Question 1

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Accepted Answer

A)   Abraham Lincoln
B)   Thomas Edison
C)   Benjamin Franklin
D)   Albert EinsteinE) A) and D)
F) B) and C)

Question 2

Of the following interest rates,which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

Accepted Answer

A)   3 percent
B)   5 percent
C)   7 percent
D)   9 percentE) All of the above
F) C) and D)

Question 3

Some people claim that stocks follow a random walk.What does this mean?

Accepted Answer

A)   The price of stock one day is about what it was on the previous day.
B)   Changes in stock prices cannot be predicted from available information.
C)   Stock prices are not determined by market fundamentals such as supply and demand.
D)   Prices of stocks of different firms in the same industry show no or little tendency to move together.E) C) and D)
F) None of the above

Question 4

Which of the following is correct if the interest rate is 6 percent?

Accepted Answer

A)   $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400.
B)   $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400.
C)   $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400.
D)   $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.E) B) and D)
F) A) and D)

Question 5

Other things the same,as the number of stocks in a portfolio rises,

Accepted Answer

A)   risk increases and the standard deviation of the return rises.
B)   risk increases and the standard deviation of the return falls.
C)   risk decreases and the standard deviation of the return rises.
D)   risk decreases and the standard deviation of the return falls.E) None of the above
F) A) and D)

Question 6

The fact that we observe a trade-off between risk and return is puzzling to economists,because that observation conflicts with the notion that most people are risk averse.

Accepted Answer

A) True 
 B)False

Question 7

Figure 19-1.The figure shows a utility function. 
-Refer to Figure 19-1.The properties exhibited by this utility function help to explain various things we observe in the economy,including

Accepted Answer

A)   the risk-return tradeoff.
B)   insurance.
C)   diversification.
D)   All of the above are correct.E) C) and D)
F) B) and C)

Question 8

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $432.92?

Accepted Answer

A)   10
B)   14
C)   17
D)   20E) A) and D)
F) A) and C)

Question 9

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

Accepted Answer

A)   the demand for bank stocks rise which would raise the prices of bank stocks.
B)   the demand for bank stocks rise which would reduce the prices of bank stocks.
C)   the demand for bank stocks fall which would raise the prices of bank stocks.
D)   the demand for bank stocks fall which would reduce the prices of bank stocks.E) A) and B)
F) A) and C)

Question 10

What is the future value of $500 one year from today if the interest rate is 6 percent?

Accepted Answer

A)   $515
B)   $520
C)   $530
D)   None of the above is correct.E) B) and C)
F) A) and B)

Question 11

Risk-averse people will choose different asset portfolios than people who are not risk averse.Over a long period of time,we would expect that

Accepted Answer

A)   every risk-averse person will earn a higher rate of return than every non-risk-averse person.
B)   every risk-averse person will earn a lower rate of return than every non-risk-averse person.
C)   the average risk-averse person will earn a higher rate of return than the average non-risk-averse person.
D)   the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.E) B) and C)
F) C) and D)

Question 12

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that ...

Question 13

As the number of stocks in a portfolio rises,

Accepted Answer

A)   both firm-specific risks and market risk fall.
B)   firm-specific risks fall; market risk does not.
C)   market risk falls; firm-specific risks do not.
D)   neither firm-specific risks nor market risk falls.E) A) and D)
F) All of the above

Question 14

Suppose that interest rates unexpectedly rise and that Carter Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down.According to the efficient markets hypothesis,which of the these things make the price of Carter Corporation Stock fall?

Accepted Answer

A)   both the interest rate rising and the revenue announcement
B)   neither the interest rate rising nor the revenue announcement
C)   only the interest rate rising
D)   only the revenue announcementE) C) and D)
F) A) and B)

Question 15

Marcus puts a greater proportion of his portfolio into government bonds.Marcus's action

Accepted Answer

A)   increases both risk and the average rate of return.
B)   decreases both risk and the average rate of return.
C)   increases risk,but decreases the average rate of return.
D)   decreases risk,but increases the average rate of return.E) C) and D)
F) All of the above

Question 16

Diversifying

Accepted Answer

A)   increases the standard deviation of the value of a portfolio indicating its risk has increased.
B)   increases the standard deviation of the value of a portfolio indicating its risk has decreased.
C)   decreases the standard deviation of the value of a portfolio indicating its risk has increased.
D)   decreases the standard deviation of the value of a portfolio indicating its risk has decreased.E) C) and D)
F) A) and C)

