Question 1

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Accepted Answer

A) Broker A: "There are risks in holding stocks, even in a highly diversified portfolio." 
B) Broker B: "Portfolios with smaller standard deviations have lower risk." 
C) Broker C: "Stocks with greater risks offer lower average returns." 
D) They all gave her correct advice. 
A) Broker A: "There are risks in holding stocks, even in a highly diversified portfolio." 
B) Broker B: "Portfolios with smaller standard deviations have lower risk." 
C) Broker C: "Stocks with greater risks offer lower average returns." 
D) They all gave her correct advice.

Question 2

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 3

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Accepted Answer

A) True 
 B)False

Question 4

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A) Stock prices should follow a random walk. 
B) Index funds should typically outperform highly managed funds. 
C) News has no effect on stock prices. 
D) There is little point in spending many hours studying the business pages looking for undervalued stocks. 
A) Stock prices should follow a random walk. 
B) Index funds should typically outperform highly managed funds. 
C) News has no effect on stock prices. 
D) There is little point in spending many hours studying the business pages looking for undervalued stocks.

Question 6

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Accepted Answer

A) 80 to 100. 
B) 40 to 80. 
C) 10 to 20. 
D) 1 to 10. 
A) 80 to 100. 
B) 40 to 80. 
C) 10 to 20. 
D) 1 to 10.

Question 7

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.

Accepted Answer

A) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
A) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B) Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D) Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Question 8

If the efficient markets hypothesis is correct, then

Accepted Answer

A) the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B) the stock market is informationally efficient. 
C) stock prices never follow a random walk. 
D) at the market price, more people think the stock is overvalued rather than undervalued. 
A) the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B) the stock market is informationally efficient. 
C) stock prices never follow a random walk. 
D) at the market price, more people think the stock is overvalued rather than undervalued.

Question 9

Figure 27-1
The following figure shows a utility function for Ren.  
-Refer to Figure 27-1. Suppose the vertical distance between the points (0, A) and (0, B) is 9. If his wealth increased from $1,050 to $1,350, then

Accepted Answer

A) Ren's subjective measure of his well-being would increase by less than 9 units. 
B) Ren's subjective measure of his well-being would increase by more than 9 units. 
C) Ren would change from being a risk-averse person into a person who is not risk averse. 
D) Ren would change from being a person who is not risk averse into a risk-averse person. 
A) Ren's subjective measure of his well-being would increase by less than 9 units. 
B) Ren's subjective measure of his well-being would increase by more than 9 units. 
C) Ren would change from being a risk-averse person into a person who is not risk averse. 
D) Ren would change from being a person who is not risk averse into a risk-averse person.

Question 10

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 11

Suppose your uncle offers you $200 today or $355 in 8 years. You would prefer to take the $200 today if the interest rate is

Accepted Answer

A) 7 percent. 
B) 6 percent. 
C) 8 percent. 
D) 5 percent. 
A) 7 percent. 
B) 6 percent. 
C) 8 percent. 
D) 5 percent.

Question 12

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. Is Dave risk averse? Explain.

Accepted Answer

Yes, Dave is risk averse. The

Question 13

Define the efficient markets hypothesis.

Accepted Answer

The efficient market hypothesi

Question 14

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is

Accepted Answer

A) no less than 9.48 percent. 
B) no greater than 9.48 percent. 
C) no less than 10.83 percent. 
D) no greater than 10.83 percent. 
A) no less than 9.48 percent. 
B) no greater than 9.48 percent. 
C) no less than 10.83 percent. 
D) no greater than 10.83 percent.

Question 15

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Accepted Answer

A) True 
 B)False

Question 16

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

Accepted Answer

A) True 
 B)False

Question 17

Riley says that the present value of $700 to be received one year from today if the interest rate is 6 percent is less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Anh says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

Accepted Answer

A) Both Riley and Anh are correct. 
B) Both Riley and Anh are incorrect. 
C) Only Riley is correct. 
D) Only Anh is correct. 
A) Both Riley and Anh are correct. 
B) Both Riley and Anh are incorrect. 
C) Only Riley is correct. 
D) Only Anh is correct.

Question 18

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

Accepted Answer

A) True 
 B)False

Question 19

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Accepted Answer

A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction. 
A) have no effect on its stock price. 
B) raise the price of the stock. 
C) lower the price of the stock. 
D) change the price of the stock in a random direction.

Question 20

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

Accepted Answer

A) Should Ryan put $2,000 today into a 5-year certificate of deposit that pays 5percent annual interest? 
B) Should XYZ Corporation buy a factory today for $4 million, knowing that the factory will yield the corporation $5 million after 4 years? 
C) If Ellie puts $1,000 today into a bank account that pays 4 percent interest, then how much will she have in the account after 3 years? 
D) If William lends his friend Miya $450, how much will she owe him in a year if she insists on paying 5 percent interest? 
A) Should Ryan put $2,000 today into a 5-year certificate of deposit that pays 5percent annual interest? 
B) Should XYZ Corporation buy a factory today for $4 million, knowing that the factory will yield the corporation $5 million after 4 years? 
C) If Ellie puts $1,000 today into a bank account that pays 4 percent interest, then how much will she have in the account after 3 years? 
D) If William lends his friend Miya $450, how much will she owe him in a year if she insists on paying 5 percent interest?

Exam 27: Tools of Finance

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Which of the following is not consistent with the efficient market hypothesis?

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.

If the efficient markets hypothesis is correct, then

Figure 27-1 The following figure shows a utility function for Ren. -Refer to Figure 27-1. Suppose the vertical distance between the points (0, A) and (0, B) is 9. If his wealth increased from $1,050 to $1,350, then

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

Suppose your uncle offers you $200 today or $355 in 8 years. You would prefer to take the $200 today if the interest rate is

Scenario 27-2 ​ Suppose Dave has a utility function U=4W1/2U = 4 W ^ { 1 / 2 }U=4W1/2 where W is his wealth in millions of dollars and U is the utility he obtains. ​ -Refer to Scenario 27-2. Is Dave risk averse? Explain.

Define the efficient markets hypothesis.

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a speculative bubble.

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

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

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

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. Is Dave risk averse? Explain.