Question 1

Fundamental analysis determines the value of a stock based on

Accepted Answer

A) dividends. 
B) the expected final sale price. 
C) the ability of the corporation to earn profits. 
D) all of the above. 
A) dividends. 
B) the expected final sale price. 
C) the ability of the corporation to earn profits. 
D) all of the above.

Question 2

If you presently have $6,000 saved and earn 15 percent interest per year,about how many years will it take for your investment to triple?

Accepted Answer

A) 6 
B) 8 
C) 10 
D) 12 
A) 6 
B) 8 
C) 10 
D) 12

Question 3

Which of the following is correct concerning a risk-averse person?

Accepted Answer

A) She would not play games where the probability of winning and losing a dollar are the same. 
B) She might not buy health insurance if she thinks her risks are low. 
C) Her marginal utility of wealth decreases as her income increases. 
D) All of the above are correct. 
A) She would not play games where the probability of winning and losing a dollar are the same. 
B) She might not buy health insurance if she thinks her risks are low. 
C) Her marginal utility of wealth decreases as her income increases. 
D) All of the above are correct.

Question 4

If stock prices follow a random walk,it means

Accepted Answer

A) long periods of declining prices are followed by long periods of rising prices. 
B) the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day. 
C) stock prices are unrelated to random events that shock the economy. 
D) stock prices are just as likely to rise as to fall at any given time. 
A) long periods of declining prices are followed by long periods of rising prices. 
B) the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day. 
C) stock prices are unrelated to random events that shock the economy. 
D) stock prices are just as likely to rise as to fall at any given time.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Which of the following best illustrates adverse selection?

Accepted Answer

A) A person adds risky stock to their portfolio. 
B) A person who has narrowly avoided many accidents applies for automobile insurance. 
C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D) A person gets homeowners insurance and then checks their smoke detector batteries less frequently. 
A) A person adds risky stock to their portfolio. 
B) A person who has narrowly avoided many accidents applies for automobile insurance. 
C) A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. 
D) A person gets homeowners insurance and then checks their smoke detector batteries less frequently.

Question 7

Norne Corporation is considering building a new plant.It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today.Of the interest rates below,which is the highest interest rate at which Norne would still be willing to build the plant?

Accepted Answer

A) 3 percent 
B) 3.5 percent 
C) 4 percent 
D) 4.5 percent 
A) 3 percent 
B) 3.5 percent 
C) 4 percent 
D) 4.5 percent

Question 8

Draw graphs showing the following three relationships.
1. The relation between utility and wealth for a risk averse consumer.
2. The relation between risk deviation and the number of stocks in a portfolio.
3. The relation between return and risk.

Accepted Answer

The answer of Draw graphs showing the following three relationships.
1....

Question 9

Which if any of the present values below are correct?

Accepted Answer

A) $100 one year from today at 2 percent interest = $98.81 
B) $200 two years from today at 3 percent interest = $188.22 
C) $300 three years from today at 4 percent interest = $234.34 
D) None of the above are correct to the nearest penny. 
A) $100 one year from today at 2 percent interest = $98.81 
B) $200 two years from today at 3 percent interest = $188.22 
C) $300 three years from today at 4 percent interest = $234.34 
D) None of the above are correct to the nearest penny.

Question 10

Three people go to the bank to cash in their accounts.Amy had her money in an account for 25 years at 4 percent interest.Bill had his money in an account for 20 years at 5 percent interest.Celia had her money in an account for 5 years at 20 percent interest.If each of them originally deposited $500 in their accounts,which of them gets the most money when they cash in their accounts?

Accepted Answer

A) Amy 
B) Bill 
C) Celia 
D) They each get the same amount. 
A) Amy 
B) Bill 
C) Celia 
D) They each get the same amount.

Question 11

Suppose that interest rates unexpectedly rise and that Carter 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 these things make the price of Carter 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 12

Hector puts $150 into an account when the interest rate is 4 percent.Later he checks his balance and finds he has about $168.73.How long did Hector wait to check his balance?

Accepted Answer

A) 3 years 
B) 3.5 years 
C) 4 years 
D) 4.5 years 
A) 3 years 
B) 3.5 years 
C) 4 years 
D) 4.5 years

Question 13

Which of the following games might a risk-averse person be willing to play?

