Question 1

Suppose that the number of buyers and sellers of municipal bonds increases substantially. The result should be a(an)

Accepted Answer

A) increase in the prices of municipal bonds. 
B) decrease in the prices of municipal bonds. 
C) increase in U.S. Treasury bond yields. 
D) decrease in the tax rate on municipal bond yields. 
A) increase in the prices of municipal bonds. 
B) decrease in the prices of municipal bonds. 
C) increase in U.S. Treasury bond yields. 
D) decrease in the tax rate on municipal bond yields. A

Question 2

Rank the following assets from least liquid to most liquid: U.S. Treasury bills; corporate bonds issued by Jimmy's Motorcycle Emporium; municipal bonds issued by the city of Orlando.

Accepted Answer

A) Orlando, Jimmy's, U.S. Treasury 
B) Jimmy's, Orlando, U.S. Treasury 
C) Jimmy's, U.S. Treasury, Orlando 
D) Orlando, U.S. Treasury, Jimmy's 
A) Orlando, Jimmy's, U.S. Treasury 
B) Jimmy's, Orlando, U.S. Treasury 
C) Jimmy's, U.S. Treasury, Orlando 
D) Orlando, U.S. Treasury, Jimmy's B

Question 3

Suppose that Steve's Book Supplies has a return of 15% one-third of the time and a return of 0% two-thirds of the time. Your expected return from investing in Acme Widget would be

Accepted Answer

A) 2.5%. 
B) 5.0%. 
C) 7.5%. 
D) 10.0%. 
A) 2.5%. 
B) 5.0%. 
C) 7.5%. 
D) 10.0%. B

Question 4

Luxury assets are assets

Accepted Answer

A) with wealth elasticities of less than 1. 
B) held by savers for investment. 
C) used by savers to conduct regular transactions. 
D) not subject to federal income tax. 
A) with wealth elasticities of less than 1. 
B) held by savers for investment. 
C) used by savers to conduct regular transactions. 
D) not subject to federal income tax.

Question 5

Suppose that when your wealth increases from $100,000 to $200,000 , your holdings of U.S. Treasury securities increases from $2000 to $5000. Your wealth elasticity of demand for U.S. government securities then is

Accepted Answer

A) less than 1 and U.S. government securities are a luxury asset. 
B) greater than 1 and U.S. government securities are a necessity asset. 
C) less than 1 and U.S. government securities are a necessity asset. 
D) greater than 1 and U.S. government securities are a luxury asset. 
A) less than 1 and U.S. government securities are a luxury asset. 
B) greater than 1 and U.S. government securities are a necessity asset. 
C) less than 1 and U.S. government securities are a necessity asset. 
D) greater than 1 and U.S. government securities are a luxury asset.

Question 6

Suppose that the number of buyers and sellers of municipal bonds decreases substantially. The result should be a(an)

Accepted Answer

A) decline in municipal bond yields. 
B) increase in municipal bond yields. 
C) decline in U.S. Treasury bond yields. 
D) increase in the tax rate on municipal bond yields. 
A) decline in municipal bond yields. 
B) increase in municipal bond yields. 
C) decline in U.S. Treasury bond yields. 
D) increase in the tax rate on municipal bond yields.

Question 7

If the returns on two assets are perfectly positively correlated, adding the second asset to your portfolio when you already own the first

Accepted Answer

A) reduces the risk in the portfolio. 
B) increases the risk in the portfolio. 
C) has no effect on the risk in the portfolio. 
D) reduces the risk in the portfolio only if you are risk averse. 
A) reduces the risk in the portfolio. 
B) increases the risk in the portfolio. 
C) has no effect on the risk in the portfolio. 
D) reduces the risk in the portfolio only if you are risk averse.

Question 8

Diversification can eliminate

Accepted Answer

A) all risk in a portfolio. 
B) the idiosyncratic risk in a portfolio. 
C) the market risk in a portfolio. 
D) risk only if the saver is risk neutral. 
A) all risk in a portfolio. 
B) the idiosyncratic risk in a portfolio. 
C) the market risk in a portfolio. 
D) risk only if the saver is risk neutral.

Question 9

A portfolio that includes all the stocks listed on the New York Stock Exchange would

Accepted Answer

A) have a higher expected return than the expected return on any individual stock. 
B) face no idiosyncratic risk, only systematic risk. 
C) face no systematic risk, only idiosyncratic risk. 
D) face neither systematic nor idiosyncratic risk. 
A) have a higher expected return than the expected return on any individual stock. 
B) face no idiosyncratic risk, only systematic risk. 
C) face no systematic risk, only idiosyncratic risk. 
D) face neither systematic nor idiosyncratic risk.

Question 10

Assets with greater liquidity

Accepted Answer

A) also typically have greater returns. 
B) are generally tax-free. 
C) help savers smooth spending over time. 
D) are generally available only through brokers. 
A) also typically have greater returns. 
B) are generally tax-free. 
C) help savers smooth spending over time. 
D) are generally available only through brokers.

Question 11

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of savings deposits increase from $10,000 to $12,000. Your wealth elasticity of demand for savings deposits then is

Accepted Answer

A) less than 1 and savings deposits are a necessity asset. 
B) greater than 1 and savings deposits are a necessity asset. 
C) less than 1 and savings deposits are a luxury asset. 
D) greater than 1 and savings deposits are a luxury asset. 
A) less than 1 and savings deposits are a necessity asset. 
B) greater than 1 and savings deposits are a necessity asset. 
C) less than 1 and savings deposits are a luxury asset. 
D) greater than 1 and savings deposits are a luxury asset.

