ECON TEST BANK
Updated: Aug 13, 2022
A strategythat attempts to reduce the overall risk of an entire investment portfolioby investing in a varietyof assets is called
pooling.
arbitrage.
C. diversification.
D. weighted average.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-06 Describe how the word risk is used in financial economics and explainthe difference betweendiversifiable and nondiversifiable risk.
Test Bank:II Topic: Risk
An investor wants to invest in the oil industry but does not know which major companies will produce the greatestreturn. As a result, the investorbuys shares in several oil companies. By buying severalcompanies to reduce risk, the investor is seeking to reduce
systemic risk.
the risk premium.
C. idiosyncratic risk.
D. nondiversifiable risk.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-06 Describe how the word risk is used in financial economics and explainthe difference betweendiversifiable and nondiversifiable risk.
Test Bank:II Topic: Risk
The typeofrisk that pushes the returns from all investment in the same direction at the same time is
idiosyncratic.
diversifiable.
C. systemic.
D. time preference.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-06 Describe how the word risk is used in financial economics and explainthe difference betweendiversifiable and nondiversifiable risk.
Test Bank:II Topic: Risk
Investors face the risk that the economy could go into another recession. This risk is
idiosyncratic.
diversifiable.
C. systemic.
D. time preference.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-06 Describe how the word risk is used in financial economics and explainthe difference betweendiversifiable and nondiversifiable risk.
Test Bank:II Topic: Risk
"Do not put all your eggs in one basket" is advice that seeks to reduce
idiosyncratic risk.
nondiversifiable risk.
systemic risk.
market risk.（错的）
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-06 Describe how the word risk is used in financial economics and explainthe difference betweendiversifiable and nondiversifiable risk.
Test Bank:II Topic: Risk
Diversification in one's investments reduces
idiosyncratic risk.
pooling risk.
systemic risk.
time preference risk.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-06 Describe how the word risk is used in financial economics and explainthe difference betweendiversifiable and nondiversifiable risk.
Test Bank:II Topic: Risk
Investment risks vary across differentcountries. The International Country Risk Guide in 2015 ranked which of the followingcountries to have the least compositerisk?
Switzerland
China
United States
India
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-06 Describe how the word risk is used in financial economics and explainthe difference betweendiversifiable and nondiversifiable risk.
Test Bank:II Topic: Risk
Investors evaluatean investment by estimating itsaverage expected rate of return, and this estimation processassigns higher weights to
higher returns.
B. more likelyoutcomes.
higher risks.
smaller returns.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
The average expected rate of returnis a
volume-weighted average.
price-weighted average.
C. probability-weighted average.
D. value-weighted average.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
Which of the following statements best describes the relationship between risk and the average expected return of investments?
Less risky assets will have similaraverage expected rates of return to more risky assets.
Less risky assets will have higher average expected rates of return than more risky assets.
C. More risky assets will have higher average expected rates of returnthan less risky assets.
D. More risky assets will have lower average expectedrates of returnthan less risky assets.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
Which of the following statements best describes the relationship between asset prices and average expected returns?
More risky assets will have similar prices to less risky assets.
Less risky assetswill have lower prices than more risky assets.
C. Less riskyassets will have higher prices than more risky assets.
D. More risky assets will have higher prices than less risky assets.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
If an investorowns a well-diversified portfolio, then
his portfoliodoes not involve any risk.
B. the idiosyncratic risk in his portfolio is minimized.
the systemic risk in his portfolio is minimized.
his portfolio will have the highestexpected return.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
If an investment is 70 percent likely to return10 percent per year and 30 percent likely to return15 percent a year, then its average expected rate of return is
10.5 percent.
11.0 percent.
C. 11.5 percent.
D. 12.5 percent.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is
34 percent.
32 percent.
C. 30 percent.
D. 12 percent.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
If an investment is equallylikely to return10 percent per year or 15 percent a year, then its average expected rate of return is
10.5 percent.
11.0 percent.
11.5 percent.
D. 12.5 percent.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
The so-calledmarket portfolio used as a benchmarkin financial economicsis
the lowestrisk portfolio.
