Question 1

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Accepted Answer

A)  increasing marginal utility of wealth and is risk averse.
B)  increasing marginal utility of wealth but is not risk averse.
C)  decreasing marginal utility of wealth and is risk averse.
D)  decreasing marginal utility of wealth but is not risk averse.E) C) and D)
F) B) and D)

Question 2

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Accepted Answer

A) True 
 B)False

Question 3

If stock prices follow a random walk, it means

Accepted Answer

A)  long periods of declining prices are followed by long periods of rising prices.
B)  the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day.
C)  stock prices are unrelated to random events that shock the economy.
D)  stock prices are just as likely to rise as to fall at any given time.E) C) and D)
F) None of the above

Question 4

According to the Rule of 70, it takes 70 years for a sum of money to double in value when the interest rate is 5 percent.​

Accepted Answer

A) True 
 B)False

Question 5

The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

Accepted Answer

Using the Rule of 70...

Question 6

Scenario 27-1
Lisa has a utility function  where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for  
.

Accepted Answer

Here is th...

Question 7

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. What is measured along the vertical axis?

Accepted Answer

A)  risk aversion
B)  marginal utility
C)  utility
D)  the number of units of a good that can be purchasedE) All of the above
F) C) and D)

Question 8

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

Accepted Answer

A) True 
 B)False

Question 9

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Accepted Answer

A)  8 percent.
B)  9 percent.
C)  10 percent.
D)  All of the above are correct.E) A) and D)
F) A) and C)

Question 10

You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

Accepted Answer

A)  lower than about 8 percent.
B)  higher than about 8 percent.
C)  lower than about 10 percent.
D)  higher than about 10 percent.E) A) and B)
F) All of the above

Question 11

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) A) and D)
F) A) and C)

Question 12

During a financial crisis the possibility of bank failures rises. An increase in the likelihood of a bank failing shifts demand for its stock

Accepted Answer

A)  right, so the price rises.
B)  right, so the price falls.
C)  left, so the price rises.
D)  left, so the price falls.E) A) and C)
F) A) and B)

Question 13

Figure 27-3
The following figure shows the utility function for Paul. 
-Refer to Figure 27-3. Suppose the vertical distance between the points (0, A)  and (0, B)  is 10. If his wealth increased from $700 to $900, then

Accepted Answer

A)  Paul's utility would increase by less than 10 units.
B)  Paul's utility would increase by more than 10 units.
C)  Paul's utility would increase by exactly 10 units.
D)  Any of the above could be correct.E) B) and D)
F) B) and C)

Question 14

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Accepted Answer

A) True 
 B)False

Question 15

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) A) and B)
F) B) and C)

Question 16

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) A) and B)
F) B) and C)

Question 17

Marcia has four savings accounts. Which account has the largest balance?

Accepted Answer

A)  $100 deposited 1 year ago at an 8 percent interest rate
B)  $100 deposited 2 years ago at a 4 percent interest rate
C)  $100 deposited 4 years ago at a 2 percent interest rate
D)  $100 deposited 8 years ago at a 1 percent interest rateE) B) and D)
F) B) and C)

Question 18

Which of the following is correct?

Accepted Answer

A)  Risk-averse people will not hold stock.
B)  Diversification cannot reduce firm-specific risk.
C)  The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return.
D)  Stock prices are determined by fundamental analysis rather than by supply and demand.E) All of the above
F) A) and D)

Question 19

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A)  Dexter is risk averse.
B)  Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)  the property of diminishing marginal utility does not apply to Dexter.
D)  All of the above are correct.E) A) and D)
F) A) and B)

Question 20

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

Accepted Answer

A)  $1,133.31
B)  $1,120.00
C)  $1,123.50
D)  None of the above are correct to the nearest cent.E) None of the above
F) B) and C)

Exam 27: Tools of Finance

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

Correct AnswerverifiedShow Answer

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

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If stock prices follow a random walk, it means

Correct AnswerverifiedShow Answer

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

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Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. What is measured along the vertical axis?

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According to the Rule of 70, it takes 70 years for a sum of money to double in value when the interest rate is 5 percent.​

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Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for .

Correct AnswerverifiedHere is th...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?

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Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

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You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

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Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose the vertical distance between the points (0, A) and (0, B) is 10. If his wealth increased from $700 to $900, then

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

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Marcia has four savings accounts. Which account has the largest balance?

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Which of the following is correct?

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During a financial crisis the possibility of bank failures rises. An increase in the likelihood of a bank failing shifts demand for its stock

Correct AnswerverifiedShow Answer

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Correct AnswerverifiedShow Answer

The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

Correct AnswerverifiedUsing the Rule of 70...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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According to the Rule of 70, it takes 70 years for a sum of money to double in value when the interest rate is 5 percent.

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Here is th...
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Using the Rule of 70...
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Correct Answer
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