 |
| 1 | |
Consider an initial investment of $1000 earning 5% annual interest. At the end of three years, this investment will grow to a value of: |
| | A) | (1.05)3 $1000 |
| | B) | (1.15)$1000 |
| | C) | (1.05)($1000)3 |
| | D) | $1000/(1.05)3 |
|
|
|
| 2 | |
Consider a financial investment that will return $100 at the end of each of the next 6 years. If the present value of this investment is calculated to be $540: |
| | A) | the interest rate must be negative |
| | B) | the interest rate is 10% |
| | C) | the market price of the investment will be $600 |
| | D) | the market price of the investment will be $540 |
|
|
|
| 3 | |
Suppose you win the $1,000,000 state lottery and are offered the following choice: take the prize in 2 equal yearly installments of $500,000, or accept a lump-sum payout of an amount less than $1,000,000. If the risk-free interest rate is 5%, you should: |
| | A) | take the lump-sum payout if it is at least $950,000 |
| | B) | take the lump-sum payout if it is at least $952,381 |
| | C) | take the lump-sum payout if it is at least $976,191 |
| | D) | take the two yearly installments |
|
|
|
| 4 | |
Mary is considering investing in a financial asset that represents partial ownership of a particular firm. This type of investment is known as a: |
| | A) | stock |
| | B) | bond |
| | C) | mutual fund |
| | D) | portfolio |
|
|
|
| 5 | |
Highly traded assets such as stocks and bonds with similar risks will earn the same rate of return. The process by which this occurs is known as: |
| | A) | the Beta process |
| | B) | arbitrage |
| | C) | risk-sharing |
| | D) | diversification |
|
|
|
| 6 | |
All else equal, the higher the price of a financial asset, the higher its rate of return. |
| | A) | True |
| | B) | False |
|
|
|
| 7 | |
Compared to the overall market portfolio, a financial investment with a beta of 3.0 implies that the investment: |
| | A) | has a rate of return three percentage points higher |
| | B) | has a rate of return three times higher |
| | C) | carries 3% more non-diversifiable risk |
| | D) | carries 3 times the non-diversifiable risk |
|
|
|
| 8 | |
The risk-free rate of return: |
| | A) | is zero |
| | B) | depends on peoples' time preferences |
| | C) | is the rate paid by high-grade corporate bonds |
| | D) | compensates investors for diversifiable risk |
|
|
|
| 9 | |
A corporate bond currently earns an 8% rate of return while the risk-free rate of return is 5%. This implies that: |
| | A) | the corporate bond carries a 3% risk premium |
| | B) | the corporate bond has a beta of 3.0 |
| | C) | the market risk premium is 8/5 |
| | D) | the corporate bond carries a 30% risk premium |
|
|
|
| 10 | |
The security market line: |
| | A) | is horizontal at a level equal to the risk-free rate of return |
| | B) | is horizontal at a level equal to the market-portfolio rate of return |
| | C) | is upward-sloping, reflecting a positive relationship between risk and return |
| | D) | is downward-sloping, reflecting a negative relationship between safety and return |
|
|
.