Question 1

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Accepted Answer

A)   surplus, so its price will rise.
B)   surplus, so its price will fall.
C)   shortage, so its price will rise.
D)   shortage, so its price will fall.E) None of the above
F) All of the above

Question 2

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A)   $907.03 to be paid in two years
B)   $1,000.01 to be paid in two years
C)   $1,100.01 to be paid in two years
D)   $1,102.51 to be paid in two yearsE) B) and C)
F) None of the above

Question 3

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Accepted Answer

A)   undervalued, and evidence later showed that this was clearly correct.
B)   undervalued, but whether it was remains debatable.
C)   overvalued, and evidence later showed that this was clearly correct.
D)   overvalued, but whether it was remains debatable.E) B) and C)
F) A) and D)

Question 4

Which of the following is correct concerning a risk-averse person?

Accepted Answer

A)   She would not play games where the probability of winning and losing a dollar are the same.
B)   She might not buy health insurance if she thinks her risks are low.
C)   Her marginal utility of wealth decreases as her income increases.
D)   All of the above are correct.E) All of the above
F) A) and D)

Question 5

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Accepted Answer

A)   about 6.3 years
B)   about 7 years
C)   about 7.7 years
D)   about 10 yearsE) None of the above
F) All of the above

Question 6

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Accepted Answer

A) True 
 B)False

Question 7

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Accepted Answer

A)   $414.09.
B)   $434.00.
C)   $441.87.
D)   $481.24.E) B) and D)
F) None of the above

Question 8

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Accepted Answer

A)   Option 1; Option 2; Option 3
B)   Option 3; Option 2; Option 1
C)   Option 2; Option 3; Option 1
D)   Option 3; Option 1; Option 2E) B) and C)
F) A) and B)

Question 9

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Accepted Answer

A)   and the example with Brad illustrate adverse selection.
B)   and the example with Brad illustrate moral hazard.
C)   illustrates adverse selection; the example with Brad illustrates moral hazard.
D)   illustrates moral hazard; the example with Brad illustrates adverse selection.E) B) and C)
F) A) and D)

Question 10

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than
Its price then you believe the stock is

Accepted Answer

A)   overvalued so you should consider buying it.
B)   overvalued so you should not consider buying it.
C)   undervalued so you should consider buying it.
D)   undervalued so you should not consider buying it.E) All of the above
F) B) and C)

Question 11

A risk-averse person has

Accepted Answer

A)   utility and marginal utility curves that slope upward.
B)   utility and marginal utility curves that slope downward.
C)   a utility curve that slopes down and a marginal utility curve that slopes upward.
D)   a utility curve that slopes upward and a marginal utility curve that slopes downward.E) A) and D)
F) C) and D)

Question 12

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 13

Fundamental analysis is

Accepted Answer

A)   the study of the relation between risk and return of stock portfolios.
B)   the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion.
C)   the study of a company's accounting statements and future prospects to determine its value.
D)   a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.E) None of the above
F) All of the above

Question 14

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 15

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

Question 16

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

Accepted Answer

A)   about 3.5 years
B)   about 6.3 years
C)   about 12 years
D)   about 14 yearsE) B) and D)
F) B) and C)

Question 17

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Accepted Answer

A)   $25,962
B)   $27,297
C)   $30,188
D)   None of the above are correct to the nearest dollar.E) A) and B)
F) A) and C)

Question 18

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Accepted Answer

A random walk means the path of a variab...

Question 19

How does adverse selection affect the insurance market?

Accepted Answer

High risk persons ar...

Question 20

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. Is Lisa risk averse? Explain.

Accepted Answer

Yes, Lisa is risk averse. The ...

Exam 9: The Basic Tools of Finance

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Correct AnswerverifiedShow Answer

The present value of any future sum of money is the amount that would be needed today, at current interest rates, to produce that future sum.

Correct AnswerverifiedShow Answer

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Correct AnswerverifiedShow Answer

How does adverse selection affect the insurance market?

Correct AnswerverifiedHigh risk persons ar...View AnswerShow Answer

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

Correct AnswerverifiedShow Answer

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Correct AnswerverifiedShow Answer

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Correct AnswerverifiedShow Answer

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Correct AnswerverifiedShow Answer

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Correct AnswerverifiedShow Answer

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Correct AnswerverifiedShow Answer

Fundamental analysis is

Correct AnswerverifiedShow Answer

Which of the following is correct concerning a risk-averse person?

Correct AnswerverifiedShow Answer

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Correct AnswerverifiedA random walk means the path of a variab...View AnswerShow Answer

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Correct AnswerverifiedShow Answer

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than Its price then you believe the stock is

Correct AnswerverifiedShow Answer

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. Is Lisa risk averse? Explain.

Correct AnswerverifiedYes, Lisa is risk averse. The ...View AnswerShow Answer

A risk-averse person has

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

On May 25, 1980 three pals graduated from high school, pooled together $3,000 and put the money into an account promising to pay 8% for the next 30 years. On May 25, 2010 they withdrew all the money from the account. To the nearest dollar, how much did they withdraw?

Correct AnswerverifiedShow Answer

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Correct AnswerverifiedShow Answer

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High risk persons ar...
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A random walk means the path of a variab...
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Yes, Lisa is risk averse. The ...
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