Question 1

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False  False

Question 2

Mixster Concrete Company is considering buying a new cement truck.The owners and their accountants decide that this is the profitable thing to do.Before they can buy the truck,the interest rate and price of trucks change.In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A)  Interest rates rise and truck prices rise.
B)  Interest rates fall and truck prices rise.
C)  Interest rates rise and truck prices fall.
D)  Interest rates fall and truck prices fall.E) B) and C)
F) All of the above

Question 3

Figure 27-3.The figure shows a utility function for Rob.

-Refer to Figure 27-3.If most people's utility functions look like Rob's utility function,then it is easy to explain why

Accepted Answer

A)  people buy various types of insurance.
B)  we observe a trade-off between risk and return.
C)  most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets.
D)  None of the above are correct.E) A) and C)
F) C) and D)

Question 4

Other things the same,an increase in the interest rate makes the quantity of loanable funds demanded

Accepted Answer

A)  rise,and investment spending rise.
B)  rise,and investment spending fall.
C)  fall,and investment spending rise.
D)  fall,and investment spending fall.E) All of the above
F) C) and D)

Question 5

Which of the following is correct concerning stock market irrationality?

Accepted Answer

A)  Bubbles could arise,in part,because the price that people pay for stock depends on what they think someone else will pay for it in the future.
B)  Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important.
C)  Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market.
D)  All of the above are correct.E) All of the above
F) C) and D)

Question 6

If you believe the stock market is informationally efficient,then it is a waste of time to engage in fundamental analysis.

Accepted Answer

A) True 
 B)False

Question 7

If stock prices follow a random walk,it means

Accepted Answer

A)  long periods of declining prices are followed by long periods of rising prices.
B)  the greater the number of consecutive days of price declines,the greater the probability prices will increase the following day.
C)  stock prices are unrelated to random events that shock the economy.
D)  stock prices are just as likely to rise as to fall at any given time.E) All of the above
F) C) and D)

Question 8

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

A) True 
 B)False

Question 9

A measure of the volatility of a variable is its

Accepted Answer

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

Question 10

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 11

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

Question 12

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

A) True 
 B)False

Question 13

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks.This should

Accepted Answer

A)  raise the price and raise the present value of the corporation's stock.
B)  raise the price and lower the present value of the corporation's stock.
C)  lower the price and raise the present value of the corporation's stock.
D)  lower the price and lower the present value of the corporation's stock.E) All of the above
F) B) and D)

Question 14

Figure 27-5.On the graph,x represents risk and y represents return. 
-Refer to Figure 27-5.Which of the following statements is correct?

Accepted Answer

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

Question 15

Figure 27-3.The figure shows a utility function for Rob.

-Refer to Figure 27-3.From the appearance of Rob's utility function,we know that

Accepted Answer

A)  if Rob owns a house,then he definitely would buy fire insurance provided the cost of the insurance were reasonable.
B)  Rob 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)  Rob is risk averse.
D)  Rob is not risk averse.E) None of the above
F) A) and B)

Question 16

Tami knows that people in her family die young,and so she buys life insurance.Preston knows he is a reckless driver and so he applies for automobile insurance.

Accepted Answer

A)  These are both examples of adverse selection.
B)  These are both examples of moral hazard.
C)  The first example illustrates adverse selection,and the second illustrates moral hazard.
D)  The first example illustrates moral hazard,and the second illustrates adverse selection.E) C) and D)
F) A) and C)

Question 17

From the standpoint of the economy as a whole,the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 18

Figure 27-1.The figure shows a utility function. 
-Refer to Figure 27-1.Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Accepted Answer

A)  the distance between the origin and point B
B)  the distance between the origin and point C
C)  the distance between point A and point C
D)  the distance between point B and point CE) All of the above
F) B) and D) D

Question 19

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  True

Question 20

Figure 27-5.On the graph,x represents risk and y represents return. 
-Refer to Figure 27-5.Point A represents a situation in which

Accepted Answer

A)  all of a person's savings are allocated to a class of safe assets.
B)  the person knows with certainty that his or her return will be 3 percent.
C)  the standard deviation of the person's portfolio is zero.
D)  All of the above are correct.E) C) and D)
F) B) and D)

Exam 27: The Basic Tools of Finance

The future value of $1 saved today is $1/(1 + r).

Correct AnswerverifiedFalse

Mixster Concrete Company is considering buying a new cement truck.The owners and their accountants decide that this is the profitable thing to do.Before they can buy the truck,the interest rate and price of trucks change.In which case do these changes both make them less likely to buy the truck?

Correct AnswerverifiedShow Answer

Figure 27-3.The figure shows a utility function for Rob. -Refer to Figure 27-3.If most people's utility functions look like Rob's utility function,then it is easy to explain why

Correct AnswerverifiedShow Answer

Other things the same,an increase in the interest rate makes the quantity of loanable funds demanded

Correct AnswerverifiedShow Answer

Which of the following is correct concerning stock market irrationality?

Correct AnswerverifiedShow Answer

If you believe the stock market is informationally efficient,then it is a waste of time to engage in fundamental analysis.

Correct AnswerverifiedShow Answer

If stock prices follow a random walk,it means

Correct AnswerverifiedShow Answer

Risk aversion simply means that people dislike bad things to happen.

Correct AnswerverifiedShow Answer

A measure of the volatility of a variable is its

Correct AnswerverifiedShow Answer

The market for insurance is an example of diversification.

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

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Correct AnswerverifiedShow Answer

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks.This should

Correct AnswerverifiedShow Answer

Figure 27-5.On the graph,x represents risk and y represents return. -Refer to Figure 27-5.Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Figure 27-3.The figure shows a utility function for Rob. -Refer to Figure 27-3.From the appearance of Rob's utility function,we know that

Correct AnswerverifiedShow Answer

Tami knows that people in her family die young,and so she buys life insurance.Preston knows he is a reckless driver and so he applies for automobile insurance.

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole,the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Correct AnswerverifiedShow Answer

Figure 27-1.The figure shows a utility function. -Refer to Figure 27-1.Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?

Correct AnswerverifiedD

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 AnswerverifiedTrue

Figure 27-5.On the graph,x represents risk and y represents return. -Refer to Figure 27-5.Point A represents a situation in which

Correct AnswerverifiedShow Answer

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