Exam 27: Tools of Finance

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Table 27-1 ​ $\text { Kevin's Utility Function }$ W ealth (Dollars) Utility 50,000 3,000 51,000 3,140 52,000 3,266 53,000 3,373 ​ ​ -Refer to Table 27-1. If Kevin's current wealth is $51,000, then

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

The rule of 70 applies to a growing savings account but not to a growing economy.

Kevin 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 highest average annual rate of return?

Russell holds stocks in four companies. If he adds stocks of several more companies he will decrease

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?

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 27-1 The following figure shows a utility function for Ren. -Refer to Figure 27-1. From the appearance of the utility function, we know that

Scenario 27-1 ​ Lisa has a utility function $U = W ^ { 1 / 2 }$ 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 $16 million with probability P and pays $4 million with probability (1-P). Given Lisa's utility function, how high does P need to be before Lisa will prefer option B?

Figure 27-4 -Which of the following is a source of market risk?

Which of the following actions best illustrates adverse selection?

On a graph with utility on the vertical axis and wealth on the horizontal axis, diminishing marginal utility of wealth implies that the utility function is

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

List two ways a risk adverse person may attempt to reduce risks.

Rashad is risk averse and has $3,000 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 $3,307.50 in two years. Option C is a high-risk stock that is expected to be worth about $3,646.52 in four years. Rashad should choose

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?