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A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings


A) rises. The company is more likely to buy the equipment.
B) rises. The company is less likely to buy the equipment.
C) falls. The company is more likely to buy the equipment.
D) falls. The company is less likely to buy the equipment.

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

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Scenario 27-1 Lisa has a utility function 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 . 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 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 . . 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 .

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Here is th...

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The financial system


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

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An index fund


A) holds only stocks and bonds that are indexed to inflation.
B) holds all the stocks in a given stock index.
C) guarantees a return that follows the index of leading economic indicators.
D) typically has a lower return than a managed fund.

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

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If stock prices follow a random walk, then stock investors can make large profits by


A) buying stocks whose prices have been falling for several days.
B) buying stocks whose prices have been rising for several days.
C) performing fundamental analysis of stocks using data contained in annual reports.
D) using inside information.

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

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At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

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The reduct...

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What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?


A) $240.38
B) $242.24
C) $244.40
D) None of the above are correct to the nearest cent.

E) None of the above
F) All of the above

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Can insurance be thought of as diversification? Defend your answer.

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Yes. It replaces a l...

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Diminishing marginal utility of wealth implies that the utility function is


A) upward-sloping and has decreasing slope.
B) upward-sloping and has increasing slope.
C) downward-sloping and has decreasing slope.
D) downward-sloping and has increasing slope.

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

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Draw graphs showing the following three relationships. 1. The relation between utility and wealth for a risk averse consumer. 2. The relation between standard deviation and the number of stocks in a portfolio. 3. The relation between return and risk.

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A measure of the volatility of a variable is its


A) present value.
B) future value.
C) return.
D) standard deviation.

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

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Which of the following has a present value of $100?


A) $109.12 in two years when the interest rate is 4 percent
B) $113.98 in two years when the interest rate is 6 percent
C) $116.64 in two years when the interest rate is 8 percent
D) $123.17 in two years when the interest rate is 10 percent

E) C) and D)
F) All of the above

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Figure 27-3 The following figure shows the utility function for Paul. Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there, A) Paul would be willing to accept a coin­flip bet that would result in him winning $200 if the result was heads or losing $200 if the result was tails. B) the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. C) the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. D) the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth. -Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,


A) Paul would be willing to accept a coin­flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails."
B) the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth.
C) the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth.
D) the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth.

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

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A person with diminishing marginal utility of wealth is risk averse.

A) True
B) False

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Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?


A) the two-year account at 9 percent
B) the three-year account at 6 percent
C) the six-year account at 3 percent
D) The accounts are all worth the same.

E) None of the above
F) B) and C)

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The efficient markets hypothesis says that


A) only individual investors can make money in the stock market.
B) it should be easy to find stocks whose price differs from their fundamental value.
C) stock prices follow a random walk.
D) All of the above are correct.

E) None of the above
F) B) and D)

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Figure 27-4. The figure shows a utility function for Alex. Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. B) Alex 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) Alex is risk averse. D) Alex is not risk averse. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that


A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable.
B) Alex 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) Alex is risk averse.
D) Alex is not risk averse.

E) None of the above
F) B) and C)

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Figure 27-5. The figure shows a utility function for Dexter. 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 A) Dexter is risk averse. B) Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. C) the property of decreasing marginal utility applies to Dexter. D) All of the above are correct. -Refer to Figure 27-5. From the appearance of the utility function, we know that


A) Dexter is risk averse.
B) Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C) the property of decreasing marginal utility applies to Dexter.
D) All of the above are correct.

E) B) and C)
F) All of the above

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Suppose your bank account pays a 4% interest rate. You are considering purchasing a share of stock in ABC Corporation for $500. The stock will pay you a $10 dividend at the end of years 1, 2, and 3. You expect to be able to sell the stock at the end of year 3 for $550. Is ABC a good investment? Provide evidence to support your answer.

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The present value of the inves...

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When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

A) True
B) False

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