Question 1

A risk-averse person has

Accepted Answer

A)   a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth.
B)   a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth.
C)   a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth.
D)   a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.E) A) and B)
F) A) and C)

Question 2

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Accepted Answer

A)   $210
B)   $300
C)   $800
D)   $1,010E) B) and D)
F) A) and C)

Question 3

Risk-averse persons will take no risks.

Accepted Answer

A) True 
 B)False

Question 4

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,310.16. What number of dollars, X, did you deposit?

Accepted Answer

A)   $3,680.00
B)   $3,712.77
C)   $3,750.00
D)   $3,772.57E) B) and D)
F) A) and B)

Question 5

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct what is the current interest rate?

Accepted Answer

A)   6 percent
B)   7 percent
C)   8 percent
D)   9 percentE) None of the above
F) B) and D)

Question 6

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

Question 7

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) A) and C)
F) All of the above

Question 8

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A)   the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions.
B)   the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions.
C)   the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions.
D)   the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.E) C) and D)
F) B) and D)

Question 9

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) A) and D)
F) None of the above

Question 10

Figure 9-3. The figure shows a utility function for Rob.
 
-Refer to Figure 9-3. From the appearance of Rob's utility function, we know that

Accepted Answer

A)   if Rob owns a house, then he definitely would buy fire insurance provided the cost of the insurance were reasonable.
B)   Rob would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk.
C)   Rob is risk averse.
D)   Rob is not risk averse.E) C) and D)
F) B) and D)

Question 11

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) B) and D)
F) B) and C)

Question 12

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Accepted Answer

A)   $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years.
B)   $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years.
C)   $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years.
D)   $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.E) C) and D)
F) None of the above

Question 13

The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?

Accepted Answer

A)   $415,000 if the interest rate is 5%
B)   $419,000 if the interest rate is 4%
C)   K-Nine would buy the equipment in both cases.
D)   K-Nine would not buy the equipment in either case.E) B) and D)
F) None of the above

Question 14

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Accepted Answer

A) True 
 B)False

Question 15

Figure 9-1. The figure shows a utility function.
 
-Refer to Figure 9-1. 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 B)
F) A) and C)

Question 16

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

Accepted Answer

A)   the interest rate is to make sure that the price of bonds increases over time.
B)   diversification is to eliminate market risk.
C)   insurance is to reduce the risks inherent in life.
D)   insurance is to spread risks around more efficiently.E) All of the above
F) A) and B)

Question 17

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

A)   risk increases at an increasing rate.
B)   risk increases at a decreasing rate.
C)   risk decreases at an increasing rate.
D)   risk decreases at a decreasing rate.E) None of the above
F) A) and B)

Question 18

John says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest. George says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent.

Accepted Answer

A)   John and George are both correct.
B)   John and George are both incorrect.
C)   Only John is correct.
D)   Only George is correct.E) A) and C)
F) B) and C)

Question 19

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)   overvalued, so its price would rise.
B)   overvalued, so its price would fall.
C)   undervalued, so its price would rise.
D)   undervalued, so its price would fall.E) A) and B)
F) B) and D)

Question 20

Risk aversion helps to explain various things we observe in the economy, including

Accepted Answer

A)   adherence to the old adage, "Don't put all your eggs in one basket."
B)   insurance.
C)   the risk-return trade-off.
D)   All of the above are correct.E) None of the above
F) B) and C)

Exam 9: The Basic Tools of Finance

Correct Answer
verified

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

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

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Correct Answer
verified

A bank might make mortgages to people in different regions of the country. By doing so

Correct Answer
verified

Correct Answer
verified

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,310.16. What number of dollars, X, did you deposit?

Correct Answer
verified

Which of the following is correct?

Correct Answer
verified

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Correct Answer
verified

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

Correct Answer
verified

Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. The utility function that is shown exhibits the property of diminishing

Correct Answer
verified

Risk aversion helps to explain various things we observe in the economy, including

Correct Answer
verified

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Correct Answer
verified

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Correct Answer
verified

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct what is the current interest rate?

Correct Answer
verified

Figure 9-3. The figure shows a utility function for Rob. -Refer to Figure 9-3. From the appearance of Rob's utility function, we know that

Correct Answer
verified

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

Correct Answer
verified

A risk-averse person has

Correct Answer
verified

Risk-averse persons will take no risks.

Correct Answer
verified

Which of the following is correct?

Correct Answer
verified

Exam 9: The Basic Tools of Finance

Correct AnswerverifiedShow Answer

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

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

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Correct AnswerverifiedShow Answer

A bank might make mortgages to people in different regions of the country. By doing so

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You deposit X dollars into a 3-year certificate of deposit that pays 4.75 percent annual interest. At the end of the 3 years you have $4,310.16. What number of dollars, X, did you deposit?

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. The utility function that is shown exhibits the property of diminishing

Correct AnswerverifiedShow Answer

Risk aversion helps to explain various things we observe in the economy, including

Correct AnswerverifiedShow Answer

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Correct AnswerverifiedShow Answer

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct what is the current interest rate?

Correct AnswerverifiedShow Answer

Figure 9-3. The figure shows a utility function for Rob. -Refer to Figure 9-3. From the appearance of Rob's utility function, we know that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A risk-averse person has

Correct AnswerverifiedShow Answer

Risk-averse persons will take no risks.

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

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