Question 1

The main reason for diversifying a portfolio is

Accepted Answer

A) to take advantage of the fact that returns on assets are imperfectly correlated. 
B) to take advantage of the favorable tax treatments diversified portfolios receive from the federal government. 
C) that diversified portfolios have greater liquidity than undiversified portfolios. 
D) that diversified portfolios have lower information costs than undiversified portfolios. 
A) to take advantage of the fact that returns on assets are imperfectly correlated. 
B) to take advantage of the favorable tax treatments diversified portfolios receive from the federal government. 
C) that diversified portfolios have greater liquidity than undiversified portfolios. 
D) that diversified portfolios have lower information costs than undiversified portfolios.

Question 2

According to many economists, the equity premium

Accepted Answer

A) is mainly attributable to tax considerations. 
B) reflects investors' fears of future inflation. 
C) is probably zero. 
D) is too large to be explained by risk considerations alone. 
A) is mainly attributable to tax considerations. 
B) reflects investors' fears of future inflation. 
C) is probably zero. 
D) is too large to be explained by risk considerations alone.

Question 3

Which of the following economists has NOT won a Nobel Prize in economics for research on the benefits of diversification?

Accepted Answer

A) James Tobin 
B) Harry Markowitz 
C) Milton Friedman 
D) William Sharpe 
A) James Tobin 
B) Harry Markowitz 
C) Milton Friedman 
D) William Sharpe

Question 4

Securities issued by state and local governments generally are

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

The theory of portfolio allocation

Accepted Answer

A) predicts how savers allocate their assets. 
B) explains the relative liquidity of different assets. 
C) explains the relative riskiness of different assets. 
D) predicts the inflation rate. 
A) predicts how savers allocate their assets. 
B) explains the relative liquidity of different assets. 
C) explains the relative riskiness of different assets. 
D) predicts the inflation rate.

Question 6

A small company that issues bonds for the first time may have to offer them at a high yield because the bonds will

Accepted Answer

A) not be as liquid as many other corporate bonds. 
B) be less risky than many other corporate bonds. 
C) be less costly to gather information on than other corporate bonds. 
D) be subject to a lower tax rate than other corporate bonds. 
A) not be as liquid as many other corporate bonds. 
B) be less risky than many other corporate bonds. 
C) be less costly to gather information on than other corporate bonds. 
D) be subject to a lower tax rate than other corporate bonds.

Question 7

A risk-neutral saver

Accepted Answer

A) can eliminate the market risk in his or her portfolio through diversification. 
B) gains nothing from diversification. 
C) benefits from diversification more than does the risk-averse saver. 
D) actually increases the risk in his or her portfolio by diversification. 
A) can eliminate the market risk in his or her portfolio through diversification. 
B) gains nothing from diversification. 
C) benefits from diversification more than does the risk-averse saver. 
D) actually increases the risk in his or her portfolio by diversification.

Question 8

If, on average, a 1% increase in the market portfolio leads to an increase of 2% in the value of an asset, then the asset's beta equals

Accepted Answer

A) 0.5. 
B) 1. 
C) 2. 
D) Not enough information has been given to determine the asset's beta. 
A) 0.5. 
B) 1. 
C) 2. 
D) Not enough information has been given to determine the asset's beta.

Question 9

Suppose that information is made public that Mammoth Computer is having severe financial difficulties. The effect will be to

Accepted Answer

A) increase the yield on Mammoth's long-term bonds. 
B) increase the yield on rival Orange Computer's long-term bonds. 
C) lower the yield on Mammoth's long-term bonds. 
D) increase the yield on both Mammoth's long-term bonds and rival Orange Computer's long-term bonds. 
A) increase the yield on Mammoth's long-term bonds. 
B) increase the yield on rival Orange Computer's long-term bonds. 
C) lower the yield on Mammoth's long-term bonds. 
D) increase the yield on both Mammoth's long-term bonds and rival Orange Computer's long-term bonds.

Question 10

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 2006?

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 11

Which of the following was NOT a major store of U.S. household wealth in 1950?

Accepted Answer

A) Mutual funds 
B) Equities 
C) Bank accounts 
D) U.S. government securities 
A) Mutual funds 
B) Equities 
C) Bank accounts 
D) U.S. government securities

Question 12

In general, an older saver should choose a financial portfolio based on

Accepted Answer

A) selecting safe assets to earn an expected real return of about zero. 
B) maximizing expected return with only limited concern for variability 
C) equal concern for expected return and variability. 
D) avoiding tax-free securities. 
A) selecting safe assets to earn an expected real return of about zero. 
B) maximizing expected return with only limited concern for variability 
C) equal concern for expected return and variability. 
D) avoiding tax-free securities.

