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Exam 27: The Basic Tools of Finance

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Question 221

Multiple Choice

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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

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 D)
F) B) and C)

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Question 222

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If you are faced with the choice of receiving $500 today or $800 6 years from today,you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

A) True
B) False

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Question 223

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Discuss the statistical evidence concerning the efficient markets hypothesis.

Hector puts $150 into an account when the interest rate is 4 percent.Later he checks his balance and finds he has about $168.73.How long did Hector wait to check his balance?

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%.Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%.Who had more in their account? About how much more did he have?

The future value of $1 saved today is $1/(1 + r).

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

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?

If asset markets are driven by the "animal spirits" of investors,then

Scott Adams,creator of the comic strip Dilbert,has a theory that you should

Figure 14-5.On the graph,x represents risk and y represents return. -Refer to Figure 14-5.Point A represents a situation in which

If the interest rate is 7.5 percent,then what is the present value of $4,000 to be received in 6 years?

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years.PZX will forgo the project if the interest rate is higher than 10 percent.

Figure 14-1.The figure shows a utility function. -Refer to Figure 14-1.The properties exhibited by this utility function help to explain various things we observe in the economy,including

Whenever the price of an asset rises above what appears to be its fundamental value,the market is said to be experiencing a

Why might someone be willing to pay more than the fundamental value for a stock?

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years.Among the following interest rates,which is the highest one at which Dobson would find this project profitable?

Assuming the interest rate is 6 percent,which of the following has the greatest present value?

If you presently have $50,000 saved and earn 15 percent interest per year,about how many years will it take for your investment to triple?