Question 1

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Accepted Answer

A) surplus, so its price will rise. 
B) surplus, so its price will fall. 
C) shortage, so its price will rise. 
D) shortage, so its price will fall. 
A) surplus, so its price will rise. 
B) surplus, so its price will fall. 
C) shortage, so its price will rise. 
D) shortage, so its price will fall.

Question 2

After the 1982 recession, the U.S. and world economies entered into a long period

Accepted Answer

A) of high unemployment rates. 
B) high inflation rates. 
C) that has become known as the "Great Moderation." 
D) that has become known as the "Great Recession." 
A) of high unemployment rates. 
B) high inflation rates. 
C) that has become known as the "Great Moderation." 
D) that has become known as the "Great Recession."

Question 3

By diversifying, the risk of holding stock

Accepted Answer

A) can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B) can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C) can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D) can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
A) can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
B) can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds. 
C) can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds. 
D) can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

Question 4

Which of the following is not correct?

Accepted Answer

A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks. 
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D) If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis. 
A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks. 
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds. 
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions. 
D) If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis.

Question 5

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 6

Figure 14-1. The figure shows a utility function.  
-Refer to Figure 14-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

Accepted Answer

A) the risk-return tradeoff. 
B) insurance. 
C) diversification. 
D) All of the above are correct. 
A) the risk-return tradeoff. 
B) insurance. 
C) diversification. 
D) All of the above are correct.

Question 7

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 8

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Accepted Answer

A) and the example with Brad illustrate adverse selection. 
B) and the example with Brad illustrate moral hazard. 
C) illustrates adverse selection; the example with Brad illustrates moral hazard. 
D) illustrates moral hazard; the example with Brad illustrates adverse selection. 
A) and the example with Brad illustrate adverse selection. 
B) and the example with Brad illustrate moral hazard. 
C) illustrates adverse selection; the example with Brad illustrates moral hazard. 
D) illustrates moral hazard; the example with Brad illustrates adverse selection.

Question 9

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $10,000 or (2) two annual payments, each in the amount of $5,200, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the immediate payment of $10,000 if the interest rate is

Accepted Answer

A) 2 percent, but not if the interest rate is 1 percent. 
B) 3 percent, but not if the interest rate is 2 percent. 
C) 4 percent, but not if the interest rate is 3 percent. 
D) 5 percent, but not if the interest rate is 4 percent. 
A) 2 percent, but not if the interest rate is 1 percent. 
B) 3 percent, but not if the interest rate is 2 percent. 
C) 4 percent, but not if the interest rate is 3 percent. 
D) 5 percent, but not if the interest rate is 4 percent.

Question 10

The risk of a portfolio

Accepted Answer

A) increases as the number of stocks in the portfolio increases. 
B) is usually measured using a statistic called the standard diversification. 
C) is positively related to the average return of the portfolio. 
D) bears no relationship to the average return of the portfolio. 
A) increases as the number of stocks in the portfolio increases. 
B) is usually measured using a statistic called the standard diversification. 
C) is positively related to the average return of the portfolio. 
D) bears no relationship to the average return of the portfolio.

Question 11

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A) 4 percent. 
B) 6 percent. 
C) 8 percent. 
D) All of the above are correct. 
A) 4 percent. 
B) 6 percent. 
C) 8 percent. 
D) All of the above are correct.

Question 12

An index fund

Accepted Answer

A) holds only stocks and bonds that are indexed to inflation. 
B) holds all the stocks in a given stock index. 
C) guarantees a return that follows the index of leading economic indicators. 
D) typically has a lower return than a managed fund. 
A) holds only stocks and bonds that are indexed to inflation. 
B) holds all the stocks in a given stock index. 
C) guarantees a return that follows the index of leading economic indicators. 
D) typically has a lower return than a managed fund.

Question 13

Figure 14-1. The figure shows a utility function.  
-Refer to Figure 14-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?

Accepted Answer

A) 
$$\frac { 0 \mathrm {~A} } { 600 }$$ 
B) 
$$\frac { A B } { 600 }$$ 
C) 
$$\frac { 0 B } { 200 }$$ 
D) 
$$\frac { A B } { 200 }$$ 
A) 
$$\frac { 0 \mathrm {~A} } { 600 }$$ 
B) 
$$\frac { A B } { 600 }$$ 
C) 
$$\frac { 0 B } { 200 }$$ 
D) 
$$\frac { A B } { 200 }$$

Question 14

Which of the following defines an annuity?

Accepted Answer

A) For a fee, an insurance company provides you with regular income until you die. 
B) A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C) Annuity is another name for stock funds managed by mutual fund managers. 
D) Annuity is another name for any diversified portfolio. 
A) For a fee, an insurance company provides you with regular income until you die. 
B) A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C) Annuity is another name for stock funds managed by mutual fund managers. 
D) Annuity is another name for any diversified portfolio.

Question 15

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Accepted Answer

A) $X(1 + rN)N 
B) $X(1 + r)N 
C) $X(1 + rN) 
D) $X(1 + r/N)N 
A) $X(1 + rN)N 
B) $X(1 + r)N 
C) $X(1 + rN) 
D) $X(1 + r/N)N

Question 16

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Accepted Answer

A) chance of winning $120 in two years and the interest rate was 11%. 
B) chance of winning $114 in two years and the interest rate was 7%. 
C) chance of winning $110 in two years and the interest rate was 3%. 
D) None of the above are correct; a risk averse person would not accept any of the above bets. 
A) chance of winning $120 in two years and the interest rate was 11%. 
B) chance of winning $114 in two years and the interest rate was 7%. 
C) chance of winning $110 in two years and the interest rate was 3%. 
D) None of the above are correct; a risk averse person would not accept any of the above bets.

Question 17

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel argued that, in the years leading up to the financial crisis of 2008-2009,

Accepted Answer

A) financial firms acted in too risky a fashion. 
B) the Federal Reserves's efforts to rein in the risky behavior of certain financial firms were inadequate. 
C) falling house prices "crashed the banks and the economy." 
D) All of the above are correct. 
A) financial firms acted in too risky a fashion. 
B) the Federal Reserves's efforts to rein in the risky behavior of certain financial firms were inadequate. 
C) falling house prices "crashed the banks and the economy." 
D) All of the above are correct.

Question 18

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

Accepted Answer

A) $1,200.00 
B) $1,111.77 
C) $983.58 
D) $859.09 
A) $1,200.00 
B) $1,111.77 
C) $983.58 
D) $859.09

Question 19

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

Accepted Answer

A) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C) As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D) You would find it necessary to calculate a future value in order to answer all of these questions. 
A) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C) As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D) You would find it necessary to calculate a future value in order to answer all of these questions.

Question 20

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

Exam 14: The Basic Tools of Finance

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

After the 1982 recession, the U.S. and world economies entered into a long period

By diversifying, the risk of holding stock

Which of the following is not correct?

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

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

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.

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

The risk of a portfolio

Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is

An index fund

Which of the following defines an annuity?

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel argued that, in the years leading up to the financial crisis of 2008-2009,

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

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

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

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

Application: The Costs of Taxation

Application: International Trade

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 Macroeconomic Models

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

Six Debates Over Macroeconomic Policy

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