Chapter 1 Economics

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Fundamental Economic Concepts: Introduction


1.Risk is best thought of as
a.the chance that the actual return will be zero or negative
b.the chance that the actual return will differ from the expected return
c.the chance that the expected return will be lower than what investors demand
d.the chance that the expected return will be incorrectly estimated

2.Which of the following is INCORRECT about risk-averse investors?
a.They always try to minimize their risk regardless of return.
b.They will not seek risk for its own sake.
c.They can buy very risky securities.
d.They seek to earn a rate of return that is proportional to the risk taken.

3.In describing the investing tradeoff that investors face, which of the following statements is CORRECT?
a.on an expected basis for the next year, the tradeoff can be upward or downward sloping
b.over long periods of financial market history, such as 50 or more years, the tradeoff is downward sloping
c.over recent historical periods of one or two years, the tradeoff can be upward sloping or downward sloping
d.on an expected basis for the next 10 or 15 years, the tradeoff could be either upward sloping or downward sloping

4.Which of the following factual statements is INCORRECT?
a.portfolio management is the first step in the investment decision process
b.a passive investment strategy is designed to make few changes over time
c.the Efficient Market Hypothesis states that the prices of securities reflect their economic value active investment strategy seeks to change investment proportions and/or assets in the belief that profits can be made

5.Given the expected return--risk tradeoff that exists for investment decisions, which of the following financial assets would be expected to be highest on the tradeoff?
a.AAA corporate bonds
b.Treasury bonds common stocks
d.preferred stock

6.Ex post, the return-risk tradeoff available to investors
a.can only be a flat line in return-risk space.
b.can only be upward sloping in return-risk space.
c.can only be downward sloping in return-risk space.
d.could be downward sloping in return-risk space.

7.Intelligent investment decisions for any future period are based on
a.the relation between realized return and risk
b.the relation between expected return and risk
c.expected return only
d.a tradeoff between return and risk that is downward sloping

8. A Chartered Financial Analyst designation is
a.A professional designation awarded by AIMR to candidates passing three levels of examinations involving important investments topics.
b.a certification of a successful investing record used by professionals to attract business.
c.a professional designation awarded by employers to employees meeting recognized standards of competency and conduct.
d.a professional designation awarded by colleges upon successful completion of the proper exams.


9.With regard to direct and indirect investing, choose the INCORRECT statement.
a.Direct investing refers to the purchase of securities directly in one’s brokerage account
b.Indirect investing refers to the purchase of investment companies, thereby letting the intermediary do the investing on behalf of the investment company owners
c.Direct investing must be done by every investor since it is not possible to invest only indirectly
d.Many investors do both direct and indirect investing

10.An example of a nonmarketable security is
a.a Treasury bill
b.a government savings bond
c.a banker's acceptance
d.commercial paper

11.Which of the following is not a money-market security?
a.a Treasury bill market deposit account
c.a banker's acceptance
d.commercial paper

12.Which of the following characteristics applies to the Treasury bill?
a.sold at face value on a...
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