Question 1

Diversification

Accepted Answer

A) increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B) increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C) reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D) reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
A) increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B) increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C) reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D) reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.

Question 2

According to fundamental analysis, a saver should prefer to buy stocks that are

Accepted Answer

A) undervalued. This means the price of the stock is low given the value of the corporation. 
B) undervalued. This means the value of the corporation is low given the price of stock. 
C) overvalued. This means the price of the stock is high given the value of the corporation. 
D) overvalued. This means the value of the corporation is high given the price of stock. 
A) undervalued. This means the price of the stock is low given the value of the corporation. 
B) undervalued. This means the value of the corporation is low given the price of stock. 
C) overvalued. This means the price of the stock is high given the value of the corporation. 
D) overvalued. This means the value of the corporation is high given the price of stock.

Question 3

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A) $907.03 to be paid in two years 
B) $1,000.01 to be paid in two years 
C) $1,100.01 to be paid in two years 
D) $1,102.51 to be paid in two years 
A) $907.03 to be paid in two years 
B) $1,000.01 to be paid in two years 
C) $1,100.01 to be paid in two years 
D) $1,102.51 to be paid in two years

Question 4

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 5

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A) The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B) The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C) The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard. 
D) The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection. 
A) The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B) The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C) The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard. 
D) The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection.

Question 6

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Accepted Answer

A) is now lower than it was before, and so Hydro Grow is less likely to build the building. 
B) is now lower than it was before, and so HydroGrow is more likely to build the building. 
C) is now higher than it was before, and so HydroGrow is less likely to build the building. 
D) is now higher than it was before, and so HydroGrow is more likely to build the building. 
A) is now lower than it was before, and so Hydro Grow is less likely to build the building. 
B) is now lower than it was before, and so HydroGrow is more likely to build the building. 
C) is now higher than it was before, and so HydroGrow is less likely to build the building. 
D) is now higher than it was before, and so HydroGrow is more likely to build the building.

Question 7

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

Accepted Answer

A) $210 
B) $300 
C) $800 
D) $1,010 
A) $210 
B) $300 
C) $800 
D) $1,010

Question 8

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Accepted Answer

A) True 
 B)False

Question 9

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Accepted Answer

A) True 
 B)False

Question 10

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A) 80 to 100. 
B) 40 to 80. 
C) 10 to 20. 
D) 1 to 10. 
A) 80 to 100. 
B) 40 to 80. 
C) 10 to 20. 
D) 1 to 10.

Question 11

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. 
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.

Question 12

Which of the following changes would decrease the present value of a future payment?

Accepted Answer

A) an increase in the size of the payment 
B) an increase in the time until the payment is made 
C) a decrease in the interest rate 
D) All of the above are correct. 
A) an increase in the size of the payment 
B) an increase in the time until the payment is made 
C) a decrease in the interest rate 
D) All of the above are correct.

Question 13

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

Accepted Answer

A) has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B) almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C) is spending his or her time wisely if the efficient markets hypothesis is correct. 
D) is interested in the likely ability of a corporation to pay dividends in the future. 
A) has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk. 
B) almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds. 
C) is spending his or her time wisely if the efficient markets hypothesis is correct. 
D) is interested in the likely ability of a corporation to pay dividends in the future.

Question 14

The future value of a deposit in a savings account will be larger

Accepted Answer

A) the longer a person waits to withdraw the funds. 
B) the higher the interest rate is. 
C) the larger the initial deposit is. 
D) All of the above are correct. 
A) the longer a person waits to withdraw the funds. 
B) the higher the interest rate is. 
C) the larger the initial deposit is. 
D) All of the above are correct.

Question 15

Which of the following games might a risk-averse person play?

Accepted Answer

A) a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B) a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D) a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1 
A) a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B) a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C) a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D) a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1

Question 16

According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen's Leisure Company?

Accepted Answer

A) Veblen announces, just as everyone had expected, that it has fired its CEO who has been accused of ethics violations. 
B) Veblen announces, as the market had expected, that its profits were low. 
C) Fundamental analysis published by KM Financial shows that Veblen's stock is undervalued. 
D) A highly anticipated book is published by a Veblen insider which details Veblen's innovative technology in plain English, information that was previously unavailable to the public and which will now be used by Veblen's competitors. 
A) Veblen announces, just as everyone had expected, that it has fired its CEO who has been accused of ethics violations. 
B) Veblen announces, as the market had expected, that its profits were low. 
C) Fundamental analysis published by KM Financial shows that Veblen's stock is undervalued. 
D) A highly anticipated book is published by a Veblen insider which details Veblen's innovative technology in plain English, information that was previously unavailable to the public and which will now be used by Veblen's competitors.

Question 17

Figure 27-3
The following figure shows the utility function for Paul.  
-Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Accepted Answer

A) Paul would be willing to accept a coin-flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B) the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. 
C) the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. 
D) the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth. 
A) Paul would be willing to accept a coin-flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B) the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. 
C) the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. 
D) the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth.

Question 18

When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

Accepted Answer

A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years 
A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years

Question 19

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Accepted Answer

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

Question 20

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Accepted Answer

A) $540.75 
B) $540.80 
C) $540.85 
D) None of the above are correct to the nearest cent. 
A) $540.75 
B) $540.80 
C) $540.85 
D) None of the above are correct to the nearest cent.

Exam 27: Tools of Finance

Diversification

According to fundamental analysis, a saver should prefer to buy stocks that are

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

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

Which of the following changes would decrease the present value of a future payment?

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

The future value of a deposit in a savings account will be larger

Which of the following games might a risk-averse person play?

According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen's Leisure Company?

Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

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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