Question 17

Figure 19-3.The figure shows a utility function for Rob. 
-Refer to Figure 19-3.If most people's utility functions look like Rob's utility function,then it is easy to explain why

Accepted Answer

A)   people buy various types of insurance.
B)   we observe a trade-off between risk and return.
C)   most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets.
D)   None of the above are correct.E) B) and C)
F) B) and D)

Question 18

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Accepted Answer

A)   This stock is overvalued; you should consider adding it to your portfolio.
B)   This stock is overvalued; you shouldn't consider adding it to your portfolio.
C)   This stock is undervalued; you should consider adding it to your portfolio.
D)   This stock is undervalued; you shouldn't consider adding it to your portfolio.E) B) and C)
F) B) and D)

Question 19

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 20

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Accepted Answer

A)   $180
B)   $181.82
C)   $220
D)   $222.22E) All of the above
F) B) and C)

Exam 19: The Basic Tools of Finance

Figure 19-1.The figure shows a utility function. -Refer to Figure 19-1.The properties exhibited by this utility function help to explain various things we observe in the economy,including

Correct Answer
verified

Risk-averse people will choose different asset portfolios than people who are not risk averse.Over a long period of time,we would expect that

Correct Answer
verified

As the number of stocks in a portfolio rises,

Correct Answer
verified

Which of the following is correct if the interest rate is 6 percent?

Correct Answer
verified

Figure 19-3.The figure shows a utility function for Rob. -Refer to Figure 19-3.If most people's utility functions look like Rob's utility function,then it is easy to explain why

Correct Answer
verified

What is the future value of $500 one year from today if the interest rate is 6 percent?

Correct Answer
verified

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Correct Answer
verified

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

Correct Answer
verified

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct Answer
verified
An example of adverse selection is that ...
View Answer

Of the following interest rates,which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

Correct Answer
verified

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $432.92?

Correct Answer
verified

Some people claim that stocks follow a random walk.What does this mean?

Correct Answer
verified

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

The fact that we observe a trade-off between risk and return is puzzling to economists,because that observation conflicts with the notion that most people are risk averse.

Correct Answer
verified

Other things the same,as the number of stocks in a portfolio rises,

Correct Answer
verified

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Correct Answer
verified

Diversifying

Correct Answer
verified

Correct Answer
verified

Marcus puts a greater proportion of his portfolio into government bonds.Marcus's action

Correct Answer
verified

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct Answer
verified

Exam 19: The Basic Tools of Finance

Figure 19-1.The figure shows a utility function. -Refer to Figure 19-1.The properties exhibited by this utility function help to explain various things we observe in the economy,including

Correct AnswerverifiedShow Answer

Risk-averse people will choose different asset portfolios than people who are not risk averse.Over a long period of time,we would expect that

Correct AnswerverifiedShow Answer

As the number of stocks in a portfolio rises,

Correct AnswerverifiedShow Answer

Which of the following is correct if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

Figure 19-3.The figure shows a utility function for Rob. -Refer to Figure 19-3.If most people's utility functions look like Rob's utility function,then it is easy to explain why

Correct AnswerverifiedShow Answer

What is the future value of $500 one year from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

What is the present value of a payment of $200 to be made one year from today if the interest rate is 10 percent?

Correct AnswerverifiedShow Answer

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

Correct AnswerverifiedShow Answer

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct AnswerverifiedAn example of adverse selection is that ...View AnswerShow Answer

Of the following interest rates,which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

Correct AnswerverifiedShow Answer

If you put $250 into an account with a 4 percent interest rate,how many years would you have to wait to have $432.92?

Correct AnswerverifiedShow Answer

Some people claim that stocks follow a random walk.What does this mean?

Correct AnswerverifiedShow Answer

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

The fact that we observe a trade-off between risk and return is puzzling to economists,because that observation conflicts with the notion that most people are risk averse.

Correct AnswerverifiedShow Answer

Other things the same,as the number of stocks in a portfolio rises,

Correct AnswerverifiedShow Answer

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Correct AnswerverifiedShow Answer

Diversifying

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Marcus puts a greater proportion of his portfolio into government bonds.Marcus's action

Correct AnswerverifiedShow Answer

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct AnswerverifiedShow Answer

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An example of adverse selection is that ...
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