Question 1

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A)   $5001.05) 2 + $500/1.05) 2
B)   $5001.05) 2 + $500
C)   $500 + $500/1.05) 2
D)   $500 + $500E) A) and C)
F) A) and B)

Question 2

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Accepted Answer

The answer of If you put $400 into a bank...

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) A) and B)
F) A) and C)

Question 5

Figure 27-6. On the graph, x represents risk and y represents return. 
-Refer to Figure 27-6. 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 D)
F) B) and D)

Question 6

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Accepted Answer

A)   $500/1.06) 2
B)   $500 - 5001.06) 2
C)   $500/1.02) 6
D)   None of the above is correct.E) B) and C)
F) A) and B)

Question 7

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Accepted Answer

The presen...

Question 8

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

Approximat...

Question 9

No particular stock is a better buy than any other stock if

Accepted Answer

A)   stock prices are driven by investors' "animal spirits."
B)   the random-walk theory of stock prices is incorrect.
C)   the efficient markets hypothesis is correct.
D)   actively managed mutual funds always outperform index funds.E) A) and B)
F) B) and C)

Question 10

The efficient markets hypothesis implies that

Accepted Answer

A)   building a portfolio based on a published list of the "most respected" companies is likely to produce a better­ than-average return.
B)   if a stock rose in price last year, it is likely to rise in price this year.
C)   managed mutual funds should generally outperform indexed mutual funds.
D)   None of the above are correct.E) B) and D)
F) A) and B)

Question 11

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Accepted Answer

A)   This means its present value is less than its price. You should consider adding the stock to your portfolio.
B)   This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio.
C)   This means its present value is more than its price. You should consider adding the stock to your portfolio.
D)   This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.E) A) and D)
F) B) and C)

Question 12

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Accepted Answer

A) True 
 B)False

Question 13

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

Question 14

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A)   "random walk"
B)   "random bubble"
C)   "speculative bubble"
D)   "speculative hedge"E) B) and C)
F) A) and C)

Question 15

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Accepted Answer

A)   every risk-averse person will earn a higher rate of return than every non-risk-averse person.
B)   every risk-averse person will earn a lower rate of return than every non-risk-averse person.
C)   the average risk-averse person will earn a higher rate of return than the average non-risk-averse person.
D)   the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.E) C) and D)
F) B) and D)

Question 16

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

Accepted Answer

A)   $575.00
B)   $578.81
C)   $579.64
D)   None of the above is correct.E) A) and B)
F) All of the above

Question 17

List two ways a risk adverse person may attempt to reduce risks.

Accepted Answer

buy insurance divers...

Question 18

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)   A person adds risky stock to his portfolio.
B)   A person who has narrowly avoided many accidents applies for automobile insurance.
C)   A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)   A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.E) A) and D)
F) C) and D)

Question 19

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Accepted Answer

A)   It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in.
B)   Stock prices, even if not exactly a random walk, are very close to it.
C)   Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis.
D)   All of Chloe's conclusions are correct.E) B) and D)
F) None of the above

Question 20

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Accepted Answer

A)   If it is "heads," she wins $100; if it is tails, she loses $95.
B)   If it is "heads," she wins $150; if it is tails, she loses $150.
C)   If it is "heads," she wins $150; if it is tails, she loses $140.
D)   She definitely would not accept any of these bets.E) B) and D)
F) B) and C)

Exam 14: The Basic Tools of Finance

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?

Correct AnswerverifiedShow Answer

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Correct AnswerverifiedShow Answer

List two ways a risk adverse person may attempt to reduce risks.

Correct Answerverifiedbuy insurance divers...View AnswerShow Answer

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Correct AnswerverifiedShow Answer

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Correct AnswerverifiedApproximat...View AnswerShow Answer

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

Correct AnswerverifiedShow Answer

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Correct AnswerverifiedShow Answer

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Correct AnswerverifiedThe presen...View AnswerShow Answer

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

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Risk

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Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies that

Correct AnswerverifiedShow Answer

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Correct AnswerverifiedShow Answer

No particular stock is a better buy than any other stock if

Correct AnswerverifiedShow Answer

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates adverse selection?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct AnswerverifiedShow Answer

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buy insurance divers...
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Approximat...
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The presen...
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