Question 1

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Accepted Answer

A)   $240 paid in three years
B)   $225 paid in two years
C)   $210 paid in one year
D)   $200 todayE) None of the above
F) All of the above

Question 2

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

Accepted Answer

A)   You receive $90.91 two years from today.
B)   You receive $82.64 one year from today.
C)   You receive $75.13 today.
D)   All of these payments have the same present value to the nearest cent.E) C) and D)
F) B) and D)

Question 3

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Accepted Answer

A)   4.5 percent
B)   5.4 percent
C)   6.2 percent
D)   8.0 percentE) A) and B)
F) B) and C)

Question 4

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Accepted Answer

A)   market risk.
B)   moral hazard.
C)   adverse selection.
D)   risk aversion.E) A) and B)
F) All of the above

Question 5

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?

Accepted Answer

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

Question 6

For a risk averse person,

Accepted Answer

A)   the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet.
B)   the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
C)   the utility function exhibits the property of increasing marginal utility.
D)   the utility function gets steeper as wealth increases.E) A) and B)
F) A) and C)

Question 7

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. Suppose the vertical distance between the points 0, A)  and 0, B)  is 12. If his wealth increased from $1,300 to $1,800, then

Accepted Answer

A)   Dexter's subjective measure of his well­being would increase by less than 12 units.
B)   Dexter's subjective measure of his well­being would increase by more than 12 units.
C)   Dexter would change from being a risk-averse person into a person who is not risk averse.
D)   Dexter would forgo the insurance he bought when his wealth was $1,300.E) None of the above
F) A) and B)

Question 8

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Accepted Answer

A) True 
 B)False

Question 9

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu...

Question 10

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 $4,229.70. 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) A) and C)
F) A) and B)

Question 11

By diversifying, the risk of holding stock

Accepted Answer

A)   can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
B)   can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.
C)   can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
D)   can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.E) A) and D)
F) B) and D)

Question 12

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations. What does the efficient markets hypothesis predict will happen to Johnson's stock price.

Accepted Answer

The efficient markets hypothes...

Question 13

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

Accepted Answer

A)   $1,200.00
B)   $1,111.77
C)   $983.58
D)   $859.09E) A) and B)
F) A) and C)

Question 14

Risk

Accepted Answer

A)   can be reduced by placing a large number of small bets rather than a small number of large bets.
B)   can be reduced by increasing the number of stocks in a portfolio.
C)   Both A and B are correct.
D)   Neither A nor B are correct.E) All of the above
F) B) and C)

Question 15

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

Question 16

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) All of the above
F) None of the above

Question 17

The possibility of speculative bubbles in the stock market arises in part because

Accepted Answer

A)   stock prices may not depend at all on psychological factors.
B)   fundamental analysis may be the correct way to evaluate the value of stocks.
C)   future streams of dividend payments are very hard to estimate.
D)   the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.E) A) and B)
F) All of the above

Question 18

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Accepted Answer

A)   6
B)   8
C)   10
D)   12E) None of the above
F) A) and D)

Question 19

Albert Einstein once referred to compounding as

Accepted Answer

A)   "an obsession among economists that defies explanation."
B)   "the greatest mathematical discovery of all time."
C)   his own discovery.
D)   John Maynard Keynes's greatest contribution.E) A) and B)
F) C) and D)

Question 20

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A)   80 to 100.
B)   40 to 80.
C)   10 to 20.
D)   1 to 10.E) C) and D)
F) A) and B)

Exam 19: The Basic Tools of Finance

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Correct Answer
verified

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations. What does the efficient markets hypothesis predict will happen to Johnson's stock price.

Correct Answer
verified
The efficient markets hypothes...
View Answer

Albert Einstein once referred to compounding as

Correct Answer
verified

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Correct Answer
verified

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points 0, A) and 0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Correct Answer
verified

The possibility of speculative bubbles in the stock market arises in part because

Correct Answer
verified

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Correct Answer
verified
Bill's behavior illu...
View Answer

Correct Answer
verified

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Correct Answer
verified

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

Correct Answer
verified

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

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

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 $4,229.70. What number of dollars, X, did you deposit?

Correct Answer
verified

For a risk averse person,

Correct Answer
verified

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Correct Answer
verified

Risk

Correct Answer
verified

By diversifying, the risk of holding stock

Correct Answer
verified

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Correct Answer
verified

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Correct Answer
verified

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Correct Answer
verified

Exam 19: The Basic Tools of Finance

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Correct AnswerverifiedShow Answer

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations. What does the efficient markets hypothesis predict will happen to Johnson's stock price.

Correct AnswerverifiedThe efficient markets hypothes...View AnswerShow Answer

Albert Einstein once referred to compounding as

Correct AnswerverifiedShow Answer

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points 0, A) and 0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Correct AnswerverifiedShow Answer

The possibility of speculative bubbles in the stock market arises in part because

Correct AnswerverifiedShow Answer

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Correct AnswerverifiedBill's behavior illu...View AnswerShow Answer

Correct AnswerverifiedShow Answer

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Correct AnswerverifiedShow Answer

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

Correct AnswerverifiedShow Answer

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

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

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 $4,229.70. What number of dollars, X, did you deposit?

Correct AnswerverifiedShow Answer

For a risk averse person,

Correct AnswerverifiedShow Answer

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

Risk

Correct AnswerverifiedShow Answer

By diversifying, the risk of holding stock

Correct AnswerverifiedShow Answer

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Correct AnswerverifiedShow Answer

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Correct AnswerverifiedShow Answer

Correct Answer
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The efficient markets hypothes...
View Answer

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Bill's behavior illu...
View Answer

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