Question 1

Figure 14-4. The figure shows a utility function for Dexter. 
-Refer to Figure 14-4. 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 C)

Question 2

From the standpoint of the economy as a whole, the role of insurance is

Accepted Answer

A)  to entice risk-loving people to become risk averse.
B)  to promote the phenomenon of adverse selection.
C)  not to eliminate the risks inherent in life, but to spread them around more efficiently.
D)  not to spread risks, but to eliminate them for individual policy holders.E) C) and D)
F) All of the above

Question 3

Which of the following is correct concerning stock market irrationality?

Accepted Answer

A)  Bubbles could arise, in part, because the price that people pay for stock depends on what they think someone else will pay for it in the future.
B)  Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important.
C)  Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market.
D)  All of the above are correct.E) B) and D)
F) None of the above

Question 4

Which of the following is correct?

Accepted Answer

A)  Managed funds typically have a higher return than indexed funds. This tends to refute the efficient market hypothesis.
B)  Managed funds typically have a higher return than indexed funds. This tends to support the efficient market hypothesis.
C)  Index funds typically have a higher rate of return than managed funds. This tends to refute the efficient market hypothesis.
D)  Index funds typically have a higher rate of return than managed funds. This tends to support the efficient market hypothesis.E) A) and C)
F) B) and C)

Question 5

Figure 14-1. The figure shows a utility function. 
-Refer to Figure 14-1. The utility function that is shown exhibits the property of diminishing

Accepted Answer

A)  wealth.
B)  utility.
C)  marginal wealth.
D)  marginal utility.E) A) and D)
F) None of the above

Question 6

There are many concerns for risk-averse lenders. Consider the following: 1. Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans. 2. Lenders are concerned that real GDP will decline leading to reduced corporate profits. 3. Lenders are concerned that products produced by certain corporations will become obsolete.

Accepted Answer

A)  1 is market risk; 2 is firm-specific risk
B)  2 is market risk; 3 is firm-specific risk
C)  3 is market risk; 1 is firm-specific risk
D)  2 is firm-specific risk; 3 is market riskE) B) and C)
F) A) and B)

Question 7

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Accepted Answer

A)  4 percent
B)  5 percent
C)  6 percent
D)  7 percentE) A) and C)
F) All of the above

Question 8

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Accepted Answer

$1,600/$50 = 32. The rule of 70 says tha...

Question 9

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?

Accepted Answer

A)  5 percent
B)  4 percent
C)  3 percent
D)  2 percentE) B) and D)
F) A) and B)

Question 10

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today.Option B: $550 one year from today.Option C: $575 two years from today.Option D: $600 three years from today.Which of the payments has the lowest present value today?

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option DE) B) and C)
F) C) and D)

Question 11

The problem of moral hazard arises because

Accepted Answer

A)  life is full of all sorts of risks.
B)  after people buy insurance, they have less incentive to be careful about their risky behavior.
C)  a high-risk person is more likely to apply for insurance than is a low-risk person.
D)  insurance companies go to great effort to avoid paying claims to their policy holders.E) B) and C)
F) C) and D)

Question 12

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A)  The insurance requirement and the credit check are both designed primarily to reduce adverse selection.
B)  The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard.
C)  The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard.
D)  The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection.E) A) and B)
F) B) and C)

Question 13

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

Accepted Answer

A)  $12,000
B)  $14,000
C)  $15,500
D)  $20,000E) None of the above
F) B) and D)

Question 14

The financial system

Accepted Answer

A)  involves bank accounts, mortgages, stock prices, and many other items.
B)  involves decisions and actions undertaken by people at a point in time that affect their lives in the future.
C)  coordinates the economy's saving and investment.
D)  All of the above are correct.E) A) and B)
F) B) and D)

Question 15

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Accepted Answer

A)  2 percent
B)  4 percent
C)  6 percent
D)  8 percentE) B) and D)
F) A) and D)

Question 16

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A)  Stock prices should follow a random walk.
B)  Index funds should typically outperform highly managed funds.
C)  News has no effect on stock prices.
D)  There is little point in spending many hours studying the business pages looking for undervalued stocks.E) B) and C)
F) All of the above

Question 17

Diversification cannot reduce market risk.

Accepted Answer

A) True 
 B)False

Question 18

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Accepted Answer

A)  Broker A: "There are risks in holding stocks, even in a highly diversified portfolio."
B)  Broker B: "Portfolios with smaller standard deviations have lower risk."
C)  Broker C: "Stocks with greater risks offer lower average returns."
D)  They all gave her correct advice.E) B) and D)
F) A) and B)

Question 19

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Accepted Answer

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

Question 20

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

Exam 14: The Basic Tools of Finance

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Correct Answer
verified

Diversification cannot reduce market risk.

Correct Answer
verified

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. The utility function that is shown exhibits the property of diminishing

Correct Answer
verified

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Correct Answer
verified

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Correct Answer
verified

The problem of moral hazard arises because

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

Which of the following is correct?

Correct Answer
verified

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

Correct Answer
verified

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today.Option B: $550 one year from today.Option C: $575 two years from today.Option D: $600 three years from today.Which of the payments has the lowest present value today?

Correct Answer
verified

Correct Answer
verified

Which of the following is correct concerning stock market irrationality?

Correct Answer
verified

From the standpoint of the economy as a whole, the role of insurance is

Correct Answer
verified

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Correct Answer
verified

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?

Correct Answer
verified

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. From the appearance of the utility function, we know that

Correct Answer
verified

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Correct Answer
verified
$1,600/$50 = 32. The rule of 70 says tha...
View Answer

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Correct Answer
verified

Which of the following is not consistent with the efficient market hypothesis?

Correct Answer
verified

The financial system

Correct Answer
verified

Exam 14: The Basic Tools of Finance

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Correct AnswerverifiedShow Answer

Diversification cannot reduce market risk.

Correct AnswerverifiedShow Answer

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. The utility function that is shown exhibits the property of diminishing

Correct AnswerverifiedShow Answer

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Correct AnswerverifiedShow Answer

The problem of moral hazard arises because

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

Which of the following is correct?

Correct AnswerverifiedShow Answer

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

Correct AnswerverifiedShow Answer

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today.Option B: $550 one year from today.Option C: $575 two years from today.Option D: $600 three years from today.Which of the payments has the lowest present value today?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is correct concerning stock market irrationality?

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $145.80 two years from today equal to $125 today?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Correct Answerverified$1,600/$50 = 32. The rule of 70 says tha...View AnswerShow Answer

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Correct AnswerverifiedShow Answer

Which of the following is not consistent with the efficient market hypothesis?

Correct AnswerverifiedShow Answer

The financial system

Correct AnswerverifiedShow Answer

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Correct Answer
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$1,600/$50 = 32. The rule of 70 says tha...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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