Question 1

Dakota rearranges her portfolio so that it has a higher average return. In doing this rearranging, she

Accepted Answer

A) raised both firm-specific risk and market risk. 
B) raised firm-specific risk, but not market risk. 
C) raised market risk, but not firm-specific risk. 
D) None of the above is correct. 
A) raised both firm-specific risk and market risk. 
B) raised firm-specific risk, but not market risk. 
C) raised market risk, but not firm-specific risk. 
D) None of the above is correct.

Question 2

A person with diminishing marginal utility of wealth is risk averse.

Accepted Answer

A) True 
 B)False

Question 3

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Accepted Answer

A) True 
 B)False

Question 4

You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,170 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,712.50 one year from today. In order for the same interest rate to apply to the two loans, X =

Accepted Answer

A) $2,366.67. 
B) $2,450.00. 
C) $2,500.00. 
D) $2,525.50. 
A) $2,366.67. 
B) $2,450.00. 
C) $2,500.00. 
D) $2,525.50.

Question 5

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False

Question 6

An asset market is said to experience a speculative bubble when

Accepted Answer

A) the price of the asset rises above what appears to be its fundamental value. 
B) the price of the asset appears to follow a random walk. 
C) the market cannot establish an equilibrium price for the asset. 
D) the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms. 
A) the price of the asset rises above what appears to be its fundamental value. 
B) the price of the asset appears to follow a random walk. 
C) the market cannot establish an equilibrium price for the asset. 
D) the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.

Question 7

What is the future value of $450 at an interest rate of 9 percent two years from today?

Accepted Answer

A) $534.65 
B) $546.35 
C) $565.18 
D) $574.13 
A) $534.65 
B) $546.35 
C) $565.18 
D) $574.13

Question 8

One way to characterize the difference between compounding and discounting is to say that

Accepted Answer

A) compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption. 
B) discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption. 
C) the process of compounding produces a future value, whereas the process of discounting produces a present value. 
D) the process of compounding produces a present value, whereas the process of discounting produces a future value. 
A) compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption. 
B) discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption. 
C) the process of compounding produces a future value, whereas the process of discounting produces a present value. 
D) the process of compounding produces a present value, whereas the process of discounting produces a future value.

Question 9

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A) $500(1.05)2 + $500/(1.05)2 
B) $500(1.05)2 + $500 
C) $500 + $500/(1.05)2 
D) $500 + $500 
A) $500(1.05)2 + $500/(1.05)2 
B) $500(1.05)2 + $500 
C) $500 + $500/(1.05)2 
D) $500 + $500

Question 10

The future value of $500 saved for two years at an interest rate of 5% is

Accepted Answer

A) $550.25. 
B) $550.00. 
C) $551.25. 
D) None of the above are correct. 
A) $550.25. 
B) $550.00. 
C) $551.25. 
D) None of the above are correct.

Question 11

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

Accepted Answer

A) 5 
B) 6 
C) 8 
D) 9 
A) 5 
B) 6 
C) 8 
D) 9

Question 12

The available evidence indicates that

Accepted Answer

A) about one-half of all managers of active mutual funds consistently outperform index funds. 
B) outperforming the market on a consistent basis is extremely difficult to do. 
C) there is little truth to the notion that there is a trade-off between risk and return. 
D) there is little truth to the efficient markets hypothesis. 
A) about one-half of all managers of active mutual funds consistently outperform index funds. 
B) outperforming the market on a consistent basis is extremely difficult to do. 
C) there is little truth to the notion that there is a trade-off between risk and return. 
D) there is little truth to the efficient markets hypothesis.

Question 13

George has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did he open his account?

Accepted Answer

A) 4 years 
B) 5 years 
C) 6 years 
D) 7 years 
A) 4 years 
B) 5 years 
C) 6 years 
D) 7 years

Question 14

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

Accepted Answer

A) $100 today plus $190 one year from today 
B) $150 today plus $140 one year from today 
C) $200 today plus $90 one year from today 
D) $250 today plus $40 one year from today 
A) $100 today plus $190 one year from today 
B) $150 today plus $140 one year from today 
C) $200 today plus $90 one year from today 
D) $250 today plus $40 one year from today

Question 15

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 16

Matt's Utility Function $$\begin{array} { c c } 
\text { Wealth } & \text { Utilty } \
\$ 50,000 & 7000 \
51,000 & 7250 \
52,000 & 7499 \
53,000 & 7746
\end{array}$$ If Matt's current wealth is $51,000, then

Accepted Answer

A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. 
B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. 
C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. 
D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse. 
A) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. 
B) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. 
C) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. 
D) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse.

Question 17

April, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, April will

Accepted Answer

A) increase the risk of her portfolio. 
B) decrease some, but not all, of the risk of her portfolio. 
C) decrease all of the risk of her portfolio. 
D) leave the risk of her portfolio unchanged from its present level. 
A) increase the risk of her portfolio. 
B) decrease some, but not all, of the risk of her portfolio. 
C) decrease all of the risk of her portfolio. 
D) leave the risk of her portfolio unchanged from its present level.

Question 18

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Accepted Answer

A) is now lower than it was before, and so Hydro Grow is less likely to build the building. 
B) is now lower than it was before, and so HydroGrow is more likely to build the building. 
C) is now higher than it was before, and so HydroGrow is less likely to build the building. 
D) is now higher than it was before, and so HydroGrow is more likely to build the building. 
A) is now lower than it was before, and so Hydro Grow is less likely to build the building. 
B) is now lower than it was before, and so HydroGrow is more likely to build the building. 
C) is now higher than it was before, and so HydroGrow is less likely to build the building. 
D) is now higher than it was before, and so HydroGrow is more likely to build the building.

Question 19

The efficient markets hypothesis implies that

Accepted Answer

A) building a portfolio based on a published list of the "most respected" companies is likely to produce a better-than-average return. 
B) if a stock rose in price last year, it is likely to rise in price this year. 
C) managed mutual funds should generally outperform indexed mutual funds. 
D) None of the above are correct. 
A) building a portfolio based on a published list of the "most respected" companies is likely to produce a better-than-average return. 
B) if a stock rose in price last year, it is likely to rise in price this year. 
C) managed mutual funds should generally outperform indexed mutual funds. 
D) None of the above are correct.

Question 20

By holding insurance a person

Accepted Answer

A) reduces the risk of a bad outcome, such as their house burning down. 
B) shares risk and so reduces the burden of risk. 
C) Both A and B are correct. 
D) Neither A nor B are correct. 
A) reduces the risk of a bad outcome, such as their house burning down. 
B) shares risk and so reduces the burden of risk. 
C) Both A and B are correct. 
D) Neither A nor B are correct.

Exam 14: The Basic Tools of Finance

Dakota rearranges her portfolio so that it has a higher average return. In doing this rearranging, she

A person with diminishing marginal utility of wealth is risk averse.

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

The future value of $1 saved today is $1/(1 + r).

An asset market is said to experience a speculative bubble when

What is the future value of $450 at an interest rate of 9 percent two years from today?

One way to characterize the difference between compounding and discounting is to say that

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

The future value of $500 saved for two years at an interest rate of 5% is

At an annual interest rate of 20 percent, about how many years will it take $100 to triple in value?

The available evidence indicates that

George has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did he open his account?

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

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

Matt's Utility Function Wealth Utilty \ 50,000 7000 51,000 7250 52,000 7499 53,000 7746 If Matt's current wealth is $51,000, then

April, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, April will

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

The efficient markets hypothesis implies that

By holding insurance a person

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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