Applied Finance & Economics Flashcards

A portfolio manager observes that a stock's beta is 1.4 and the market risk premium is 6%. If the risk-free rate is 3%, what is the expected return per the CAPM?

Answer: 11.4%

CAPM: E(r) = 3% + 1.4 × 6% = 3% + 8.4% = 11.4%.

Which yield curve shape historically has the strongest predictive power for an impending economic recession in the US?

Answer: Inverted yield curve

An inverted yield curve, where short-term yields exceed long-term yields, has historically preceded US recessions.

The Treynor ratio differs from the Sharpe ratio primarily because it uses which denominator?

Answer: Portfolio beta

The Treynor ratio uses portfolio beta (systematic risk) as the denominator, while Sharpe uses total standard deviation.

A bond with a duration of 7 years is expected to decrease in price by approximately how much if interest rates rise by 50 basis points?

Answer: 3.5%

Approximate price change = –Duration × Δy = –7 × 0.005 = –3.5%.

In a perfectly competitive market, a firm's long-run equilibrium price equals:

Answer: Minimum average total cost

In long-run perfectly competitive equilibrium, P = MC = minimum ATC, eliminating economic profit.

Which of the following best describes the J-curve effect following a currency depreciation?

Answer: The trade balance initially worsens before improving as trade volumes adjust

The J-curve describes how the trade deficit worsens short-term after depreciation (due to price effects) before improving as export/import volumes adjust.

A callable bond compared to an otherwise identical non-callable bond will typically have:

Answer: Lower price and higher yield

Callable bonds carry call risk, so investors demand a higher yield (and thus lower price) as compensation.