Question 1

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Accepted Answer

A) doubles every 70/X years. 
B) doubles every 70(1 - 1/X) years. 
C) doubles every 70/X2 years. 
D) doubles every 70/(1 - X) years. 
A) doubles every 70/X years. 
B) doubles every 70(1 - 1/X) years. 
C) doubles every 70/X2 years. 
D) doubles every 70/(1 - X) years.

Question 2

Which of the following is a source of market risk?

Accepted Answer

A) Holding stocks in many companies carries the risk of a reduced average return. 
B) Real GDP varies over time and sales and profits move with real GDP. 
C) When a paper producer has declining sales, it is likely that so will other paper producers. 
D) If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market. 
A) Holding stocks in many companies carries the risk of a reduced average return. 
B) Real GDP varies over time and sales and profits move with real GDP. 
C) When a paper producer has declining sales, it is likely that so will other paper producers. 
D) If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market.

Question 3

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A) For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent. 
B) For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
C) For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
D) For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent. 
A) For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent. 
B) For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
C) For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent. 
D) For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.

Question 4

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Accepted Answer

A) $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years. 
B) $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years. 
C) $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years. 
D) $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years. 
A) $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years. 
B) $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years. 
C) $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years. 
D) $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.

Question 5

Suppose you win a small lottery and you are given the following choice: You can (1) receive an immediate payment of $10,000 or (2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Accepted Answer

A) 2 percent, but not if the interest rate is 3 percent. 
B) 3 percent, but not if the interest rate is 4 percent. 
C) 4 percent, but not if the interest rate is 5 percent. 
D) 5 percent, but not if the interest rate is 6 percent. 
A) 2 percent, but not if the interest rate is 3 percent. 
B) 3 percent, but not if the interest rate is 4 percent. 
C) 4 percent, but not if the interest rate is 5 percent. 
D) 5 percent, but not if the interest rate is 6 percent.

Question 6

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

Accepted Answer

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

Question 7

David recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the lowest risk?​

Accepted Answer

A) ​A portfolio with an average annual rate of return of 5%. 
B) ​​A portfolio with an average annual rate of return of 8%. 
C) ​​A portfolio with an average annual rate of return of 10%. 
D) ​​A portfolio with an average annual rate of return of 14%. 
A) ​A portfolio with an average annual rate of return of 5%. 
B) ​​A portfolio with an average annual rate of return of 8%. 
C) ​​A portfolio with an average annual rate of return of 10%. 
D) ​​A portfolio with an average annual rate of return of 14%.

Question 8

Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your portfolio?​

Accepted Answer

A) ​Choosing stocks based on research and analysis you do yourself 
B) ​Relying on advice from Wall Street analysts 
C) ​Buying shares of an actively managed mutual fund 
D) ​Buying shares of an index fund that purchases all stocks in a particular stock index 
A) ​Choosing stocks based on research and analysis you do yourself 
B) ​Relying on advice from Wall Street analysts 
C) ​Buying shares of an actively managed mutual fund 
D) ​Buying shares of an index fund that purchases all stocks in a particular stock index

Question 9

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by

Question 10

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

Accepted Answer

A) You receive the payment 4 years from now and the interest rate is 4 percent. 
B) You receive the payment 4 years from now and the interest rate is 5 percent. 
C) You receive the payment 5 years from now and the interest rate is 4 percent. 
D) You receive the payment 5 years from now and the interest rate is 5 percent. 
A) You receive the payment 4 years from now and the interest rate is 4 percent. 
B) You receive the payment 4 years from now and the interest rate is 5 percent. 
C) You receive the payment 5 years from now and the interest rate is 4 percent. 
D) You receive the payment 5 years from now and the interest rate is 5 percent.

Question 11

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Accepted Answer

A) rises. The company is more likely to buy the equipment. 
B) rises. The company is less likely to buy the equipment. 
C) falls. The company is more likely to buy the equipment. 
D) falls. The company is less likely to buy the equipment. 
A) rises. The company is more likely to buy the equipment. 
B) rises. The company is less likely to buy the equipment. 
C) falls. The company is more likely to buy the equipment. 
D) falls. The company is less likely to buy the equipment.

Question 12

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Accepted Answer

The reduct

Question 13

Figure 27-6. On the graph, x represents risk and y represents return.  
-Refer to Figure 27-6. Which of the following statements is correct?

Accepted Answer

A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk, the greater the return. 
A) At point A the standard deviation of the portfolio is 3. 
B) A risk averse person always will choose to be at point A. 
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D) The figure shows that the greater the risk, the greater the return.

Question 14

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

Accepted Answer

A) $766.50 
B) $768.75 
C) $770.23 
D) None of the above are correct to the nearest cent. 
A) $766.50 
B) $768.75 
C) $770.23 
D) None of the above are correct to the nearest cent.

Question 15

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

Accepted Answer

A) $302.50 
B) $306.23 
C) $308.67 
D) $309.39 
A) $302.50 
B) $306.23 
C) $308.67 
D) $309.39

Question 16

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Accepted Answer

A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent 
A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent

Question 17

Matt's Utility Function
Wealth
Utility
$50,000
7000
51,000
7250
52,000
7499
53,000
7746
If Matt's current wealth is $51,000, then

Accepted Answer

A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. 
B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. 
C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. 
D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse. 
A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. 
B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. 
C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. 
D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse.

Question 18

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 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) 9 percent 
A) 6 percent 
B) 7 percent 
C) 8 percent 
D) 9 percent

Question 19

In answering which of the following questions would you find it necessary to calculate a future value?

Accepted Answer

A) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C) As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D) You would find it necessary to calculate a future value in order to answer all of these questions. 
A) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C) As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D) You would find it necessary to calculate a future value in order to answer all of these questions.

Question 20

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Accepted Answer

A) True 
 B)False

Exam 27: Tools of Finance

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Which of the following is a source of market risk?

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

David recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the lowest risk?​

Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your portfolio?​

List three different ways that a risk-averse person can reduce financial risk.

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Which of the following statements is correct?

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Matt's Utility Function Wealth Utility $50,000 7000 51,000 7250 52,000 7499 53,000 7746 If Matt's current wealth is $51,000, then

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct, then what is the current interest rate?

In answering which of the following questions would you find it necessary to calculate a future value?

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

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

David recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the lowest risk?

Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your portfolio?