Accepted Answer

A) A game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1. 
B) A game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1. 
C) Both A and B. 
D) Neither A nor B 
A) A game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1. 
B) A game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1. 
C) Both A and B. 
D) Neither A nor B

Question 14

When he was 18,Gerald put $100 into an account at an interest rate of 8 percent.He now has about $171.38 in this account.How many years did Gerald leave this money in his account?

Accepted Answer

A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years 
A) 5 years 
B) 6 years 
C) 7 years 
D) 8 years

Question 15

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years,you will have $998.25 in your account.If your accountant is correct,what is the current interest rate?

Accepted Answer

A) 9 percent 
B) 10 percent 
C) 11 percent 
D) 12 percent 
A) 9 percent 
B) 10 percent 
C) 11 percent 
D) 12 percent

Question 16

The efficient markets hypothesis says that

Accepted Answer

A) only individual investors can make money in the stock market. 
B) it should be difficult to find stocks whose price differs from their fundamental value. 
C) stock prices do not follow a random walk. 
D) All of the above. 
A) only individual investors can make money in the stock market. 
B) it should be difficult to find stocks whose price differs from their fundamental value. 
C) stock prices do not follow a random walk. 
D) All of the above.

Question 17

You have a contract with someone who has agreed to pay you $20,000 in four years.She offers to pay you now instead.For which of the following interest rates and payments would you take the money today?.

Accepted Answer

A) 8%, $15,000 
B) 7%, $16,000 
C) 6%, $17,000 
D) All of the above are correct. 
A) 8%, $15,000 
B) 7%, $16,000 
C) 6%, $17,000 
D) All of the above are correct.

Question 18

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

Accepted Answer

A) market risk. 
B) moral hazard. 
C) adverse selection. 
D) risk aversion. 
A) market risk. 
B) moral hazard. 
C) adverse selection. 
D) risk aversion.

Question 19

You are expecting to receive $1,000 at some time in the future.Which of the following would unambiguously decrease the present value of this future payment?

Accepted Answer

A) Interest rates rise and you get the payment sooner. 
B) Interest rates rise and you have to wait longer for the payment. 
C) Interest rates fall and you get the payment sooner. 
D) Interest rates fall and you have to wait longer to get the payment. 
A) Interest rates rise and you get the payment sooner. 
B) Interest rates rise and you have to wait longer for the payment. 
C) Interest rates fall and you get the payment sooner. 
D) Interest rates fall and you have to wait longer to get the payment.

Question 20

Marcus puts a greater proportion of his portfolio into government bonds.This

Accepted Answer

A) increases both risk and the average rate of return 
B) decreases both risk and the average rate of return 
C) increases risk, but decreases the average rate of return 
D) decreases risk, but increases the average rate of return 
A) increases both risk and the average rate of return 
B) decreases both risk and the average rate of return 
C) increases risk, but decreases the average rate of return 
D) decreases risk, but increases the average rate of return

Exam 27: The Basic Tools of Finance

Fundamental analysis determines the value of a stock based on

If you presently have $6,000 saved and earn 15 percent interest per year,about how many years will it take for your investment to triple?

Which of the following is correct concerning a risk-averse person?

If stock prices follow a random walk,it means

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

Which of the following best illustrates adverse selection?

Norne Corporation is considering building a new plant.It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today.Of the interest rates below,which is the highest interest rate at which Norne would still be willing to build the plant?

Draw graphs showing the following three relationships. 1. The relation between utility and wealth for a risk averse consumer. 2. The relation between risk deviation and the number of stocks in a portfolio. 3. The relation between return and risk.

Which if any of the present values below are correct?

Hector puts $150 into an account when the interest rate is 4 percent.Later he checks his balance and finds he has about $168.73.How long did Hector wait to check his balance?

Which of the following games might a risk-averse person be willing to play?

When he was 18,Gerald put $100 into an account at an interest rate of 8 percent.He now has about $171.38 in this account.How many years did Gerald leave this money in his account?

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years,you will have $998.25 in your account.If your accountant is correct,what is the current interest rate?

The efficient markets hypothesis says that

You have a contract with someone who has agreed to pay you $20,000 in four years.She offers to pay you now instead.For which of the following interest rates and payments would you take the money today?.

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

You are expecting to receive $1,000 at some time in the future.Which of the following would unambiguously decrease the present value of this future payment?

Marcus puts a greater proportion of his portfolio into government bonds.This

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

Supply, demand, and Government Policies

Consumers, producers, and the Efficiency of Markets

Application: 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

Oligopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment

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 Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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