Question 12

Market risk

Accepted Answer

A) can be eliminated through diversification. 
B) represents the risk generated through chance events affecting a single company. 
C) cannot be eliminated through diversification. 
D) is another name for idiosyncratic risk. 
A) can be eliminated through diversification. 
B) represents the risk generated through chance events affecting a single company. 
C) cannot be eliminated through diversification. 
D) is another name for idiosyncratic risk.

Question 13

The theory of portfolio allocation describes

Accepted Answer

A) why savers behave as they do when selecting one asset rather than another. 
B) the relationship among interest rates on bonds of different maturities. 
C) why firms sometimes raise funds by issuing equities and sometimes by issuing debt. 
D) the reasons why assets differ in their degree of liquidity. 
A) why savers behave as they do when selecting one asset rather than another. 
B) the relationship among interest rates on bonds of different maturities. 
C) why firms sometimes raise funds by issuing equities and sometimes by issuing debt. 
D) the reasons why assets differ in their degree of liquidity.

Question 14

Necessity assets are assets

Accepted Answer

A) with wealth elasticities of less than 1. 
B) with wealth elasticities of greater than 1. 
C) held by savers for investment. 
D) not subject to federal income tax. 
A) with wealth elasticities of less than 1. 
B) with wealth elasticities of greater than 1. 
C) held by savers for investment. 
D) not subject to federal income tax.

Question 15

The "equity premium" refers to

Accepted Answer

A) the exemption of stock dividends from federal income tax. 
B) the gap between the return on stocks and the return on bonds. 
C) the premium investors are willing to pay for Internet stocks. 
D) the low mortgage rates available to borrowers who make large down payments when purchasing a home. 
A) the exemption of stock dividends from federal income tax. 
B) the gap between the return on stocks and the return on bonds. 
C) the premium investors are willing to pay for Internet stocks. 
D) the low mortgage rates available to borrowers who make large down payments when purchasing a home.

Question 16

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of stock mutual funds increases from $20,000 to $50,000. Your wealth elasticity of demand for stock mutual funds then is

Accepted Answer

A) less than 1 and stock mutual funds are a necessity asset. 
B) greater than 1 and stock mutual funds are a luxury asset. 
C) less than 1 and stock mutual funds are a luxury asset. 
D) greater than 1 and stock mutual funds are a necessity asset. 
A) less than 1 and stock mutual funds are a necessity asset. 
B) greater than 1 and stock mutual funds are a luxury asset. 
C) less than 1 and stock mutual funds are a luxury asset. 
D) greater than 1 and stock mutual funds are a necessity asset.

Question 17

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 1950?

Accepted Answer

A) Pension reserves 
B) Equities 
C) Mortgages 
D) U.S. government securities 
A) Pension reserves 
B) Equities 
C) Mortgages 
D) U.S. government securities

Question 18

Necessity assets are assets

Accepted Answer

A) used by savers to conduct regular transactions. 
B) with wealth elasticities of greater than 1. 
C) held by savers for investment. 
D) not subject to federal income tax. 
A) used by savers to conduct regular transactions. 
B) with wealth elasticities of greater than 1. 
C) held by savers for investment. 
D) not subject to federal income tax.

Question 19

Acme Gold Mining, Inc. discovers a huge vein of gold in the mountains of Iowa. This is an example of

Accepted Answer

A) the high returns that can be expected from investing in companies that mine minerals. 
B) idiosyncratic risk. 
C) market risk. 
D) systematic risk. 
A) the high returns that can be expected from investing in companies that mine minerals. 
B) idiosyncratic risk. 
C) market risk. 
D) systematic risk.

Question 20

The theory of portfolio selection leads to the conclusion that

Accepted Answer

A) there is one best asset for each investor. 
B) there is one best asset for all investors. 
C) savers should allocate their savings among many different assets. 
D) savers should concentrate their savings in as few assets as possible. 
A) there is one best asset for each investor. 
B) there is one best asset for all investors. 
C) savers should allocate their savings among many different assets. 
D) savers should concentrate their savings in as few assets as possible.

Exam 5: The Theory of Portfolio Allocation

Suppose that the number of buyers and sellers of municipal bonds increases substantially. The result should be a(an)

Rank the following assets from least liquid to most liquid: U.S. Treasury bills; corporate bonds issued by Jimmy's Motorcycle Emporium; municipal bonds issued by the city of Orlando.

Suppose that Steve's Book Supplies has a return of 15% one-third of the time and a return of 0% two-thirds of the time. Your expected return from investing in Acme Widget would be

Luxury assets are assets

Suppose that when your wealth increases from $100,000 to $200,000 , your holdings of U.S. Treasury securities increases from $2000 to $5000. Your wealth elasticity of demand for U.S. government securities then is

Suppose that the number of buyers and sellers of municipal bonds decreases substantially. The result should be a(an)

If the returns on two assets are perfectly positively correlated, adding the second asset to your portfolio when you already own the first

Diversification can eliminate

A portfolio that includes all the stocks listed on the New York Stock Exchange would

Assets with greater liquidity

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of savings deposits increase from $10,000 to $12,000. Your wealth elasticity of demand for savings deposits then is

Market risk

The theory of portfolio allocation describes

Necessity assets are assets

The "equity premium" refers to

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of stock mutual funds increases from $20,000 to $50,000. Your wealth elasticity of demand for stock mutual funds then is

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 1950?

Necessity assets are assets

Acme Gold Mining, Inc. discovers a huge vein of gold in the mountains of Iowa. This is an example of

The theory of portfolio selection leads to the conclusion that

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters