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Exam 8: The Basic Tools of Finance

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Question 31

Multiple Choice

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A market in which prices reflect all available information in a rational way is said to be

A) rationally efficient.
B) informationally efficient.
C) hypothetically efficient.
D) a stock market.

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

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Question 32

Multiple Choice

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Markus is a mortgage broker, who is paid by commission.When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages.But when interest rates rise, business falls substantially.To diversify, Markus should choose investments that

A) provide a higher return than the market average.
B) provide a lower return than the market average.
C) pay higher returns when interest rates rise and lower returns when interest rates fall.
D) pay lower returns when interest rates rise and higher returns when interest rates fall.

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

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Question 33

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If a depositor puts R100 in a bank account that earns 4 per cent interest compounded annually, how much will be in the account after five years?

The value of a share is based on the present value of the future stream of dividend payments and the final sales price.

Diversification of a portfolio can

If the prevailing interest rate is 10 per cent, a rational person should be indifferent between receiving R1 000 today and R1 000 one year from today.

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life but to

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Economists have developed models of risk aversion using the concept of utility, which is a person's subjective measure of

Why is an understanding of the concept called present value so critical for those who want to understand finance.

The study of a company's accounting statements and future prospects to determine its value is known as

Diversification has the advantage of

Risk is measured here with a statistic called

Investors need to realize that _______ average returns that they want to enjoy comes at the price of ________ risk.

If people are risk averse, the utility gained from winning R1 000 is equal to the utility lost from losing a R1 000 bet.

Which of the following changes would increase the present value of a future payment?