Topic 1

Question 1

Money eliminates the need for

A. a search for a double coincidence of wants.
B. government regulation.
C. specialization of labor.
D. financial Intermediaries.

Answer 1

A. a search for a double coincidence of wants.

Question 2

The high transaction costs associated with a barter system refers to the:

A. fact that, these exchanges are taxed by governments.
B. risk associated with having to carry an inventory of goods to trade.
C. high cost associated with finding someone with whom to exchange.
D. cost of drawing up complete contracts.

Answer 2

C. high cost associated with finding someone with whom to exchange.

Question 3

Which of the following is included in both M1 and M2

A. Short term bonds
B. Savings account deposits
C. Certificate of Deposits
D. Checking account deposits

Answer 3

D. Checking account deposits

Question 4

A financial instrument can

A. Transfer risk to another party
B. Transfer purchasing power into the future
C. Act as a means of payment
D. All of the above

Answer 4

D. All of the above

Question 5

The fundamental characteristics influencing the value of a financial instrument include each of the following except

A. the size of the payment promised.
B. when the promised payment will be made.
C. where the instrument is traded.
D. the likelihood of payment.

Answer 5

C. where the instrument is traded.

Question 6

Which of the following statements is most correct?

A. All banks are financial intermediaries, but not all financial intermediaries are banks.
B. Financial intermediaries must be public corporations.
C. All financial intermediaries are insurance companies.
D. All financial intermediaries are government agencies.

Answer 6

A. All banks are financial intermediaries, but not all financial intermediaries are banks.

Question 7

If an investment will return $1,600 half of the time and $700 half of the time, the expected value of the investment is:

A. $1,250
B. $1,050
C. $1,150
D. $2,200

Answer 7

C. $1,150

Question 8

An investment pays $1,200 a quarter of the time; $1,000 half of the time; and $800 a quarter of the time. Its expected value and standard deviation are: 
A. $1,000; $141
B. $1,050; $20,000
C. $1,000; $20,000
D. $1,000; $100

Answer 8

A. $1,000; $141

Question 9

Risk-free investments have rates of return:

A. equal to zero
B. with a standard deviation equal to zero
C. that are uncertain, but have a certain time horizon
D. that exhibit a large spread of potential payoffs

Answer 9

B. with a standard deviation equal to zero

Question 10

The difference between standard deviation and value at risk (VaR) is:

A. nothing, they are two names for the same thing
B. value at risk (VaR) is a more common measure in financial circles than is standard deviation
C. standard deviation reflects the spread of possible outcomes while VaR focuses on the value of the worst outcome
D. value at risk is expected value times the standard deviation

Answer 10

C. standard deviation reflects the spread of possible outcomes while VaR focuses on the value of the worst outcome

Question 11

An investment with a large spread between possible payoffs will generally have:

A. a low expected return
B. a high standard deviation
C. a low value at risk
D. both a low expected return and a low value at risk

Answer 11

B. a high standard deviation

Question 12

Investment A returns 10% half the time and -5% half the time. What is EV and SD?

A. 2% & 7.5%
B. 2.5% & 7%
C. 2.5% & 7.5%
D. 5% & 7%

Answer 12

C. 2.5% & 7.5%

Question 13

Investment A or B or C returns 10% half the time and -5% half the time (CORR = 0). If you invest in equal amounts of A,B,C your risk will ____ relative to investing in just A. The Standard deviation of your portfolio will ___ as well.

A. Decrease, decrease
B. Increase, increase
C. Decrease, increase
D. Increase, decrease

Answer 13

A. Decrease, decrease