Question 1

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Accepted Answer

A)   the present value of the factory rises. It's more likely the company will build the factory.
B)   the present value of the factory rises. It's less likely the company will build the factory.
C)   the present value of the factory falls. It's more likely the company will build the factory.
D)   the present value of the factory falls. It's less likely the company will build the factory.E) A) and B)
F) A) and C)

Question 2

If stock prices follow a random walk, then stock investors can make large profits by

Accepted Answer

A)   buying stocks whose prices have been falling for several days.
B)   buying stocks whose prices have been rising for several days.
C)   performing fundamental analysis of stocks using data contained in annual reports.
D)   using inside information.E) A) and D)
F) B) and C)

Question 3

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Accepted Answer

A)   both the firm-specific risk and the market risk of his portfolio.
B)   the firm-specific risk, but not the market risk of his portfolio.
C)   the market risk, but not the firm-specific risk of his portfolio.
D)   neither the market risk nor the firm-specific risk of his portfolio.E) A) and C)
F) C) and D)

Question 4

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Accepted Answer

A)   $110.00 two years from today.
B)   $112.49 three years from today.
C)   $116.00 four years from today.
D)   $123.67 five years from today.E) None of the above
F) A) and B)

Question 5

Suppose your bank account pays a 5% interest rate. You are considering purchasing a share of stock in DH Corporation for $250. The stock will pay you a $10 dividend at the end of years 1, 2, 3, 4, and 5. You expect to be able to sell the stock at the end of year 5 for $300. Is DH a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of...

Question 6

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Accepted Answer

A)   $485.44.
B)   $496.50.
C)   $509.28.
D)   $515.00.E) All of the above
F) A) and C)

Question 7

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

Accepted Answer

To spread these risk...

Question 8

Laura says that the present value of $700 to be received one year from today if the interest rate is 6 percent is less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Cassie says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

Accepted Answer

A)   Both Laura and Cassie are correct.
B)   Both Laura and Cassie are incorrect.
C)   Only Laura is correct.
D)   Only Cassie is correct.E) B) and C)
F) None of the above

Question 9

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Accepted Answer

A) True 
 B)False

Question 10

Suppose you win a small lottery and you are given the following choice: You can 1)  receive an immediate payment of $10,000 or 2)  three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Accepted Answer

A)   2 percent, but not if the interest rate is 3 percent.
B)   3 percent, but not if the interest rate is 4 percent.
C)   4 percent, but not if the interest rate is 5 percent.
D)   5 percent, but not if the interest rate is 6 percent.E) A) and B)
F) A) and C)

Question 11

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Accepted Answer

A)   5.50 percent
B)   5.65 percent
C)   6.25 percent
D)   7.05 percentE) None of the above
F) B) and D)

Question 12

If you believe that stock prices follow a random walk, then probably you

Accepted Answer

A)   do not believe that there is positive relationship between risk and return.
B)   do not believe that stock prices reflect all available information.
C)   believe in the validity of the efficient markets hypothesis.
D)   believe that it is a good idea to engage in fundamental analysis.E) A) and B)
F) C) and D)

Question 13

David increases the number of companies in which he holds stocks.

Accepted Answer

A)   This reduces risk's standard deviation and firm-specific risk.
B)   This reduces risk's standard deviation and market risk.
C)   This raises market risk, but lowers firm-specific risk. What happens to overall risk is unclear.
D)   This raises firm-specific risk, but lowers market risk. What happens to overall risk is unclear.E) B) and D)
F) All of the above

Question 14

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A)   For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent.
B)   For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent.
C)   For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent.
D)   For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.E) A) and B)
F) A) and C)

Question 15

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Accepted Answer

A)   $285.83
B)   $236.98
C)   $202.04
D)   $145.65E) B) and C)
F) A) and C)

Question 16

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 17

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Accepted Answer

A)   $457.14
B)   $468.02
C)   $478.47
D)   None of the above are correct to the nearest cent.E) B) and C)
F) A) and D)

Question 18

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

Accepted Answer

A)   $550 one year from today.
B)   $580 two years from today.
C)   $600 three years from today.
D)   $615 four years from today.E) B) and C)
F) B) and D)

Question 19

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn't already done them, what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

Accepted Answer

The client can reduce his risk by furthe...

Question 20

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

Accepted Answer

A)   the first one
B)   the second one
C)   the third one
D)   They all have the same balance.E) None of the above
F) A) and B)

Exam 14: The Basic Tools of Finance

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Correct Answer
verified

If stock prices follow a random walk, then stock investors can make large profits by

Correct Answer
verified

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Correct Answer
verified

Correct Answer
verified

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn't already done them, what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

Correct Answer
verified
The client can reduce his risk by furthe...
View Answer

Correct Answer
verified

David increases the number of companies in which he holds stocks.

Correct Answer
verified

Correct Answer
verified
The present value of...
View Answer

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Correct Answer
verified

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

Correct Answer
verified

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Correct Answer
verified

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Correct Answer
verified

Correct Answer
verified

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

Correct Answer
verified
To spread these risk...
View Answer

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Correct Answer
verified

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Correct Answer
verified

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Correct Answer
verified

If you believe that stock prices follow a random walk, then probably you

Correct Answer
verified

The market for insurance is an example of diversification.

Correct Answer
verified

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Correct Answer
verified

Exam 14: The Basic Tools of Finance

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

If stock prices follow a random walk, then stock investors can make large profits by

Correct AnswerverifiedShow Answer

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn't already done them, what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

Correct AnswerverifiedThe client can reduce his risk by furthe...View AnswerShow Answer

Correct AnswerverifiedShow Answer

David increases the number of companies in which he holds stocks.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe present value of...View AnswerShow Answer

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Correct AnswerverifiedShow Answer

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

Correct AnswerverifiedShow Answer

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Correct AnswerverifiedShow Answer

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

Correct AnswerverifiedTo spread these risk...View AnswerShow Answer

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Correct AnswerverifiedShow Answer

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Correct AnswerverifiedShow Answer

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Correct AnswerverifiedShow Answer

If you believe that stock prices follow a random walk, then probably you

Correct AnswerverifiedShow Answer

The market for insurance is an example of diversification.

Correct AnswerverifiedShow Answer

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified
The client can reduce his risk by furthe...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The present value of...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
To spread these risk...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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