A portfolio of assets has lower risk than holding one asset, but the same expected return and higher transaction costs. Which of the following statements is most correct?
a. The portfolio is attractive to people who are risk averse and risk-neutral, but n
c. The portfolio is not attractive to investors who are risk-neutral
An individual who is risk-averse?
a. Never takes risks
b. Accepts risk but only when the expected return is very small
c. Requires larger compensation when the risk increases
d. Will accept a lower return as risk rises.
c. Requires larger compensation when the risk increases
An automobile insurance company on average charges a premium that:
a. Equals the expected loss from each driver
b. Is less than the expected loss from each driver
c. Is greater than the expected loss from each driver
d. Equals 1/(expected loss) of each dr
c. Is greater than the expected loss from each driver
An automobile insurance company that writes millions of policies is practicing a form of:
a. Mutual fund
b. Hedging fund
c. Spreading risk
d. Eliminating systematic risk
c. Spreading risk
Spreading involves:
a. Finding assets whose returns are perfectly negatively correlated
b. Adding assets to a portfolio that move independently
c Investing in bonds and avoiding stocks during bad times
d. Building a portfolio of assets whose returns move
a. Adding assets to a portfolio that move independently
The Russian wheat crop fails, driving up wheat prices in the U.S. This is an example of:
a. Idiosyncratic risk
b. Diversification
c. Systematic risk
d. Quantifiable risk
a. Idiosyncratic risk
Systematic risk:
a. Is the risk eliminated through diversification
b. Represents the risk affecting a specific company
c. Cannot be eliminated through diversification
d. Is another name for risk unique to an individual asset
c. Cannot be eliminated through diversification
Which of the following statements is false:
a. Diversification can reduce risk
b. Diversification can reduce risk but only by reducing the expected return
c. Diversification reduces idiosyncratic risk
d. Diversification allocates savings across more than
b. Diversification can reduce risk but only by reducing the expected return
Diversification is the principle of:
a. Eliminating risk
b. Reducing the risk we carry to just two
c. Holding more than one risk at a time
d. Eliminating Investments from our portfolio that we have idiosyncratic risk
c. Holding more than one risk at a time
Unique risk is another name for:
a. Market risk
b. Systematic risk
c. The risk Premium
d. Idiosyncratic risk
d. Idiosyncratic risk
When the home construction industry does poorly due to a recession, this is an example of:
a. Systematic risk
b. Idiosyncratic risk
c. Risk premium
d. Unique risk
a. Systematic risk
Idiosyncratic risk:
a. Affects all firms in the economy
b. Affects one or a few firms, not everyone
c. Is fixed across all firms
d. Impacts all firms in the same industry equally
b. Affects one or a few firms, not everyone
Professional gamblers know that the odds are always in favor of the house (casinos). The fact that they gamble says they are:
a. Irrational
b. Risk-neutral
c. Risk-averse
d. Risk seekers
d. Risk seekers
A risk-averse investor will:
a. Always accept a greater risk with a greater expected return
b. Only invest in assets providing certain returns
c. Never accept lower risk if it means accepting a lower expected return
d. Sometimes accept a lower expected re
d. Sometimes accept a lower expected return if it means less risk
Which of the following investment strategies involves generating a higher expected rate of return through increasing risk?
a. Diversifying
b. Hedging risk
c. Leverage
d. Value at risk
c. Leverage
If the probability of an outcome equals one, the outcome:
a. Is more likely to occur than the others listed
b. Is certain to occur
c. Is certain not to occur
d. Has unquantifiable risk
b. Is certain to occur
The two best known bond rating services are:
a. The Federal Reserve and Moodys Investment Services
b. The Federal Reserve and the US Treasury
c. Standard & Poors and the Wall Street Journal
d. Standard & Poors and Moodys Investment Services
d. Standard & Poors and Moodys Investment Services
What is the highest bond rating assigned by Standard & Poor's?
