Question 1

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Accepted Answer

A) Broker A: "There are risks in holding stocks, even in a highly diversified portfolio." 
B) Broker B: "Portfolios with smaller standard deviations have lower risk." 
C) Broker C: "Stocks with greater risks offer lower average returns." 
D) They all gave her correct advice. 
A) Broker A: "There are risks in holding stocks, even in a highly diversified portfolio." 
B) Broker B: "Portfolios with smaller standard deviations have lower risk." 
C) Broker C: "Stocks with greater risks offer lower average returns." 
D) They all gave her correct advice.

Question 2

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Accepted Answer

A) True 
 B)False

Question 3

Write the formula for finding the future value in n years of $x today.

Accepted Answer

The answer of Write the formula for finding the future...

Question 4

Some people argue that there are two advantages to holding mutual funds. The first is that mutual funds provide an inexpensive way to hold a diversified portfolio. The second is that because of their expertise mutual fund managers should be able to consistently beat the market. Which of the following does the evidence show?

Accepted Answer

A) Diversification does reduce risk and mutual funds typically outperform the market. 
B) Diversification does reduce risk, but mutual funds do not typically outperform the market. 
C) Diversification does not reduce risk but mutual funds typically outperform the market. 
D) Diversification does not reduce risk and mutual funds do not typically outperform the market. 
A) Diversification does reduce risk and mutual funds typically outperform the market. 
B) Diversification does reduce risk, but mutual funds do not typically outperform the market. 
C) Diversification does not reduce risk but mutual funds typically outperform the market. 
D) Diversification does not reduce risk and mutual funds do not typically outperform the market.

Question 5

Which of the following is adverse selection?

Accepted Answer

A) the risk associated with selecting stocks in only a few specific companies 
B) the risk that a person will become overconfident in his ability to select stocks 
C) a high-risk person being more likely to apply for insurance 
D) after obtaining insurance a person having less incentive to be careful 
A) the risk associated with selecting stocks in only a few specific companies 
B) the risk that a person will become overconfident in his ability to select stocks 
C) a high-risk person being more likely to apply for insurance 
D) after obtaining insurance a person having less incentive to be careful

Question 6

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. In what way(s) does the graph differ from the usual case?

Accepted Answer

A) The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward-sloping. 
B) The utility function shown here is bowed downward (convex), whereas in the usual case the utility function is bowed upward (concave). 
C) On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D) On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis. 
A) The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward-sloping. 
B) The utility function shown here is bowed downward (convex), whereas in the usual case the utility function is bowed upward (concave). 
C) On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D) On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.

Question 7

The problem of moral hazard arises because

Accepted Answer

A) life is full of all sorts of risks. 
B) after people buy insurance, they have less incentive to be careful about their risky behavior. 
C) a high-risk person is more likely to apply for insurance than is a low-risk person. 
D) insurance companies go to great effort to avoid paying claims to their policy holders. 
A) life is full of all sorts of risks. 
B) after people buy insurance, they have less incentive to be careful about their risky behavior. 
C) a high-risk person is more likely to apply for insurance than is a low-risk person. 
D) insurance companies go to great effort to avoid paying claims to their policy holders.

Question 8

Which of the following is correct if the interest rate is 6 percent?

Accepted Answer

A) $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400. 
B) $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400. 
C) $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400. 
D) $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400. 
A) $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400. 
B) $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400. 
C) $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400. 
D) $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.

Question 9

You are considering buying a share of stock in Company ABC. At the end of years 1, 2, and 3 the stock will pay you a dividend of $10. In addition, at the end of the third year you expect to sell the share of stock for $200. If the interest rate is 5%, how much is the share of ABC stock worth to you today?

Accepted Answer

A) $200 
B) $210 
C) $220 
D) $230 
A) $200 
B) $210 
C) $220 
D) $230

Question 10

How does moral hazard matter in the market for insurance?

Accepted Answer

Once people have ins

Question 11

At an annual interest rate of 10 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A) 8 
B) 10 
C) 12 
D) 14 
A) 8 
B) 10 
C) 12 
D) 14

Question 12

Discuss the statistical evidence concerning the efficient markets hypothesis.

Accepted Answer

The evidence indicates that stock prices

Question 13

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Accepted Answer

A) market risk by more than an increase from 110 to 120. 
B) market risk by less than an increase from 110 to 120. 
C) firm-specific risk by more than an increase from 110 to 120. 
D) firm-specific risk by less than an increase from 110 to 120. 
A) market risk by more than an increase from 110 to 120. 
B) market risk by less than an increase from 110 to 120. 
C) firm-specific risk by more than an increase from 110 to 120. 
D) firm-specific risk by less than an increase from 110 to 120.

Question 14

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 today 
A) $240 paid in three years 
B) $225 paid in two years 
C) $210 paid in one year 
D) $200 today

Question 15

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

Accepted Answer

A) stock prices follow a random walk. 
B) the stock market is informationally efficient. 
C) it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D) All of the above are correct. 
A) stock prices follow a random walk. 
B) the stock market is informationally efficient. 
C) it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D) All of the above are correct.

Question 16

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Accepted Answer

A) $9,090.91 
B) $10,000.00 
C) $8,264.46 
D) $9,523.81 
A) $9,090.91 
B) $10,000.00 
C) $8,264.46 
D) $9,523.81

Question 17

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. 
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.

Question 18

The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?

Accepted Answer

A) $415,000 if the interest rate is 5% 
B) $419,000 if the interest rate is 4% 
C) K-Nine would buy the equipment in both cases. 
D) K-Nine would not buy the equipment in either case. 
A) $415,000 if the interest rate is 5% 
B) $419,000 if the interest rate is 4% 
C) K-Nine would buy the equipment in both cases. 
D) K-Nine would not buy the equipment in either case.

Question 19

The efficient markets hypothesis says that

Accepted Answer

A) only individual investors can make money in the stock market. 
B) it should be easy to find stocks whose price differs from their fundamental value. 
C) stock prices follow a random walk. 
D) All of the above are correct. 
A) only individual investors can make money in the stock market. 
B) it should be easy to find stocks whose price differs from their fundamental value. 
C) stock prices follow a random walk. 
D) All of the above are correct.

Question 20

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

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. 
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.

Exam 27: Tools of Finance

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Write the formula for finding the future value in n years of $x today.

Which of the following is adverse selection?

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. In what way(s) does the graph differ from the usual case?

The problem of moral hazard arises because

Which of the following is correct if the interest rate is 6 percent?

How does moral hazard matter in the market for insurance?

At an annual interest rate of 10 percent, about how many years will it take $100 to triple in value?

Discuss the statistical evidence concerning the efficient markets hypothesis.

An increase in the number of corporations in a portfolio from 1 to 10 reduces

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

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

Risk

The efficient markets hypothesis says that

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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