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Chapter 17 - Financial Economics
154. Refer to the graph above. Which of the following would best be explained by an
expansionary monetary policy?
Chapter 17 - Financial Economics
155. Refer to the graph above. 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 above. A movement of the Security Market Line from SML2 to SML1,
and of the highlighted asset from A2 to A1 would be caused, respectively, by:
157. (Consider This) The implied risk-return point of a Ponzi scheme "asset":
Chapter 17 - Financial Economics
158. (Consider This) Ponzi schemes are investments in which:
159. (Last Word) Actively managed funds:
160. (Last Word) Before being adjusted for costs:
Chapter 17 - Financial Economics
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:
163. The two most important investor preferences are a desire for high rates of return and a
dislike of inflation.
Chapter 17 - Financial Economics
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.
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.
Chapter 17 - Financial Economics
168. A 10 percent rate of interest will increase the value of an asset more quickly if the
interest is compounded.
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.
Chapter 17 - Financial Economics
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.
Chapter 17 - Financial Economics
177. A portfolio of many different stocks and bonds protects against non-diversifiable risk.
178. The beta of an investment measures the probability weighted expected rate of return of a
portfolio.
179. The risk-free interest rate is the rate on long-term U.S. government bonds.
Chapter 17 - Financial Economics
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.
182. The Securities 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.
Chapter 17 - Financial Economics
184. The Securities Market Line shows the positive relationship between the average expected
rates of return and levels of diversifiable risk of financial assets.
185. A change in investors' feelings about risk will change the intercept and therefore shift the
Securities Market Line.
186. The market portfolio, by definition, has a beta = 0.
187. If investors are reasonably tolerant of risk, the Securities Market Line will be relatively
flat.
Chapter 17 - Financial Economics
188. Arbitrage will cause a shift in the Securities Market Line.
189. Because of arbitrage, any given financial asset will be expected to return to the Securities
Market Line.
190. An expansionary monetary policy will shift the Security Market Line down.
191. Index funds consistently beat actively managed funds because actively managed funds
incur greater management costs.
