Economics (McConnell) AP Edition, 19th Edition

Chapter 34: Financial Economics

Quiz

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)$1000 x (1.05)3
B)$1000 x (1.15)
C)($1000)3 x (1.05)
D)$1000 / (1.05)3
2
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
3
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 more non-diversifiable risk
4
Refer to the following diagram, which portrays the security market line:

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The risk-free interest rate is:
A)4%
B)6%
C)7%
D)2%
5
Refer to the following diagram, which portrays the security market line:

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A stock with a beta of 1.5 will pay a risk premium of:
A)1%
B)3%
C)4%
D)7%
6
You notice that two stocks have recently been selling for the same price. Stock A has a beta of 1.3 and stock B has a beta of 1.7. From this information, you can infer that:
A)Stock A will have a higher expected rate of return than stock B
B)Stock B will have a higher expected rate of return than stock A
C)investing in both A and B will raise your risk relative to investing in either one alone
D)arbitrage will force the price of A down and the price of B up.
7
Consider a stock that is currently priced at $500. At the end of one year, there is a 10% chance that the firm will go bankrupt and the stock will be worthless. However, there is a 60% chance that the stock price will rise to $700 and a 30% chance that it will fall to $400. The expected rate of return on this asset is:
A)–4%
B)4%
C)8%
D)16%
8
All else equal, an asset's expected rate of return is:
A)inversely related both to its price and its level of risk
B)directly related both to its price and its level of risk
C)directly related to its price and inversely related to its level of risk
D)inversely related to its price and directly related to its level of risk
9
The steeper the security market line, the:
A)higher the risk-free interest rate
B)the greater the risk level of the overall market
C)the greater the compensation investors demand for any increase in risk
D)higher is beta
10
If the risk-free interest rate is 8%, what is the present value of a financial asset that is guaranteed to pay $1000 one year from now?
A)$80
B)$1080
C)$964.11
D)$925.93
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