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Exam 27: Tools of Finance

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Question 61

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Scenario 27-1 ​ Lisa has a utility function $U = W ^ { 1 / 2 }$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains. ​ -Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

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The utility Lisa receives from...

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Question 62

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Figure 27-4 -Refer to Figure 27-4. Which of the following statements is correct?

A) At point A the standard deviation of the portfolio is 3.
B) A risk averse person always will choose to be at point A.
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets.
D) The figure shows that the greater the risk, the greater the return.

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

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Question 63

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Suppose the interest rate is 5 percent. Consider four payment options: Option A: $500 today. Option B: $515 one year from today. Option C: $615 two years from today. Option D: $690 three years from today. ​ Which of the payments has the highest present value today?

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.

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

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

Cameron puts $300 into an account when the interest rate is 3 percent. Later he checks his balance and finds he has about $347.78. How long did Cameron wait to check his balance?

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Scenario 27-2 ​ Suppose Dave has a utility function $U = 4 W ^ { 1 / 2 }$ where W is his wealth in millions of dollars and U is the utility he obtains. ​ -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for $0 \leq W \leq 25$ . ​

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

How does adverse selection affect the insurance market?

If the interest rate is 3.75 percent, then what is the present value of $4,750 to be received in 11 years?

Recently, Mina's wealth increased by $525. If her wealth were to increase by another $525 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, and graphing wealth on each horizontal axis, Mina's utility function

Scenario 27-1 ​ Lisa has a utility function $U = W ^ { 1 / 2 }$ 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 $0 \leq W \leq 25$ . ​

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

The market for insurance is an example of diversification.

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?

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

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