a. AA
b. EEE
c. AAA
d. A
c. AAA
The lowest rating for an investment grade bond assigned by Moody's is:
a. Baa
b. A
c. BBB
d. Aa
b. A
Bonds rated as "highly speculative":
a. Are rated so because they guarantee high returns for the buyer
b. Are commonly referred to as junk bonds
c. Are ranked just below investment grade by Standard & Poor's
d. Are rated so because they do not have any de
b. Are commonly referred to as junk bonds
Once a bond rating is assigned, it:
a. Never changes over the life of the bond
b. Can change as the financial position of the issuer changes
c. Can only change if the rating change is approved by the SEC
d. Can change on the next bond from the issuer but
b. Can change as the financial position of the issuer changes
Most commercial paper is:
a. Issued with maturities exceeding one year
b. Issued with maturities between 50-75 days
c. Used exclusively for short-term financing needs
d. Issued by foreign companies doing business in the US
c. Used exclusively for short-term financing needs
Bonds issued by the US Treasury are referred to as benchmark bonds because:
a. They are always purchased for a premium
b. They are the closest thing to a risk-free bond
c. All bonds from national governments are labeled as benchmark bonds
d. All bonds fro
b. They are the closest thing to a risk-free bond
The risk spread:
a. Is also known as the default risk premium
b. Should have a direct relationship with the bonds price
c. Should have an inverse relationship with the bonds yield
d. Is always constant
a. Is also known as the default risk premium
Municipal bonds are issued by:
a. Cities only
b. The US treasury, but the proceeds can only be used by cities
c. States and cities, but their interest is taxable only at the federal level
d. States and cities and their interest is exempt from US governmen
d. States and cities and their interest is exempt from US government taxation
Under the Liquidity Premium Theory, if investors expect short-term interest rates to remain constant, the yield curve should:
a. Have a positive slope
b. Have a negative slope
c. Be flat
d. Have an increasing slope
a. Have a positive slope
A share of common stock represents
a. A claim from a lender against a borrower
b. A share in the companies debts
c. A share of ownership of the company
d. An unlimited liability to the owner of the stock
c. A share of ownership of the company
Two characteristics that make owning stock attractive are:
a. Unlimited liability and first claim on assets
b. Share prices are relatively inexpensive and are transferable
c. Each share represents a large percentage of ownership and dividends are fixed
d.
b. Share prices are relatively inexpensive and are transferable
Which of the following statements is most correct?
a. Stockholders have limited liability and have no control over corporate leadership
b. Stockholders can dislodge the managers of the corporation but not the board of directors
c. Stockholders have unlimi
d. Stockholders can dislodge members of the board and have limited liability
What do bondholders and stockholders have in common?
a. Both are claimants
b. Both have voting rights
c. Both are shareholders in the company
d. Both receive fixed payments on their securities each year
a. Both are claimants
An index number is valuable because:
a. It provides useful information to the viewer
b. It is more stable than the data it reflects
c. It provides a meaningful measurement scale to calculate percentage changes
d. It does not require any calculations to co
c. It provides a meaningful measurement scale to calculate percentage changes
The Dow Jones Industrial Average is:
a. An index made up of the stock prices of the 100 largest corporations in the US
b. An index that measures the value of purchasing 100 shares in each of the coporations
c. The average prices of stock in 30 of the larg
c. The average prices of stock in 30 of the largest companies in the US
The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because:
a. It takes into account the stock prices of 500 of the largest firms, which is less than the DJM
b. It is a price-weighted index, where the DJIA is a valuable-weighted i
d. It takes into account the prices of more stocks and it uses a different weighting scheme
When studying world stock indexes, we observe that:
a. The S&P 500 is largest in terms of index value
b. Most of the world's indexes are price-weighted
c. The indexes are very comfortable
d. The indexes are comparable but only in percentage terms
d. The indexes are comparable but only in percentage terms
The dividends that stockholders receive:
a. Are fixed by contract and paid annually
b. Are distributions from profits
c. Are paid before all other obligations of the company are met
d. Are always equal to the average amount of interest paid to a bond hold
b. Are distributions from profits
You start with a $1000 portfolio; it loses 50% over the next year, the following year it gains 50% at the end of two years, your portfolio is worth:
a. $1000
b. $500
c. $750
d. $950
c. $750
You start with a portfolio valued at $500.00. Other the next twelve months, it loses 40%; the following years is a gain of 30%. At the end of two years your portfolio is worth:
a. $390
b. $450
c. $300
d. $410
a. $390
The dividend discount model of stock valuation:
a. Is an application of the net present value formula
b. Takes the net present value of expected dividends and add it to the future sale price of the stock
c. Takes the net present value of the expected futu
a. Is an application of the net present value formula
The dividend-discount model predicts that stock prices:
a. Should be high when dividends are high
b. Will be high when interest rates are high
c. Will be higher when the growth rate of dividends is low
d. Should be high when dividends are low
a. Should be high when dividends are high
In the event of bankruptcy, stockholders:
a. Are paid before bondholders
b. Receive at least their initial investment due to limited liability
c. Could lose more than their initial investment
d. Are the last to be paid and could end up losing what they ha
d. Are the last to be paid and could end up losing what they have invested
As a company issues more debt:
a. Its leverage decreases
b. The share of financing from equity increases
c. The expected return to equity holders falls
d. Risk increases
d. Risk increases
Stock market bubbles impact customers by:
a. Encouraging greater consumption of luxury goods and greater savings
b. Encouraging greater consumption of luxury goods and less saving
c. Encouraging more work and delaying retirement
d. Resulting in less inves
b. Encouraging greater consumption of luxury goods and less saving
Derivatives are financial instruments that:
a. Present high levels of risk and should only be used by the wealthy
b. When used correctly, can actually lower risk
c. Should only be used by people seeking high returns from low risk
d. Represents the outrigh
b. When used correctly, can actually lower risk
The value of a derivative is determined by:
a. The Federal Reserve
b. SEC Regulation
c. The value of the underlying asset
d. The risk free rate
c. The value of the underlying asset
The purpose of derivatives is to:
a. Increase the risk so the return is larger
b. Eliminate the risk for both parties in the transaction
c. Postpone the risk for both parties in the transaction
d. Transfer the risk from one person to another
d. Transfer the risk from one person to another
With a futures contract:
a. Payment is made when the contract is created
b. No payment is made until the settlement date
c. The short position agrees to purchase the underlying asset
d. The risk is eliminated for both parties
b. No payment is made until the settlement date
Marking to market is a process that:
a. Involves a transfer of risk
b. Ensures that the buyers and sellers receive what the contract promises
c. Always requires the sellers of contracts to transfer funds to the buyers of contracts
d. Buyers and sellers ca
b. Ensures that the buyers and sellers receive what the contract promises
Speculators differ from hedgers in the sense that:
a. Speculators do not like risk
b. Hedgers seek to transfer risk
c. Speculators seek to transfer risk
d. Speculators are hedgers, there isn't any difference.