Question 13

A portfolio is a

Accepted Answer

A) brokerage house specializing in the trading of common stock. 
B) brokerage house specializing in the trading of corporate bonds. 
C) measure of the risk involved with a holding a particular asset. 
D) collection of assets. 
A) brokerage house specializing in the trading of common stock. 
B) brokerage house specializing in the trading of corporate bonds. 
C) measure of the risk involved with a holding a particular asset. 
D) collection of assets.

Question 14

Comparing the range of the one-year returns on stocks to the range of the twenty-year returns over the period from 1926 to 2005 reveals that

Accepted Answer

A) the range has been about the same. 
B) the range has been narrower for one-year returns. 
C) the range has been narrower for twenty-year returns. 
D) there has been no consistent relationship between the ranges for one-year returns and twenty-year returns. 
A) the range has been about the same. 
B) the range has been narrower for one-year returns. 
C) the range has been narrower for twenty-year returns. 
D) there has been no consistent relationship between the ranges for one-year returns and twenty-year returns.

Question 15

An asset in a portfolio always represents

Accepted Answer

A) a medium of exchange. 
B) a unit of account. 
C) a store of value. 
D) the same thing as a liability. 
A) a medium of exchange. 
B) a unit of account. 
C) a store of value. 
D) the same thing as a liability.

Question 16

The average investor must weigh the benefits of liquidity against

Accepted Answer

A) the high taxes generally levied on liquid assets. 
B) the lower returns on liquid assets. 
C) the high transactions costs involved in disposing of liquid assets. 
D) the greater variability in the nominal returns on liquid assets. 
A) the high taxes generally levied on liquid assets. 
B) the lower returns on liquid assets. 
C) the high transactions costs involved in disposing of liquid assets. 
D) the greater variability in the nominal returns on liquid assets.

Question 17

Which of the following is NOT a determinant of asset demand?

Accepted Answer

A) The saver's wealth 
B) The saver's income 
C) Expectations of the return on the asset 
D) The liquidity of the asset 
A) The saver's wealth 
B) The saver's income 
C) Expectations of the return on the asset 
D) The liquidity of the asset

Question 18

As a saver's wealth increases, explain whether each of the following is likely to become a smaller or a larger fraction of her portfolio.
(a) Corporate bonds
(b) Corporate stock
(c) Cash
(d) Checking account balance

Accepted Answer

(a) Larger

Question 19

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

Accepted Answer

A) Corporate stock 
B) Corporate bonds 
C) U.S. government securities 
D) Checking account balance 
A) Corporate stock 
B) Corporate bonds 
C) U.S. government securities 
D) Checking account balance

Question 20

The main reason that savers must assess the impact of inflation on returns is

Accepted Answer

A) an increase in inflation will lower the nominal return on an asset. 
B) changes in the value of money will affect the real value of returns. 
C) inflation has a larger impact on the returns on luxury assets than on the returns on necessity assets. 
D) real after-tax returns generally rise during periods of inflation. 
A) an increase in inflation will lower the nominal return on an asset. 
B) changes in the value of money will affect the real value of returns. 
C) inflation has a larger impact on the returns on luxury assets than on the returns on necessity assets. 
D) real after-tax returns generally rise during periods of inflation.

Exam 5: The Theory of Portfolio Allocation

The main reason for diversifying a portfolio is

According to many economists, the equity premium

Which of the following economists has NOT won a Nobel Prize in economics for research on the benefits of diversification?

Securities issued by state and local governments generally are

The theory of portfolio allocation

A small company that issues bonds for the first time may have to offer them at a high yield because the bonds will

A risk-neutral saver

If, on average, a 1% increase in the market portfolio leads to an increase of 2% in the value of an asset, then the asset's beta equals

Suppose that information is made public that Mammoth Computer is having severe financial difficulties. The effect will be to

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 2006?

Which of the following was NOT a major store of U.S. household wealth in 1950?

In general, an older saver should choose a financial portfolio based on

A portfolio is a

Comparing the range of the one-year returns on stocks to the range of the twenty-year returns over the period from 1926 to 2005 reveals that

An asset in a portfolio always represents

The average investor must weigh the benefits of liquidity against

Which of the following is NOT a determinant of asset demand?

As a saver's wealth increases, explain whether each of the following is likely to become a smaller or a larger fraction of her portfolio. (a) Corporate bonds (b) Corporate stock (c) Cash (d) Checking account balance

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

The main reason that savers must assess the impact of inflation on returns is

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