Deck 10: Investment and Financial Markets

Question 1

Some risks are correlated across projects,other tend to be highly covariate tending to hit investors in a community at _________,other risks such as road traffic accidents,theft,or fire tend to be _______

A) The same time; idiosyncratic
B) Different times; idiosyncratic
C) The same times; inter-related
D) Different times; inter-related

Answer 1

A

Question 2

What is the net return of an investment?

A) The total benefit from the investment asset
B) The total improvements in the investor's life circumstances from the investment
C) The difference between gross return and the operating and maintenance costs
D) The difference between the gross return and the interest rate

Answer 2

C

Question 3

If Susan multiplies by the discount factor β once to utility experienced in period 1,twice to utility in period two,and t times to utility experienced t periods into the future.She is said to employ _________ when assessing the value of future consumption and utility.

A) Constant discounting
B) Decreasing discounting
C) Zero discounting
D) Increasing discounting

Answer 3

A

Question 4

Using standard economic models of investment choices in the presence of uncertainty,the investor knows:

A) The exact return on investment
B) Probability of a positive return on investment
C) Nothing about the expected return
D) The distribution of the investment's returns

Question 5

The _________ of an investment's return is a measure of how much the possible returns vary above and below the expected return across states of the world.Among projects with the same expected return,those with higher variance are ___________.

A) Variance; less risky
B) The expected value; less risky
C) Expected value; more risky
D) Variance; more risky

Question 6

The weighted average of the returns across all possible states of the world,where the weights are equal to the probabilities with which the different states occur is called ???????????_________.The ________ indicates how great the return is expected to be "on average."

A) Distribution; variance
B) The expected value; expected return
C) Rate of return; expected value
D) Variance; distribution

Question 7

Investment decisions require inter-temporal comparisons of costs and benefits,which means:

A) Comparing marginal costs and benefits
B) Comparing future costs with current benefits
C) Comparing future benefits with future costs
D) Comparing future benefits with current costs

Question 8

A person subject to present bias finds it ____________ to delay ___________ from the present to one period into the future than it is to delay __________ from the future to later in the future.

A) Less difficult; income; consumption
B) More difficult; consumption; income
C) More difficult; consumption; consumption
D) Less difficult; income; income

Question 9

Investment will be more likely by those who have __________,can borrow at ______interest rates,have more ________ to liquidate,or are more willing to delay___________

A) Better and more access to credit; lower; assets; consumption
B) Better access to credit; higher; assets; income
C) Better and more access to credit; lower; liabilities; investment
D) Better and more access to credit; lower; debts; consumption

Question 10

Table 10.1
Returns for investment projects under different states of the world
$$\begin{array} { | l | c | c | c | } \hline & R _ { b } & R _ { n } & R _ { g } \\\hline \text { Project 1 } & \mathbf { 8 0 } & \mathbf { 1 0 0 } & \mathbf { 1 2 0 } \\\hline \text { Project 2 } & \mathbf { 5 0 } & \mathbf { 1 0 0 } & \mathbf { 1 5 0 } \\\hline\end{array}$$

-Suppose that only three states of the world - bad (b),normal (n)and good (g)- are possible,and suppose that the normal state occurs with probability 0.5,while the bad and good states each occur with probability 0.25.Consider two investment projects for which the returns in the three states are given in What is the expected return for Project 1?

A) 200
B) 150
C) 100
D) 120

Question 11

Table 10.1
Returns for investment projects under different states of the world
$$\begin{array} { | l | c | c | c | } \hline & R _ { b } & R _ { n } & R _ { g } \\\hline \text { Project 1 } & \mathbf { 8 0 } & \mathbf { 1 0 0 } & \mathbf { 1 2 0 } \\\hline \text { Project 2 } & \mathbf { 5 0 } & \mathbf { 1 0 0 } & \mathbf { 1 5 0 } \\\hline\end{array}$$

-Suppose that only three states of the world - bad (b),normal (n)and good (g)- are possible,and suppose that the normal state occurs with probability 0.5,while the bad and good states each occur with probability 0.25.Consider two investment projects for which the returns in the three states are given in.What is the expected return for Project 2?

A) 50
B) 100
C) 150
D) 200

Question 12

Why do farmers in Sub-Saharan Africa use over 10 times less fertilizer than the rest of the world?