B. the most diversified portfolio.
the portfolio with the highest expected return.
the portfolio with zero systemic risk.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
What does the "beta" of an assetmeasure?
how the nondiversifiable risk compareswith diversifiable risk for an asset
how the expected return compareswith the diversifiable risk of a given asset
how the expected return compareswith the nondiversifiable risk of the market portfolio
D. how the nondiversifiable risk of a given asset compares with that of the marketportfolio
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
An assetwith a beta of 0.5 has
5 percentmore risk than a risk-free asset.
50 percentmore risk than a risk-free asset.
C. half the nondiversifiable risk as a market portfolio.
D. 5 times the nondiversifiable risk as a marketportfolio.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
One asset has a beta of 1.5 and another asset has a beta of 0.75. The difference in beta means that the asset with a beta of 0.75 has
75 percentless nondiversifiable risk than the asset with a beta of 1.5.
75 percentmore nondiversifiable risk than the assetwith a beta of 1.5.
twice as much nondiversifiable risk as the asset with a beta of 1.5.
D. one-half as much nondiversifiable risk as the asset with a beta of 1.5.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
The marketportfolio would have a beta of
0. B. 1.0. C. 100.
D. any value.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
The so-called risk-free rate essentially measures the investors'
risk aversion.
risk preference.
C. time preference.
D. expected rate of return.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
What is considered to be the best measure of the risk-free interest rate?
the rate of return on a corporate bond index fund
the rate of return on a corporate stock index fund
the rate of return on the Standard and Poor's 500
D. the rate ofreturn on short-term U.S. government bonds
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
People tend to be impatient, and theytypically prefer to
save for later rather than spend now.
be paid to consume nowrather than in thefuture.
C. be paid to consume in the future rather than now.
D. pay in order to consume in the future ratherthan now.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
What concept would be most consistent with the observation that people tend to be impatientand typically prefer to consume things in the presentrather than the future?
future value
present value
C. time preference
D. market portfolio
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
Short-term U.S. government securities are practically risk-free, and thus their rates of return are paymentssolely for
diversifiable risk.
B. time preference.
idiosyncratic risk.
pure profit.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
The Fed canregularly influence and change the risk-free rate of financial investments through its
open-market operations.
quantitative easing.
required reserveratio.
bank supervision.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-07 Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patientand for bearingnondiversifiable risk.
Test Bank:II Topic: Comparing Risky Investments
The expected rate of returnfrom an investment is
the rate that compensates for time preference only.
the rate that compensatesforrisk only.
C. the rate that compensates for time preference plus the rate that compensates forrisk.
D. therate that compensates fortime preference minus therate that compensates for risk.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
The SecurityMarket line (SML) shows how the averageexpected rates of returnon assets vary with
stock price.
dividend payment.
C. risk level.
D. time preference.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
The verticalintercept of the SecurityMarket Line (SML) shows the
amount of arbitrage.
B. risk-free interest rate.
beta of the market portfolio.
risk premiumfor the market portfolio.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
The Security Market Line (SML) is upward-sloping, indicating that the
beta of an investmentincreases as its risk level increases.
B. average expectedreturn on investments decreases as their risk level decreases.
average expected return on the risk-free asset increasesas its beta increases.
average expected return of the market portfolio increases as its beta increases.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's
expected rate of return is lower than could be had from some combination of the risk-freeasset and the market portfolio.
expected rate of return is higher than could be had from some combination of the risk-free asset and the marketportfolio.
price will rise as arbitrageproceeds in the market.
risk will rise as arbitrage proceeds in the market.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
If an asset has a risk-return combination that is above the SecurityMarket Line (SML), then arbitrage will make that asset's
beta increase.
beta decrease.
average expected return increase.
D. average expected return decrease.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
292.
In the accompanying graph, bracket A represents the
rate of return for an asset.
rate of returnfor the risk-free asset.
C. risk premiumfor an asset with a certain risk level.
D. compensation for time preference for an asset with a certain risk level.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
Type: Graph
293.
In the accompanying graph, bracket B represents the
amount of arbitrage for this asset.
rate of return for the market portfolio.
risk premiumfor an asset'srisk level.
