Question 1

Which of the following best illustrates diversification?

Accepted Answer

A) A company that produces many different products decides to produce fewer. 
B) After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C) Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services. 
D) A person decides to purchase only stocks that have paid high dividends in the past. 
A) A company that produces many different products decides to produce fewer. 
B) After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C) Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services. 
D) A person decides to purchase only stocks that have paid high dividends in the past.

Question 2

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 3

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

Question 4

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

Accepted Answer

A) A decrease in your salary 
B) An increase in the time until the payment is made 
C) A decrease in the size of the payment 
D) A decrease in the interest rate 
A) A decrease in your salary 
B) An increase in the time until the payment is made 
C) A decrease in the size of the payment 
D) A decrease in the interest rate

Question 5

Fatima knows that she has about $122 in her bank account. She knows she earned an interest rate of 3 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Accepted Answer

A) $4,066.67 
B) $118.45 
C) $125.66 
D) $112.95 
A) $4,066.67 
B) $118.45 
C) $125.66 
D) $112.95

Question 6

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 7

Suppose you put $475 into a bank account today. Interest is paid annually and the annual interest rate is 4.25 percent. The future value of the $475 after 3 years is

Accepted Answer

A) $419.24. 
B) $441.87. 
C) $610.57. 
D) $538.17. 
A) $419.24. 
B) $441.87. 
C) $610.57. 
D) $538.17.

Question 8

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces

Question 9

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu

Question 10

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 11

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Market risk refers to economywide risk c

Question 12

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Accepted Answer

The presen

Question 13

Why might someone be willing to pay more than the fundamental value for a stock?

Accepted Answer

She may believe that

Question 14

Historically, stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) if Ren owns a house, he would not consider buying fire insurance. 
B) Ren would prefer to hold a portfolio of stocks with an average return of 6 percent and a standard deviation of 1 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 5 percent. 
C) Ren would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D) Ren is not risk averse. 
A) if Ren owns a house, he would not consider buying fire insurance. 
B) Ren would prefer to hold a portfolio of stocks with an average return of 6 percent and a standard deviation of 1 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 5 percent. 
C) Ren would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D) Ren is not risk averse.

Question 16

Figure 27-3
The following figure shows a utility function for Dexter.  
-Refer to Figure 27-3. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph. 
A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. 
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. 
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. 
D) This cannot be determined from the graph.

Question 17

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Accepted Answer

A) Option 1; Option 2; Option 3 
B) Option 3; Option 2; Option 1 
C) Option 2; Option 3; Option 1 
D) Option 3; Option 1; Option 2 
A) Option 1; Option 2; Option 3 
B) Option 3; Option 2; Option 1 
C) Option 2; Option 3; Option 1 
D) Option 3; Option 1; Option 2

Question 18

The relation between return and risk.

Accepted Answer

The answer of The relation between return and risk....

Question 19

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Accepted Answer

A) True 
 B)False

Question 20

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 7% interest rate, the present val

Exam 27: Tools of Finance

Which of the following best illustrates diversification?

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

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

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

Fatima knows that she has about $122 in her bank account. She knows she earned an interest rate of 3 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Suppose you put $475 into a bank account today. Interest is paid annually and the annual interest rate is 4.25 percent. The future value of the $475 after 3 years is

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

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

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Why might someone be willing to pay more than the fundamental value for a stock?

Historically, stocks have offered higher rates of return than bonds.

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

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. Suppose Dexter begins with $1,300 in wealth. Starting from there,

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

The relation between return and risk.

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

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

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