A) The costs outweigh the befits
B) It contributes to the high yields of crops these farmers experience
C) Because of inter-temporal comparison and risk
D) Comparing future benefits with current costs shows minimal difference

Question 13

Under an insurance contract,an investor pays a fee,called a ___________,to purchase a contract that promised payments,called _________,in specified bad states of the world.

A) Discount rate; payouts
B) Premium; indemnities
C) Insurance rate; indemnities
D) Premium; payouts

Question 14

Modeling investment decisions with diverse possible states of the world when the return is realize allows economists to consider___________.

A) Risk
B) Possible unknowns in the outcomes
C) uncertainty
D) all of the above

Question 15

Someone is said to be time consistent if_____.

A) They plan to invest in the next period but when the next period comes they do not
B) They plan to invest in the next period and indeed undertake the investment
C) They evaluate investments at the same time
D) They undertake investments so the returns cover the financing costs.

Question 16

Behavioral economist point to empirical evidence what shows people exhibit ___________ which sometimes leads them not to follow through on saving and investment plans.

A) Timing preferences
B) Present bias
C) Time consistent preferences
D) Time inconsistent preferences

Question 17

When people invest they are

A) Buying stocks
B) Undertaking costly activities today with the hopes of returns in the future
C) Buying bonds
D) Selling bonds

Question 18

In standard economic models of inter-temporal choice,people are assumed to evaluate the overall utility they would derive from any choice by first evaluating the single-period utility?

A) Multi-stage utility
B) Single-period utility
C) 2 period utility
D) Inter-temporal utility

Question 19

Table 10.1
Returns for investment projects under different states of the world
$$\begin{array} { | l | c | c | c | } \hline & R _ { b } & R _ { n } & R _ { g } \\\hline \text { Project 1 } & \mathbf { 8 0 } & \mathbf { 1 0 0 } & \mathbf { 1 2 0 } \\\hline \text { Project 2 } & \mathbf { 5 0 } & \mathbf { 1 0 0 } & \mathbf { 1 5 0 } \\\hline\end{array}$$

-Suppose that only three states of the world - bad (b),normal (n)and good (g)- are possible,and suppose that the normal state occurs with probability 0.5,while the bad and good states each occur with probability 0.25.Consider two investment projects for which the returns in the three states are given in.The expected returns ______________.The variance for project 2 is ________making ___________ the better investment.

A) Are equal; larger; project 1
B) Are equal; smaller; project 1
C) Are close but not equal; larger; project 2
D) Are close but not equal; smaller; project 2

Question 20

When considered how to finance an investment which requires an indivisible up-front cost,Fred has all of the following options except?

A) Saving
B) Paying in installments
C) borrowing
D) liquidating other assets

Question 21

If bad credit risks are the ones who most actively seek out loans to finance investments,and therefore receive them from financial intermediaries,then financial intermediaries face the problem of:

A) Free-riding
B) Costly state verification
C) Adverse selection
D) Moral hazard

Question 22

Financial markets promote greater economic efficiency by channeling funds from ________ to _____.

A) Investors; savers
B) Borrowers; savers
C) Savers; borrowers
D) Savers; lenders

Question 23

Consider an investor with a certain income of 20 contemplating an investment project with a 50 percent chance of delivering a "good" return of 40,and a 50 percent chance of delivering a "bad" return of -20.
The investor consumes the sum of her certain income and her investment return in any state.Thus she consumes 20 in either state if she does not invest,and consumes 60 and 0 in the good and bad states if she does invest.Suppose further that her utility function is given by:(10.22) u(c) = c if < 2= 20 +0.4(c-20)if c ≥ 20.
What is the expected return for this project? What type f utility function are theses?

Question 24

How do well-functioning markets for loanable funds encourage economic growth and allow a larger set of investors to participate in growth?

Question 25

The price paid for the rental of borrowed funds is commonly referred to as:

A) Inflation rate
B) Exchange rate
C) Interest rate
D) Aggregate price level

Question 26

How do financial markets help economic growth?

Question 27

A key factor in promoting economic growth is:

A) Eliminating foreign trade
B) Well-functioning financial markets
C) High interest rates
D) Stock market volatility

Question 28

__________ are the time and resources spent conducting a trade:

A) Bargaining costs
B) Transaction costs
C) Contracting costs
D) Barter costs

Question 29

The problem created by asymmetric information before the transaction occurs is called _______,while the problem created after the transaction occurs is called__________.

A) Free-riding; costly state verification
B) Adverse selection; moral hazard
C) Costly state verification; free-riding
D) Moral hazard; adverse selection