Question 1

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

Question 2

Which of the following make(s)  insurance premiums higher than otherwise?

Accepted Answer

A)   adverse selection and moral hazard
B)   adverse selection, but not moral hazard
C)   moral hazard, but not adverse selection
D)   neither adverse selection nor moral hazardE) All of the above
F) A) and D)

Question 3

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Accepted Answer

A)   doubles every 70/X years.
B)   doubles every 70(1 - 1/X)  years.
C)   doubles every 70/X2 years.
D)   doubles every 70/(1 - X)  years.E) B) and C)
F) All of the above

Question 4

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

Accepted Answer

A)   $1,150.00
B)   $1,157.63
C)   $1,215.51
D)   $1,250.00E) A) and D)
F) All of the above

Question 5

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

Question 6

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Accepted Answer

A) True 
 B)False

Question 7

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Accepted Answer

A) True 
 B)False

Question 8

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A)   raise the price and raise the present value of the corporation's stock.
B)   raise the price and lower the present value of the corporation's stock.
C)   lower the price and raise the present value of the corporation's stock.
D)   lower the price and lower the present value of the corporation's stock.E) A) and C)
F) B) and C)

Question 9

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A)   "random walk"
B)   "random bubble"
C)   "speculative bubble"
D)   "speculative hedge"E) B) and C)
F) A) and D)

Question 10

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Accepted Answer

A) True 
 B)False

Question 11

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Accepted Answer

A)   Abraham Lincoln
B)   Thomas Edison
C)   Benjamin Franklin
D)   Albert EinsteinE) C) and D)
F) All of the above

Question 12

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Accepted Answer

A)   $637.50 after 5 years and $822.09 after 10 years.
B)   $637.50 after 5 years and $775.00 after 10 years.
C)   $653.48 after 5 years and $854.07 after 10 years.
D)   $688.36 after 5 years and $915.56 after 10 years.E) A) and C)
F) None of the above

Question 13

Which of the following is not correct?

Accepted Answer

A)   A risk averse person might be willing to hold stocks.
B)   Other things the same, a portfolio with the stocks of a large number of companies has less risk.
C)   Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return.
D)   Diversification can eliminate market risk but not firm-specific risk.E) A) and D)
F) B) and D)

Question 14

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Accepted Answer

A)   $12,579.84
B)   $12,596.80
C)   $12,597.12
D)   None of the above are correct to the nearest cent.E) All of the above
F) B) and D)

Question 15

Alice 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. Beth 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 Alice and Beth are correct.
B)   Both Alice and Beth are incorrect.
C)   Only Alice is correct.
D)   Only Beth is correct.E) A) and D)
F) A) and C)

Question 16

Diversifying

Accepted Answer

A)   increases the standard deviation of the value of a portfolio indicating its risk has increased.
B)   increases the standard deviation of the value of a portfolio indicating its risk has decreased.
C)   decreases the standard deviation of the value of a portfolio indicating its risk has increased.
D)   decreases the standard deviation of the value of a portfolio indicating its risk has decreased.E) None of the above
F) B) and D)

Question 17

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)   A person purposely chooses bonds of corporations with high default risk because of the high returns.
B)   A person dislikes losing $400 more than he likes winning $400.
C)   After obtaining automobile insurance a person drives less carefully than before.
D)   A person intending to take up dangerous hobbies applies for life insurance.E) B) and C)
F) A) and D)

Question 18

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Accepted Answer

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

Question 19

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 20

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Accepted Answer

A)   chance of winning $120 in two years and the interest rate was 11%.
B)   chance of winning $114 in two years and the interest rate was 7%.
C)   chance of winning $110 in two years and the interest rate was 3%.
D)   None of the above are correct; a risk averse person would not accept any of the above bets.E) A) and D)
F) A) and C)

Exam 9: The Basic Tools of Finance

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Correct Answer
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Which of the following is not correct?

Correct Answer
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The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Correct Answer
verified

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Correct Answer
verified

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Correct Answer
verified

Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. What is measured along the vertical axis?

Correct Answer
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Which of the following actions best illustrates adverse selection?

Correct Answer
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At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Correct Answer
verified

Diversifying

Correct Answer
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The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

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

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct Answer
verified

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct Answer
verified

The problem of moral hazard arises because

Correct Answer
verified

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Correct Answer
verified

Correct Answer
verified

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Correct Answer
verified

Which of the following make(s) insurance premiums higher than otherwise?

Correct Answer
verified

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Correct Answer
verified

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

Correct Answer
verified

Exam 9: The Basic Tools of Finance

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Correct AnswerverifiedShow Answer

Which of the following is not correct?

Correct AnswerverifiedShow Answer

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Correct AnswerverifiedShow Answer

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Correct AnswerverifiedShow Answer

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Correct AnswerverifiedShow Answer

Figure 9-1. The figure shows a utility function. -Refer to Figure 9-1. What is measured along the vertical axis?

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates adverse selection?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Correct AnswerverifiedShow Answer

Diversifying

Correct AnswerverifiedShow Answer

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

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

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct AnswerverifiedShow Answer

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct AnswerverifiedShow Answer

The problem of moral hazard arises because

Correct AnswerverifiedShow Answer

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Correct AnswerverifiedShow Answer

Which of the following make(s) insurance premiums higher than otherwise?

Correct AnswerverifiedShow Answer

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Correct AnswerverifiedShow Answer

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

Correct AnswerverifiedShow Answer

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