Problem 1
Identify each of the following investments as either an economic investment or a financial investment. a. A company builds a new factory. b. A pension plan buys some Google stock. c. A mining company sets up a new gold mine. d. A woman buys a 100 -year-old farmhouse in the countryside. e. A man buys a newly built home in the city. f. A company buys an old factory.
Problem 2
It is a fact that \((1+0.12)^{3}=1.40 .\) Knowing that to be true, what is the present value of \(\$ 140\) received in three years if the annual interest rate is 12 percent? a. \(\$ 1.40\) b. \(\$ 12\) c. \$100. d. \(\$ 112\)
Problem 3
Asset \(X\) is expected to deliver 3 future payments. They have present values of, respectively, \(\$ 1,000, \$ 2,000,\) and \(\$ 7,000\) Asset \(Y\) is expected to deliver 10 future payments, each having a present value of \(\$ 1,000 .\) Which of the following statements correctly describes the relationship between the current price of Asset \(X\) and the current price of Asset Y? \( a. Asset \)X\( and Asset \)Y\( should have the same current price. b. Asset \)X\( should have a higher current price than Asset Y. c. Asset \)X$ should have a lower current price than Asset Y.
Problem 4
Tammy can buy an asset this year for \(\$ 1,000 .\) She is expecting to sell it next year for \(\$ 1,050 .\) What is the asset's anticipated percentage rate of return? a. 0 percent. b. 5 percent. c. 10 percent. d. 15 percent.
Problem 5
Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good; the other does well when the weather is bad. Sammy's portfolio indicates that “weather risk” is a _______ risk. a. Diversifiable. b. Nondiversifiable. c. Automatic.
Problem 6
An investment has a 50 percent chance of generating a 10 percent return and a 50 percent chance of generating a 16 percent return. What is the investment's average expected rate of return? a. 10 percent. b. 11 percent. c. 12 percent. d. 13 percent. e. 14 percent. f. 15 percent. g. 16 percent.
Problem 7
If an investment has 35 percent more nondiversifiable risk than the market portfolio, its beta will be: a. 35 b. 1.35 c. 0.35
Problem 8
The interest rate on short-term U.S. government bonds is 4 percent. The risk premium for any asset with a beta \(=1.0\) is 6 percent. What is the average expected rate of return on the market portfolio? a. 0 percent. b. 4 percent. c. 6 percent. d. 10 percent.
Problem 9
Suppose that an SML indicates that assets with a beta \(=1.15\) should have an average expected rate of return of 12 percent per year. If a particular stock with a beta \(=1.15\) currently has an average expected rate of return of 15 percent, what should we expect to happen to its price? a. Rise. b. Fall. c. Stay the same.
Problem 10
If the Fed increases interest rates, the SML will shift _______ and asset prices will _______. a. Down; rise. b. Down; fall. c. Up; rise. d. Up; fall.
