Exam 27: Tools of Finance

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $0 with probability 0.8 and pays $10 million with probability 0.2. Given Dave's utility function, will he prefer option A or option B? Provide evidence to support your answer.

Which of the following is correct concerning a risk-averse person?

Risk-averse individuals like good things more than they dislike comparable bad things.

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

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

A person with diminishing marginal utility of wealth is risk averse.

Which of the following best illustrates diversification?

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

As the number of stocks in a person's portfolio increases,

Which of the following best illustrates moral hazard?

La Rossa Pasta Company is considering expanding its factory. In which case would both the change in the cost and the change in the interest rate each make it less likely that La Rossa's would expand?

Will is risk averse and has $1,000 with which to make a financial investment. He has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Will should choose

The present value of a payment to be made in the future falls as

If the efficient market hypothesis is correct, then

The efficient markets hypothesis implies

For a risk averse person,

Which of the following actions best illustrates moral hazard?

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