Question 1

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

Accepted Answer

A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C) Alex is risk averse. 
D) Alex is not risk averse. 
A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. 
B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C) Alex is risk averse. 
D) Alex is not risk averse.

Question 2

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the following makes the price of FineLine Corporation Stock fall?

Accepted Answer

A) Both the interest rate rising and the revenue announcement 
B) Neither the interest rate rising nor the revenue announcement 
C) Only the interest rate rising 
D) Only the revenue announcement 
A) Both the interest rate rising and the revenue announcement 
B) Neither the interest rate rising nor the revenue announcement 
C) Only the interest rate rising 
D) Only the revenue announcement

Question 3

In the 15 years ending February 2016, most active portfolio managers failed to beat the market.

Accepted Answer

A) True 
 B)False

Question 4

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?

Accepted Answer

A) 7 percent 
B) 8 percent 
C) 9 percent 
D) 10 percent 
A) 7 percent 
B) 8 percent 
C) 9 percent 
D) 10 percent

Question 5

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $5,000 or (2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two 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

Figure 27-1
The following figure shows a utility function for Ren.  
-Refer to Figure 27-1. Suppose Ren begins with $1,050 in wealth. Which of the following coin-flip bets would he definitely not be willing to accept?

Accepted Answer

A) If it is "heads," he wins $109; if it is tails, he loses $104. 
B) If it is "heads," he wins $150; if it is tails, he loses $150. 
C) If it is "heads," he wins $150; if it is tails, he loses $140. 
D) He definitely would not accept any of these bets. 
A) If it is "heads," he wins $109; if it is tails, he loses $104. 
B) If it is "heads," he wins $150; if it is tails, he loses $150. 
C) If it is "heads," he wins $150; if it is tails, he loses $140. 
D) He definitely would not accept any of these bets.

Question 7

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 8

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Accepted Answer

A) True 
 B)False

Question 9

Scenario 27-2
​
Suppose Dave has a utility function
 $$U = 4 W ^ { 1 / 2 }$$ where W is his wealth in millions of dollars and U is the utility he obtains.
​
-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability (1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?

Accepted Answer

Dave will prefer option B if t

Question 10

Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance. This is an example of the moral hazard problem associated with insurance.​

Accepted Answer

A) True 
 B)False

Question 11

What is meant by an asset bubble?

Accepted Answer

The price of an asse

Question 12

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 13

The market for insurance is one example of reducing risk by using diversification.

Accepted Answer

A) True 
 B)False

Question 14

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Accepted Answer

A) An interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B) An interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C) An interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D) An interest rate of 4.5 percent, with no processing fee and no bonus 
A) An interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account 
B) An interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account 
C) An interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account 
D) An interest rate of 4.5 percent, with no processing fee and no bonus

Question 15

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

A) True 
 B)False

Question 16

Scenario 27-2
​
Suppose Dave has a utility function
 $$U = 4 W ^ { 1 / 2 }$$ where W is his wealth in millions of dollars and U is the utility he obtains.
​
-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $0 with probability 0.8 and pays $10 million with probability 0.2. Given Dave's utility function, will he prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Dave receives from

Question 17

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the company's executives may take on greater risks than stockholders desire. This example illustrates

Accepted Answer

A) moral hazard and market risk. 
B) moral hazard and firm-specific risk. 
C) adverse selection and market risk. 
D) adverse selection and firm-specific risk. 
A) moral hazard and market risk. 
B) moral hazard and firm-specific risk. 
C) adverse selection and market risk. 
D) adverse selection and firm-specific risk.

Question 18

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

Accepted Answer

A) The two-year account at 9 percent 
B) The three-year account at 6 percent 
C) The six-year account at 3 percent 
D) The accounts are all worth the same. 
A) The two-year account at 9 percent 
B) The three-year account at 6 percent 
C) The six-year account at 3 percent 
D) The accounts are all worth the same.

Question 19

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

Approximat

Question 20

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Accepted Answer

Yes, according to the efficient markets

Exam 27: Tools of Finance

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

In the 15 years ending February 2016, most active portfolio managers failed to beat the market.

Figure 27-1 The following figure shows a utility function for Ren. -Refer to Figure 27-1. Suppose Ren begins with $1,050 in wealth. Which of the following coin-flip bets would he definitely not be willing to accept?

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance. This is an example of the moral hazard problem associated with insurance.​

What is meant by an asset bubble?

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

The market for insurance is one example of reducing risk by using diversification.

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the company's executives may take on greater risks than stockholders desire. This example illustrates

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

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 Nations 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

Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance. This is an example of the moral hazard problem associated with insurance.