Question 1

In making investment decisions, savers evaluate

Accepted Answer

A) the variability of the expected return as well as the size of the return. 
B) the size of the expected return, but not the variability of the return. 
C) the variability of the expected return, but not the size of the return. 
D) neither the size nor the variability of the expected return. 
A) the variability of the expected return as well as the size of the return. 
B) the size of the expected return, but not the variability of the return. 
C) the variability of the expected return, but not the size of the return. 
D) neither the size nor the variability of the expected return.

Question 2

Which of the following assets has the lowest information costs?

Accepted Answer

A) A U.S. Treasury bond 
B) A bond issued by the city of Smallplace, South Dakota 
C) A bond issued by General Motors 
D) A share of stock issued by General Motors 
A) A U.S. Treasury bond 
B) A bond issued by the city of Smallplace, South Dakota 
C) A bond issued by General Motors 
D) A share of stock issued by General Motors

Question 3

If General Auto and Crystal Auto have returns that are perfectly positively correlated, then adding Crystal Auto to a portfolio that already contains General Auto will

Accepted Answer

A) reduce the risk in the portfolio. 
B) increase the risk in the portfolio. 
C) neither increase nor decrease the risk in the portfolio. 
D) reduce the risk in the portfolio only for risk-averse savers. 
A) reduce the risk in the portfolio. 
B) increase the risk in the portfolio. 
C) neither increase nor decrease the risk in the portfolio. 
D) reduce the risk in the portfolio only for risk-averse savers.

Question 4

Interest from U.S. Treasury securities is

Accepted Answer

A) not subject to taxation. 
B) taxed at the federal level, but not at the state and local levels. 
C) taxed at the state and local levels, but not at the federal level. 
D) taxed at the local, state, and federal levels. 
A) not subject to taxation. 
B) taxed at the federal level, but not at the state and local levels. 
C) taxed at the state and local levels, but not at the federal level. 
D) taxed at the local, state, and federal levels.

Question 5

Investors are less willing to hold an asset with a high beta because

Accepted Answer

A) such assets tend to be illiquid. 
B) systematic risk cannot be diversified away. 
C) idiosyncratic risk cannot be diversified away. 
D) such assets tend to have lower expected returns. 
A) such assets tend to be illiquid. 
B) systematic risk cannot be diversified away. 
C) idiosyncratic risk cannot be diversified away. 
D) such assets tend to have lower expected returns.

Question 6

Suppose you hold a portfolio consisting of a single stock. About how many more stocks would you need to add to your portfolio in order to reduce its average annual variability to about the level of average annual variability you would experience if you held a portfolio consisting of every stock listed on the New York Stock Exchange?

Accepted Answer

A) 1 
B) 20 
C) 1000 
D) 10,000 
A) 1 
B) 20 
C) 1000 
D) 10,000

Question 7

Liquidity is

Accepted Answer

A) the ease with which an asset can be converted into cash. 
B) desirable, but reduces the value of assets held to smooth spending. 
C) desirable, but reduces the value of assets held for precautionary purposes. 
D) greater for common stock than for checkable deposits in commercial banks. 
A) the ease with which an asset can be converted into cash. 
B) desirable, but reduces the value of assets held to smooth spending. 
C) desirable, but reduces the value of assets held for precautionary purposes. 
D) greater for common stock than for checkable deposits in commercial banks.

Question 8

Mutual funds arose to

Accepted Answer

A) reduce the transactions costs small savers incur when diversifying. 
B) take advantage of the tax breaks the federal government grants for diversified portfolios. 
C) provide home buyers with an inexpensive source of mortgage funds. 
D) provide personal financial advice to small savers. 
A) reduce the transactions costs small savers incur when diversifying. 
B) take advantage of the tax breaks the federal government grants for diversified portfolios. 
C) provide home buyers with an inexpensive source of mortgage funds. 
D) provide personal financial advice to small savers.

Question 9

Which of the following is an example of a tax-exempt bond?

Accepted Answer

A) A bond issued by Microsoft 
B) A U.S. Treasury note 
C) A bond issued by the state of Ohio 
D) No bonds issued in the United States are exempt from taxation. 
A) A bond issued by Microsoft 
B) A U.S. Treasury note 
C) A bond issued by the state of Ohio 
D) No bonds issued in the United States are exempt from taxation.

Question 10

According to the capital asset pricing model, the expected return on asset j,   , equals

Accepted Answer

A)    -   × (
  -
  ). 
B)    -   + (
  -
  ). 
C)    +   - (
  -
  ). 
D)    +   × (
  -
  ). 
A)    -   × (
  -
  ). 
B)    -   + (
  -
  ). 
C)    +   - (
  -
  ). 
D)    +   × (
  -
  ).

Question 11

If the returns to Mammoth Computer and Stupendous Chemicals are independent (have zero correlation), adding Stupendous Chemicals to a portfolio already containing Mammoth Computer

Accepted Answer

A) reduces the overall portfolio risk. 
B) does not affect the overall portfolio risk. 
C) increases the overall portfolio risk. 
D) affects the overall portfolio risk only if the saver is risk averse. 
A) reduces the overall portfolio risk. 
B) does not affect the overall portfolio risk. 
C) increases the overall portfolio risk. 
D) affects the overall portfolio risk only if the saver is risk averse.

Question 12

As wealth increases, which of the following is likely to account for a smaller fraction of a saver's portfolio?

