Question 1

As the number of stocks in a portfolio rises,

Accepted Answer

A) both firm-specific risks and market risk fall. 
B) firm-specific risks fall; market risk does not. 
C) market risk falls; firm-specific risks do not. 
D) neither firm-specific risks nor market risk falls. 
A) both firm-specific risks and market risk fall. 
B) firm-specific risks fall; market risk does not. 
C) market risk falls; firm-specific risks do not. 
D) neither firm-specific risks nor market risk falls.

Question 2

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

A) True 
 B)False

Question 3

You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,125 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,200 two years from today. In order for the same interest rate to apply to the two loans, X =

Accepted Answer

A) $1,853.55. 
B) $1,898.70. 
C) $1,948.79. 
D) $2,012.22. 
A) $1,853.55. 
B) $1,898.70. 
C) $1,948.79. 
D) $2,012.22.

Question 4

If a stock or bond is risky

Accepted Answer

A) risk averse people may be willing to hold it as part of a diversified portfolio. 
B) risk averse people may be willing to hold it if the expected return is high enough. 
C) both A and B are correct. 
D) risk averse people will not hold it. 
A) risk averse people may be willing to hold it as part of a diversified portfolio. 
B) risk averse people may be willing to hold it if the expected return is high enough. 
C) both A and B are correct. 
D) risk averse people will not hold it.

Question 5

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. Suppose the vertical distance between the points (0, A) and (0, B) is 5. If her wealth increased from $1,050 to $1,350, then

Accepted Answer

A) Britney's subjective measure of her well-being would increase by less than 5 units. 
B) Britney's subjective measure of her well-being would increase by more than 5 units. 
C) Britney would change from being a risk-averse person into a person who is not risk averse. 
D) Britney would change from being a person who is not risk averse into a risk-averse person. 
A) Britney's subjective measure of her well-being would increase by less than 5 units. 
B) Britney's subjective measure of her well-being would increase by more than 5 units. 
C) Britney would change from being a risk-averse person into a person who is not risk averse. 
D) Britney would change from being a person who is not risk averse into a risk-averse person.

Question 6

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

Accepted Answer

A) $2,420.68 
B) $2,591.85 
C) $2,996.33 
D) $3,040.63 
A) $2,420.68 
B) $2,591.85 
C) $2,996.33 
D) $3,040.63

Question 7

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn't already done them, what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

Accepted Answer

The client can reduce his risk by furthe

Question 8

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Accepted Answer

A) 6 
B) 8 
C) 10 
D) 12 
A) 6 
B) 8 
C) 10 
D) 12

Question 9

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Accepted Answer

A) undervalued, and evidence later showed that this was clearly correct. 
B) undervalued, but whether it was remains debatable. 
C) overvalued, and evidence later showed that this was clearly correct. 
D) overvalued, but whether it was remains debatable. 
A) undervalued, and evidence later showed that this was clearly correct. 
B) undervalued, but whether it was remains debatable. 
C) overvalued, and evidence later showed that this was clearly correct. 
D) overvalued, but whether it was remains debatable.

Question 10

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Market risk refers to economywide risk c

Question 11

There are many concerns for risk-averse lenders. Consider the following: 1. Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans. 2. Lenders are concerned that real GDP will decline leading to reduced corporate profits. 3. Lenders are concerned that products produced by certain corporations will become obsolete.

Accepted Answer

A) 1 is market risk; 2 is firm-specific risk 
B) 2 is market risk; 3 is firm-specific risk 
C) 3 is market risk; 1 is firm-specific risk 
D) 2 is firm-specific risk; 3 is market risk 
A) 1 is market risk; 2 is firm-specific risk 
B) 2 is market risk; 3 is firm-specific risk 
C) 3 is market risk; 1 is firm-specific risk 
D) 2 is firm-specific risk; 3 is market risk

Question 12

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

Accepted Answer

A) about 3.5 years 
B) about 6.3 years 
C) about 12 years 
D) about 14 years 
A) about 3.5 years 
B) about 6.3 years 
C) about 12 years 
D) about 14 years

Question 13

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Accepted Answer

A) 5 percent 
B) 4 percent 
C) 3 percent 
D) 2 percent 
A) 5 percent 
B) 4 percent 
C) 3 percent 
D) 2 percent

Question 14

Suppose that John can buy a savings bond for $500 that matures in ten years and pays John $1,000 with certainty. He is indifferent between this bond and another $500 bond that has some risk but on which the interest rate is 5% higher. How much, to the nearest penny, does the riskier bond pay in ten years?

Accepted Answer

A) $1,275.91 
B) $1,422.63 
C) $1,577.69 
D) $1,631.17 
A) $1,275.91 
B) $1,422.63 
C) $1,577.69 
D) $1,631.17

Question 15

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

Accepted Answer

The boss is asking for an estimate of th

Question 16

Which of the following is not correct?

Accepted Answer

A) A risk averse person might be willing to hold stocks. 
B) Other things the same, a portfolio with the stocks of a large number of companies has less risk. 
C) Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return. 
D) Diversification can eliminate market risk but not firm-specific risk. 
A) A risk averse person might be willing to hold stocks. 
B) Other things the same, a portfolio with the stocks of a large number of companies has less risk. 
C) Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return. 
D) Diversification can eliminate market risk but not firm-specific risk.

Question 17

Diversification can reduce firm-specific risk.

Accepted Answer

A) True 
 B)False

Question 18

Greg's Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first year, $4 million the second year and have no value thereafter. Greg's Tasty Ice Cream should build the factory if the interest rate is

Accepted Answer

A) 3% but not if it is 4%. 
B) 4% but not if it is 5%. 
C) 5% but not if it is 6%. 
D) 6% but not if it is 7%. 
A) 3% but not if it is 4%. 
B) 4% but not if it is 5%. 
C) 5% but not if it is 6%. 
D) 6% but not if it is 7%.

Question 19

Historically, stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Question 20

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A) Britney is risk averse. 
B) Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C) the property of diminishing marginal utility applies to Britney. 
D) All of the above are correct. 
A) Britney is risk averse. 
B) Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C) the property of diminishing marginal utility applies to Britney. 
D) All of the above are correct.

Exam 27: Tools of Finance

As the number of stocks in a portfolio rises,

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

If a stock or bond is risky

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose the vertical distance between the points (0, A) and (0, B) is 5. If her wealth increased from $1,050 to $1,350, then

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn't already done them, what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

In the 1990s, Fed Chair Alan Greenspan believed that the market was

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double?

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

Which of the following is not correct?

Diversification can reduce firm-specific risk.

Historically, stocks have offered higher rates of return than bonds.

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

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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