enco homework

Extra Credit #2 – Financial Economics  There are no extra points if you got 90 or higher on the exam.  If you scored less than 90 you can bring grade up by max 1 letter grade (capped at 90/100), if you

scored less than 60 points you can earn up to 20 points toward the exam (2 letter grades). Read the chapter titled “Financial Economics” (usually chapter 17 in the textbook depending on the edition), and then answer the following questions. 1.Define the following terms: a. Stocks b. Bonds c. Arbitrage d. Diversification e. Dividend f. Capital gain g. Present value h. Risk-premium 2. Why is it so hard for actively manage funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average rate of return? 3. Identify the following investments as either an economic investment or a financial investment. a. A company builds a new factory. b. A pension plans 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. 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 anticipated percentage rate of return? 5. Suppose that you invest $100 today in a risk-free investment with an annual compounding interest rate of 4%. What will be the value of your investment in 4 years. 6. Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year, Asset A has a current price of $80 while asset B has a current price of $90. a. What are the rates of return of each asset? b. Given these rates of return, which asset should investors buy and which should they sell?

c. We know that arbitrage will equalize rates of return, Does this also guarantee it will equalize prices, explain.