Chapter 35, Financial Economics Video Solutions, Economics: Principles, Problems, and Policies

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.

Eliot Kelly

Numerade Educator

01:19

Problem 2

It is a fact that $(1+0.12)^{3}=1.40 .$ Knowing that to be truc, what is the present value of $\$ 140$ received in three years if the annual interest rate is 12 percent?
a. SI.40.
b. SI2.
c. S100.
d. SII2.

Manik Pulyani

Numerade Educator

06:33

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.

Amit Srivastava

Numerade Educator

01:41

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.

Bobby Barnes

University of North Texas

03:16

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.

Luis Fernando Olloqui Regalado

Numerade Educator

05:04

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.

Ernest Castorena

Numerade Educator

01:01

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

Prashant Bana

Numerade Educator

03:52

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.

Yi Chun Lin

Washington University in St Louis

01:08

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.

Natalie Britton

Numerade Educator

01:04

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.

Prashant Bana

Numerade Educator