Accepted Answer

A) Corporate stock 
B) Corporate bonds 
C) Cash 
D) U.S. government securities 
A) Corporate stock 
B) Corporate bonds 
C) Cash 
D) U.S. government securities

Question 13

Economists believe that as a saver's wealth increases, the saver will generally

Accepted Answer

A) increase his or her holdings of all assets proportionately. 
B) increase the fraction of wealth held as cash. 
C) increase the fraction of wealth held as common stock. 
D) decrease the fraction held as corporate bonds. 
A) increase his or her holdings of all assets proportionately. 
B) increase the fraction of wealth held as cash. 
C) increase the fraction of wealth held as common stock. 
D) decrease the fraction held as corporate bonds.

Question 14

The variable beta

Accepted Answer

A) measures the degree of liquidity in a portfolio. 
B) is the responsiveness of a stock's expected return to changes in the value of the complete market portfolio. 
C) measures the degree of idiosyncratic risk in the complete market portfolio. 
D) is always less for an individual portfolio than for the complete market portfolio. 
A) measures the degree of liquidity in a portfolio. 
B) is the responsiveness of a stock's expected return to changes in the value of the complete market portfolio. 
C) measures the degree of idiosyncratic risk in the complete market portfolio. 
D) is always less for an individual portfolio than for the complete market portfolio.

Question 15

The wealth elasticity of demand describes the percentage change in

Accepted Answer

A) the quantity demanded of an asset for a given percentage change in the price of the asset. 
B) the amount of wealth possessed for a given percentage change in the age of the saver. 
C) the quantity of an asset demanded for a given percentage change in wealth. 
D) wealth for a given percentage change in the amount of any one asset added to the saver's portfolio. 
A) the quantity demanded of an asset for a given percentage change in the price of the asset. 
B) the amount of wealth possessed for a given percentage change in the age of the saver. 
C) the quantity of an asset demanded for a given percentage change in wealth. 
D) wealth for a given percentage change in the amount of any one asset added to the saver's portfolio.

Question 16

Diversification refers to

Accepted Answer

A) choosing assets so as to maximize expected return. 
B) choosing assets so as to minimize tax liability. 
C) choosing assets so as to maximize liquidity. 
D) allocating savings among different assets. 
A) choosing assets so as to maximize expected return. 
B) choosing assets so as to minimize tax liability. 
C) choosing assets so as to maximize liquidity. 
D) allocating savings among different assets.

Question 17

The expected real return to savers equals

Accepted Answer

A) expected inflation less the nominal return. 
B) expected inflation plus the nominal return. 
C) the nominal return minus expected inflation. 
D) the nominal return divided by expected inflation. 
A) expected inflation less the nominal return. 
B) expected inflation plus the nominal return. 
C) the nominal return minus expected inflation. 
D) the nominal return divided by expected inflation.

Question 18

Luxury assets

Accepted Answer

A) have wealth elasticities of less than 1. 
B) generally have low fixed costs of ownership. 
C) generally have high transactions costs of acquisition. 
D) have returns that are taxed at a higher rate than the returns on necessity assets. 
A) have wealth elasticities of less than 1. 
B) generally have low fixed costs of ownership. 
C) generally have high transactions costs of acquisition. 
D) have returns that are taxed at a higher rate than the returns on necessity assets.

Question 19

Households save through life insurance reserves, at least in part, because

Accepted Answer

A) life insurance reserves are very liquid. 
B) the transactions costs of saving in this way are very low. 
C) life insurance reserves receive favorable tax treatment. 
D) life expectancy in the United States has been declining. 
A) life insurance reserves are very liquid. 
B) the transactions costs of saving in this way are very low. 
C) life insurance reserves receive favorable tax treatment. 
D) life expectancy in the United States has been declining.

Question 20

Why do CDs have higher interest rates than savings accounts?

Accepted Answer

A) CDs are much riskier investments than savings accounts. 
B) Interest on CDs is taxable while interest on savings accounts is not. 
C) CDs provide better hedges against inflation than do savings accounts. 
D) CDs are not as liquid as savings accounts. 
A) CDs are much riskier investments than savings accounts. 
B) Interest on CDs is taxable while interest on savings accounts is not. 
C) CDs provide better hedges against inflation than do savings accounts. 
D) CDs are not as liquid as savings accounts.

Exam 5: The Theory of Portfolio Allocation

In making investment decisions, savers evaluate

Which of the following assets has the lowest information costs?

If General Auto and Crystal Auto have returns that are perfectly positively correlated, then adding Crystal Auto to a portfolio that already contains General Auto will

Interest from U.S. Treasury securities is

Investors are less willing to hold an asset with a high beta because

Liquidity is

Mutual funds arose to

Which of the following is an example of a tax-exempt bond?

According to the capital asset pricing model, the expected return on asset j, , equals

If the returns to Mammoth Computer and Stupendous Chemicals are independent (have zero correlation), adding Stupendous Chemicals to a portfolio already containing Mammoth Computer

As wealth increases, which of the following is likely to account for a smaller fraction of a saver's portfolio?

Economists believe that as a saver's wealth increases, the saver will generally

The variable beta

The wealth elasticity of demand describes the percentage change in

Diversification refers to

The expected real return to savers equals

Luxury assets

Households save through life insurance reserves, at least in part, because

Why do CDs have higher interest rates than savings accounts?

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