D. compensation fortimepreference for an asset.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
Type: Graph
294.
In theaccompanying graph, point Y represents the
A. rate of return for the market portfolio.
B. rate of return for the risk-freeasset.
risk premiumfor the market portfolio.
compensation for time preference for a given asset.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
Type: Graph
295.
Refer to the graph. The average expected rate of return for an asset with a beta equal to X would be
A. Y.
B. A plus B.
Z minus A.
Z minus Y.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
Type: Graph
296.
Refer to the graph. The risk premium for an asset with a beta equal to X would be
Z.
A plus B.
C. Z minus B.
D. Z minus A.
AACSB: Knowledge Application
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
Type: Graph
If the Federal Reserve uses open-market operations to lower the interestrate on short-term U.S. government bonds, then, as a consequence, asset prices
increase and the averageexpected rate of return on assets decreases.
decrease and the average expected rate of return on assets increases.
increase and the average expected rate of return on assets increases.
decrease and the average expected rate of returnon assets decreases.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
If the Federal Reserve conducts an open-market purchase, then the SML will
shift up.
B. shift down.
rotate and become steeper.
rotate andbecome flatter.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
If the Fed raises the interest rates on short-term U.S. government bonds, then the SecurityMarket Line shifts
downward as the risk-freeinterest rate increases.
downward as the risk-freeinterest rate decreases.
C. upward as the risk-free interest rate increases.
D. upward as the risk-free interest rate decreases.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
During the financial crisis of 2007–2008, investors demanded much higher risk premiums in their investments. This causedthe SML to
shift up.
shift down.
C. becomesteeper.
D. become flatter.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
If investors started to prefer investing in more ethicalcompanies, then it would be expected that the stock prices for those companieswould
increase, and the rates of return would decreaserelative to othercompanies.
increase, and the rates of return would increaserelative to other companies.
increase, but the rates ofreturn would stay the same relative to other companies.
decrease, and the rates of returnwould decrease relativeto other companies.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
If investors showed less of a preference for investingin war-related companies, then it would be expectedthat the stock prices for those companies would
increase, and the rates of return would decreaserelative to othercompanies.
B. decrease,and the rates of return would increase relativeto other companies.
decrease, but the rates of return would stay the same relativeto other companies.
decrease, and the rates of returnwould decrease relativeto other companies.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
Before takingmanagement and tradingcosts into account,arbitrage activities in the marketensure that the returnsof actively managedfunds are
significantly higher than those of index funds with similar risk.
significantly lower than those ofindex funds with similar risk.
C. about the same as those of index funds with similarrisk.
D. more volatile than those of index funds with similar risk.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
A key reason that actively managed funds have lower returnsthan index funds with a similar level of risk is that
index funds require more buying and sellingto generate their returns.
B. management and trading costs reduce the returnsof actively managed funds.
index funds spend more on researchand management.
diversification is more important to actively managed funds.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-08 Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the SecurityMarket Line.
Test Bank:II Topic: The SecurityMarket Line
True / False Questions
The terms "economic investment" and"financial investment" can be usedsynonymously.
FALSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 17-01 Define financial economics and distinguish between economic investment and financial investment.
Test Bank:II Topic: Financial Investment
The "time value" of money is basedon the fact that prices may increase over time.
FALSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-02 Explain the time value of money and how compoundinterest can be used to calculate the present value of any future amount of money.
Test Bank:II Topic: Present Value
The compound interest formula states that if X dollarsare invested today at an interestrate i and allowed to grow for t years, it will become X(1 + i)(t) dollars in t years.
FALSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-02 Explain the time value of money and how compoundinterest can be used to calculate the present value of any future amount of money.
Test Bank:II Topic: Present Value
You deposit$5,000 into a 10-year bank CD that pays a 6.5 percent annual compound interestrate. When the CD matures in 10 years, you will get more than $9,000 from it.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 17-02 Explain the time value of money and how compoundinterest can be used to calculate the present value of any future amount of money.
Test Bank:II Topic: Present Value
After 4 years, a $5,000 investment earning a 6 percent annual interest rate will beworth more than a $6,000 investment earning1 percent annual interest.
TRUE