Question 1

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Accepted Answer

A) raise the price of the company's stock. 
B) not affect the price of the company's stock. 
C) reduce the price of the company's stock. 
D) More information is needed to answer the question. 
A) raise the price of the company's stock. 
B) not affect the price of the company's stock. 
C) reduce the price of the company's stock. 
D) More information is needed to answer the question.

Question 2

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A) firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
B) market risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
C) firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions. 
D) market risk, but still they have reason to worry about their wealth decreasing as a result of recessions. 
A) firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
B) market risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
C) firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions. 
D) market risk, but still they have reason to worry about their wealth decreasing as a result of recessions.

Question 3

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Accepted Answer

Efficient market theory says that it sho

Question 4

If the efficient markets hypothesis is correct, then

Accepted Answer

A) the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B) the stock market is informationally efficient. 
C) stock prices never follow a random walk. 
D) All of the above are correct. 
A) the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B) the stock market is informationally efficient. 
C) stock prices never follow a random walk. 
D) All of the above are correct.

Question 5

The utility function of a risk-averse person has a

Accepted Answer

A) positive slope and gets steeper as wealth increases. 
B) positive slope but gets flatter as wealth increases. 
C) negative slope but gets steeper as wealth increases. 
D) negative slope and gets flatter as wealth increases. 
A) positive slope and gets steeper as wealth increases. 
B) positive slope but gets flatter as wealth increases. 
C) negative slope but gets steeper as wealth increases. 
D) negative slope and gets flatter as wealth increases.

Question 6

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Accepted Answer

A) market risk. 
B) moral hazard. 
C) adverse selection. 
D) risk aversion. 
A) market risk. 
B) moral hazard. 
C) adverse selection. 
D) risk aversion.

Question 7

Which of the following is not correct?

Accepted Answer

A) The higher average return on stocks than on bonds comes at the price of higher risk. 
B) Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk. 
C) Insurance markets reduce risk, but not by diversification. 
D) Risk can be reduced by placing a large number of small bets, rather than a small number of large bets. 
A) The higher average return on stocks than on bonds comes at the price of higher risk. 
B) Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk. 
C) Insurance markets reduce risk, but not by diversification. 
D) Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.

Question 8

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Accepted Answer

A) This stock is undervalued; you should consider adding it to your portfolio. 
B) This stock is undervalued; you shouldn't consider adding it to your portfolio. 
C) This stock is overvalued; you should consider adding it to your portfolio. 
D) This stock is overvalued; you shouldn't consider adding it to your portfolio. 
A) This stock is undervalued; you should consider adding it to your portfolio. 
B) This stock is undervalued; you shouldn't consider adding it to your portfolio. 
C) This stock is overvalued; you should consider adding it to your portfolio. 
D) This stock is overvalued; you shouldn't consider adding it to your portfolio.

Question 9

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Accepted Answer

A) the efficient markets hypothesis is not a correct hypothesis. 
B) the stock market is informationally efficient. 
C) the stock market is informationally inefficient. 
D) there is no reason to establish a diversified portfolio of stocks. 
A) the efficient markets hypothesis is not a correct hypothesis. 
B) the stock market is informationally efficient. 
C) the stock market is informationally inefficient. 
D) there is no reason to establish a diversified portfolio of stocks.

Question 10

One way to characterize the difference between compounding and discounting is to say that

Accepted Answer

A) compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption. 
B) discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption. 
C) the process of compounding produces a future value, whereas the process of discounting produces a present value. 
D) the process of compounding produces a present value, whereas the process of discounting produces a future value. 
A) compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption. 
B) discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption. 
C) the process of compounding produces a future value, whereas the process of discounting produces a present value. 
D) the process of compounding produces a present value, whereas the process of discounting produces a future value.

Question 11

Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?

Accepted Answer

A) Amy 
B) Bill 
C) Celia 
D) They each get the same amount. 
A) Amy 
B) Bill 
C) Celia 
D) They each get the same amount.

Question 12

Which of the following statements is correct?

Accepted Answer

A) A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B) A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C) Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D) Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection. 
A) A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B) A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C) Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D) Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection.

Question 13

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A) impossible. Many studies find that beating the market is, at best, extremely difficult. 
B) impossible. Many studies find that beating the market is relatively easy. 
C) relatively easy. Many studies find that beating the market is, at best, extremely difficult. 
D) relatively easy. Many studies find that beating the market is relatively easy. 
A) impossible. Many studies find that beating the market is, at best, extremely difficult. 
B) impossible. Many studies find that beating the market is relatively easy. 
C) relatively easy. Many studies find that beating the market is, at best, extremely difficult. 
D) relatively easy. Many studies find that beating the market is relatively easy.

Question 14

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Accepted Answer

A) $725.62. It would be higher if the interest rate were higher. 
B) $727.28. It would be higher if the interest rate were higher. 
C) $725.62. It would be lower if the interest rate were higher. 
D) $727.28. It would be lower if the interest rate were higher. 
A) $725.62. It would be higher if the interest rate were higher. 
B) $727.28. It would be higher if the interest rate were higher. 
C) $725.62. It would be lower if the interest rate were higher. 
D) $727.28. It would be lower if the interest rate were higher.

Question 15

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Accepted Answer

A) 4 percent 
B) 5 percent 
C) 6 percent 
D) 7 percent 
A) 4 percent 
B) 5 percent 
C) 6 percent 
D) 7 percent

Question 16

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph. 
A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph.

Question 17

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 18

​Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

Accepted Answer

A) The company should not construct the new facility because the future value of the construction cost is only $1,628,894.63. 
B) ​The company should not construct the new facility because the future value of the construction cost is $1,783,267.42. 
C) ​The company should construct the new facility because the present value of the future payoff is $1,092,734.95. 
D) ​The company should construct the new facility because the present value of the future payoff is $1,043,652.53. 
A) The company should not construct the new facility because the future value of the construction cost is only $1,628,894.63. 
B) ​The company should not construct the new facility because the future value of the construction cost is $1,783,267.42. 
C) ​The company should construct the new facility because the present value of the future payoff is $1,092,734.95. 
D) ​The company should construct the new facility because the present value of the future payoff is $1,043,652.53.

Question 19

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

Question 20

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

Accepted Answer

A) 6 percent 
B) 7 percent 
C) 8 percent 
D) 10 percent 
A) 6 percent 
B) 7 percent 
C) 8 percent 
D) 10 percent

Exam 27: Tools of Finance

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

If the efficient markets hypothesis is correct, then

The utility function of a risk-averse person has a

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Which of the following is not correct?

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

One way to characterize the difference between compounding and discounting is to say that

Which of the following statements is correct?

The efficient markets hypothesis says that beating the market consistently is

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

​Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Point A represents a situation in which

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

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

Filters

Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?