b. Hedgers seek to transfer risk
Financial intermediation exists in part, because:
a. Financial markets work so well
b. Direct finance through stocks and bonds is the dominant form of financing
c. Transaction costs of financial intermediation is always higher than direct finance
d. The t
d. The transaction costs associated with direct finance can at times be prohibitive
Financial intermediaries pool the resources of many small savers so that they can:
a. Charge fees to these small savers and earn substantial income
b. Obtain the funds necessary to make loans to borrowers seeking large amounts
c. Lower their transaction c
b. Obtain the funds necessary to make loans to borrowers seeking large amounts
Financial intermediaries:
a. Increase the costs of financial transactions but offset these higher costs by providing safekeeping of customer funds
b. Provide handling of payments but usually less efficiently than other firms
c. Reduce the cost of financia
c. Reduce the cost of financial transactions
If financial intermediaries did not have the ability to pool the resources of small savers
a. Borrowers needing large amounts of money would find it more costly to obtain the funds
b. The economy would grow faster
c. People would likely save more
d. The r
a. Borrowers needing large amounts of money would find it more costly to obtain the funds
The fact that financial intermediaries employ experts to carry out particular activities and so lower transaction costs is usually associated with the following economic concept:
a. The law of demand
b. Economies of scale
c. Comparative advantage
d. Infor
c. Comparative advantage
Economies of scale associated with financial intermediaries means:
a. The total cost of handling transactions falls as more transactions are handled
b. The cost per transaction falls as a larger volume of similar transactions are handled
c. The cost per t
b. The cost per transaction falls as a larger volume of similar transactions are handled
Automated teller machines provided by financial intermediaries are an example of"
a. High transactions costs associated with financial intermediaries
b. Diseconomies of scale
c. The ability of financial intermediaries to provide liquidity
d. The ability o
c. The ability of financial intermediaries to provide liquidity
A bank can usually offer a saver a higher return for the same risk for all of the following reasons except:
a. The bank can usually purchase assets at a lower cost than any one saver
b. The bank can pool the resources of small savers and purchase higher v
d. Savers do not have good enough information to know if the return is sufficient
Lines of credit provided by financial intermediaries:
a. Decease liquidity for customers but increase income for the intermediary
b. Are pre-approved loans that can increase liquidity and lowering transaction costs
c. Are costly for intermediaries to prov
b. Are pre-approved loans that can increase liquidity and lowering transaction costs
When a bank takes savings from many small savers and lends it to many borrowers, the bank:
a. Decreases the risk to savers through diversification
b. Increases the risk to borrowers through high transaction costs
c. Decreases the risk to savers through ec
a. Decreases the risk to savers through diversification
Mutual funds offer investors
a. A greater return for greater risk than what an investor can earn on his own
b. A lower return for more risk than what the investor could earn on his own
c. A lower return for less risk than what the investor could earn on h
d. A way for individuals to eliminate the idiosyncratic risk associated with any singe investment
Mutual funds are attractive because:
a. They provide high returns from purchasing the financial securities of a few select companies
b. They provide the investor with greater diversification at a lower cost than what most investors could obtain individual
b. They provide the investor with greater diversification at a lower cost than what most investors could obtain individually
Financial markets do not function as well as they could due to:
a. The fact that banking is highly monopolized
b. The cost of obtaining information can be high
c. Regulation by governments
d. Fluctuations in the inflation rate
b. The cost of obtaining information can be high
Most individuals save at banks rather than lend directly because:
a. The bank creates information asymmetry
b. Moral hazard exists only when individuals make loans directly to borrowers, it does not occur when banks issue loans
c. Banks through economies
c. Banks through economies of scale can reduce the costs of information is necessary
A lender usually knows less about the creditworthiness of a borrower than the borrower does. This is an example of:
a. Opportunistic behavior
b. Economies of scale
c. Diminishing marginal returns
d. Information asymmetry
d. Information asymmetry