held over _____ billion in assets under
management.
67. The Standard and Poor’s 500 Index measures prices of the 500:
68. Index funds are a portfolio of:
Chapter 17 – Financial Economics
69. Index funds:
70. At the end of 2009, U.S. households and nonprofit organizations held nearly __________
in mutual funds.
71. The estimated value of all financial assets held by U.S. households and nonprofit
organizations in 2009 was about:
Chapter 17 – Financial Economics
72. Mutual funds may contain:
73. How do actively managed funds differ from passively managed funds?
74. Investment returns:
Chapter 17 – Financial Economics
75. Denny buys a rare coin for $200 and sells the coin 1 year later for $220. Denny’s rate of
return is:
76. Kelly buys a share of stock for $20 which she sells a year later for $15. Kelly’s rate of
return is:
77. Katie buys a house for $200,000 and rents it for $1000 per month. Katie’s annual rate of
return:
Chapter 17 – Financial Economics
78. George buys an antique car for $20,000 and sells it 5 years later for $24,000. George’s per
year rate of return is:
79. Joan buys a house for $250,000, rents it for 2 years for $1000 per month, and sells it at the
end of those 2 years for $300,000. Joan’s per year rate of return is:
80. Edward buys a house for $400,000, rents it for 1 year for $1500 per month, and sells it at
the end of the year for $390,000. Edward’s rate of return:
Chapter 17 – Financial Economics
81. Pigou buys a house for $500,000, rents it for $2000 per month for 4 years, then sells it for
$600,000. What is Pigou’s per year rate of return?
82. An asset’s price and rate of return:
83. Vilfredo is considering buying a house for $220,000 and renting it out for $2000 per
month. If the price suddenly jumps to $250,000, Vilfredo’s expected yearly rate of return
will:
Chapter 17 – Financial Economics
84. Maria is looking to buy one of two houses to rent out for additional income. She
determines that the first house, priced at $200,000, could rent for $1500 per month. If the
second house is priced at $280,000, how much rent would Maria have to charge to get an
equivalent yearly rate of return?
85. Pavel is considering buying a $10,000 bond with no expiration date that generates yearly
payments of $500. If the price of the bond were to fall to $9,000:
86. The buying and selling process that leads profit-seeking investors to equalize average
expected rates of return from identical assets is known as:
Chapter 17 – Financial Economics
87. Arbitrage occurs when investors try to profit from situations where:
88. Arbitrage occurs when:
89. Suppose two corporate bonds with similar risk pay different rates of return. The process of
arbitrage should:
Chapter 17 – Financial Economics
90. Arbitrage is the process by which investors simultaneously sell:
91. The process by which investors seek to profit by simultaneously selling an asset with a
lower rate of return and buying an otherwise identical asset with a higher rate of return is
known as:
92. Ben owns stock in two similar, large, financially sound corporations. Company A
consistently earns rates of return of 12 percent per year, while company B regularly generates
rates of return of 8 percent per year. If Ben is attempting to arbitrage, he will:
Chapter 17 – Financial Economics
93. For heavily traded assets like stocks and bonds, arbitrage:
94. Arbitrage causes an equalization of the _________ when assets are identical or nearly
identical.
95. 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:
Chapter 17 – Financial Economics
96. Suppose stock A sells for $50 per share and pays dividends of $2 per share per year. Stock
B sells for $100 per share and pays dividends of $4 per share per year. Through the process of
arbitrage, we would expect the price of:
97. Arbitrage equalizes rates of return across similar investments because:
98. Investors diversify portfolios:
Chapter 17 – Financial Economics
99. Another name for diversifiable risk is:
100. Another name for non-diversifiable risk is:
101. Portfolio diversification:
Chapter 17 – Financial Economics
102. Diversifiable risk refers to risk:
103. Brinley holds stock in large high-tech companies in his portfolio. The best way for
Brinley to diversify his risk would be to buy:
104. Portfolio diversification eliminates all of the ___________ from a portfolio.
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105. An investor with a diversified portfolio is generally less concerned about:
106. Non-diversifiable risk refers to potential losses from:
107. According to economists, the two factors most important to personal investment
decisions are:
Chapter 17 – Financial Economics
108. One statistic that quantifies the risk of an investment is:
109. An investment’s average expected rate of return is the:
110. Hermione is considering an investment that has a ¾ chance of paying a 10 percent rate of
return and a ¼ chance of paying 2 percent. What is the average expected rate of return on the
investment?
Chapter 17 – Financial Economics
111. 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?”
112. Jacob is holding an investment he bought for $1000 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:
113. The beta for the market portfolio’s level of non-diversifiable risk is:
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114. Two investments, X and Y, have beta values of 0.1 and 3.0, respectively. Based on this
we can claim that, relative to the market portfolio:
115. An investment with a beta of 4.0 means that the investment has four times the:
116. Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can
conclude that X has:
Chapter 17 – Financial Economics
117. In general, risk levels and average expected rates of return are:
118. Riskier investments tend to sell for:
119. Which of the following statements is true?