Question 1

Diversification

Accepted Answer

A) increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B) increases the likely fluctuation in a portfolio's return, but reduces firm-specific risk.. 
C) reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D) reduces the likely fluctuation in a portfolio's return and reduces firm-specific risk. 
A) increases the likely fluctuation in a portfolio's return, but reduces market risk. 
B) increases the likely fluctuation in a portfolio's return, but reduces firm-specific risk.. 
C) reduces the likely fluctuation in a portfolio's return and reduces market risk. 
D) reduces the likely fluctuation in a portfolio's return and reduces firm-specific risk.

Question 2

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 3

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Accepted Answer

A random walk means the path of a variab

Question 4

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

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.

Question 5

By diversifying, the risk of holding stock

Accepted Answer

A) can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B) can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C) can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D) can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
A) can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B) can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C) can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D) can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

Question 6

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 7

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Accepted Answer

A) $400 
B) $800 
C) $1,600 
D) $3,200 
A) $400 
B) $800 
C) $1,600 
D) $3,200

Question 8

Scenario 27-1
Lisa has a utility function   where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Lisa receives from

Question 9

Can insurance be thought of as diversification? Defend your answer.

Accepted Answer

Yes. It replaces a l

Question 10

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

Accepted Answer

A) X = 809.33 
B) X = 855.56 
C) X = 895.42 
D) X = 916.74 
A) X = 809.33 
B) X = 855.56 
C) X = 895.42 
D) X = 916.74

Question 11

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Accepted Answer

A) Interest rates rise and you get the payment sooner. 
B) Interest rates rise and you have to wait longer for the payment. 
C) Interest rates fall and you get the payment sooner. 
D) Interest rates fall and you have to wait longer to get the payment. 
A) Interest rates rise and you get the payment sooner. 
B) Interest rates rise and you have to wait longer for the payment. 
C) Interest rates fall and you get the payment sooner. 
D) Interest rates fall and you have to wait longer to get the payment.

Question 12

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Accepted Answer

The presen

Question 13

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. For the person to whom this utility function applies,

Accepted Answer

A) the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B) the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. 
A) the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B) the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

Question 14

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A) "random walk" 
B) "random bubble" 
C) "speculative bubble" 
D) "speculative hedge" 
A) "random walk" 
B) "random bubble" 
C) "speculative bubble" 
D) "speculative hedge"

Question 16

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Accepted Answer

A) $457.14 
B) $468.02 
C) $478.47 
D) None of the above are correct to the nearest cent. 
A) $457.14 
B) $468.02 
C) $478.47 
D) None of the above are correct to the nearest cent.

Question 17

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Accepted Answer

A) marginal utility diminishes as wealth rises, so he must be risk averse. 
B) marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse. 
C) marginal utility increases as wealth rises, so he must be risk averse. 
D) marginal utility increases as wealth rises, but we can't tell from this if he is risk averse. 
A) marginal utility diminishes as wealth rises, so he must be risk averse. 
B) marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse. 
C) marginal utility increases as wealth rises, so he must be risk averse. 
D) marginal utility increases as wealth rises, but we can't tell from this if he is risk averse.

Question 18

Over the past two centuries, the average annual rates of return were about

Accepted Answer

A) 5 percent for stocks and about 1.5 percent for short-term government bonds. 
B) 6 percent for stocks and about 2.5 percent for short-term government bonds. 
C) 8 percent for stocks and about 3 percent for short-term government bonds. 
D) None of the above is correct. 
A) 5 percent for stocks and about 1.5 percent for short-term government bonds. 
B) 6 percent for stocks and about 2.5 percent for short-term government bonds. 
C) 8 percent for stocks and about 3 percent for short-term government bonds. 
D) None of the above is correct.

Question 19

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A) Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B) Simpson announces that its profits were low, but not as low as the market had expected. 
C) Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D) All of the above would increase the price. 
A) Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B) Simpson announces that its profits were low, but not as low as the market had expected. 
C) Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D) All of the above would increase the price.

Question 20

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

Accepted Answer

A) True 
 B)False

Exam 27: Tools of Finance

Diversification

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

By diversifying, the risk of holding stock

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Can insurance be thought of as diversification? Defend your answer.

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies,

According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Over the past two centuries, the average annual rates of return were about

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

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