Question 1

Figure 14-3. The figure shows a utility function for Rob.  
-Refer to Figure 14-3. From the appearance of Rob's utility function, we know that

Accepted Answer

A) if Rob owns a house, then he definitely would buy fire insurance provided the cost of the insurance were reasonable. 
B) Rob would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C) Rob is risk averse. 
D) Rob is not risk averse. 
A) if Rob owns a house, then he definitely would buy fire insurance provided the cost of the insurance were reasonable. 
B) Rob would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. 
C) Rob is risk averse. 
D) Rob is not risk averse.

Question 2

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

Accepted Answer

A) $500/(1.04)2 
B) $500 - 500(1.04)2 
C) $500 - $500/(.04)2 
D) None of the above is correct. 
A) $500/(1.04)2 
B) $500 - 500(1.04)2 
C) $500 - $500/(.04)2 
D) None of the above is correct.

Question 4

When a person engages in detailed analysis of a company to determine its value, he or she is engaging in

Accepted Answer

A) standard deviation analysis. 
B) informational analysis. 
C) fundamental analysis. 
D) efficiency analysis. 
A) standard deviation analysis. 
B) informational analysis. 
C) fundamental analysis. 
D) efficiency analysis.

Question 5

A measure of the volatility of a variable is its

Accepted Answer

A) present value. 
B) future value. 
C) return. 
D) standard deviation. 
A) present value. 
B) future value. 
C) return. 
D) standard deviation.

Question 6

Diversification of a portfolio

Accepted Answer

A) can eliminate market risk, but it cannot eliminate firm-specific risk. 
B) can eliminate firm-specific risk, but it cannot eliminate market risk. 
C) increases the portfolio's standard deviation. 
D) is not necessary for a person who is risk averse. 
A) can eliminate market risk, but it cannot eliminate firm-specific risk. 
B) can eliminate firm-specific risk, but it cannot eliminate market risk. 
C) increases the portfolio's standard deviation. 
D) is not necessary for a person who is risk averse.

Question 7

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct what is the current interest rate?

Accepted Answer

A) 6 percent 
B) 7 percent 
C) 8 percent 
D) 9 percent 
A) 6 percent 
B) 7 percent 
C) 8 percent 
D) 9 percent

Question 8

John says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest. George says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent.

Accepted Answer

A) John and George are both correct. 
B) John and George are both incorrect. 
C) Only John is correct. 
D) Only George is correct. 
A) John and George are both correct. 
B) John and George are both incorrect. 
C) Only John is correct. 
D) Only George is correct.

Question 9

At which interest rate is the present value of $185.71 three years from today equal to $175 today?

Accepted Answer

A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent 
A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent

Question 10

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A) Interest rates rise and truck prices rise. 
B) Interest rates fall and truck prices rise. 
C) Interest rates rise and truck prices fall. 
D) Interest rates fall and truck prices fall. 
A) Interest rates rise and truck prices rise. 
B) Interest rates fall and truck prices rise. 
C) Interest rates rise and truck prices fall. 
D) Interest rates fall and truck prices fall.

Question 11

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Accepted Answer

A) provide a higher return than the market average. 
B) provide a lower return than the market average. 
C) pay higher returns when interest rates rise and lower returns when interest rates fall. 
D) pay lower returns when interest rates rise and higher returns when interest rates fall. 
A) provide a higher return than the market average. 
B) provide a lower return than the market average. 
C) pay higher returns when interest rates rise and lower returns when interest rates fall. 
D) pay lower returns when interest rates rise and higher returns when interest rates fall.

Question 12

According to fundamental analysis, a saver should prefer to buy stocks that are

Accepted Answer

A) undervalued. This means the price of the stock is low given the value of the corporation. 
B) undervalued. This means the value of the corporation is low given the price of stock. 
C) overvalued. This means the price of the stock is high given the value of the corporation. 
D) overvalued. This means the value of the corporation is high given the price of stock. 
A) undervalued. This means the price of the stock is low given the value of the corporation. 
B) undervalued. This means the value of the corporation is low given the price of stock. 
C) overvalued. This means the price of the stock is high given the value of the corporation. 
D) overvalued. This means the value of the corporation is high given the price of stock.

Question 13

Which of the following statements best describes the economist's view of finance and the financial system?

Accepted Answer

A) The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
B) The financial system, while interesting, is not very important to the functioning of the economy; however, the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
C) The financial system is very important to the functioning of the economy; however, the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful. 
D) The field of finance is intimately concerned with the financial system and the tools of finance, and financial economists see great importance in them; however, the "mainstream" economist sees little value in studying financial markets or the tools of finance. 
A) The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
B) The financial system, while interesting, is not very important to the functioning of the economy; however, the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
C) The financial system is very important to the functioning of the economy; however, the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful. 
D) The field of finance is intimately concerned with the financial system and the tools of finance, and financial economists see great importance in them; however, the "mainstream" economist sees little value in studying financial markets or the tools of finance.

Question 14

Svetlana is risk averse. Which of the following is correct about Svetlana?

Accepted Answer

A) Her marginal utility of wealth increases as her income increases. 
B) She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C) Her utility function is a straight line. 
D) None of the above are correct. 
A) Her marginal utility of wealth increases as her income increases. 
B) She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C) Her utility function is a straight line. 
D) None of the above are correct.

Question 15

Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?

Accepted Answer

A) $100(1 + .0410) 
B) $100(1 + .0410) 
C) $100 *10(1 + .04) 
D) $100(1 + .04)10 
A) $100(1 + .0410) 
B) $100(1 + .0410) 
C) $100 *10(1 + .04) 
D) $100(1 + .04)10

Question 16

Marcus puts a greater proportion of his portfolio into government bonds. Marcus's action

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.

Question 17

Eloise deposits $250 into an account and one year later has $272.50. What interest rate was paid on Eloise's deposit?

Accepted Answer

A) 8 percent 
B) 9 percent 
C) 10 percent 
D) None of the above is correct. 
A) 8 percent 
B) 9 percent 
C) 10 percent 
D) None of the above is correct.

Question 18

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Accepted Answer

A) every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B) every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C) the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D) the average risk-averse person will earn a lower rate of return than the average non-risk-averse person. 
A) every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B) every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C) the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D) the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.

Question 19

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 20

Which of the following actions best illustrates adverse selection?

Accepted Answer

A) A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B) A person dislikes losing $400 more than he likes winning $400. 
C) After obtaining automobile insurance a person drives less carefully than before. 
D) A person intending to take up dangerous hobbies applies for life insurance. 
A) A person purposely chooses bonds of corporations with high default risk because of the high returns. 
B) A person dislikes losing $400 more than he likes winning $400. 
C) After obtaining automobile insurance a person drives less carefully than before. 
D) A person intending to take up dangerous hobbies applies for life insurance.

Exam 14: The Basic Tools of Finance

Figure 14-3. The figure shows a utility function for Rob. -Refer to Figure 14-3. From the appearance of Rob's utility function, we know that

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

When a person engages in detailed analysis of a company to determine its value, he or she is engaging in

A measure of the volatility of a variable is its

Diversification of a portfolio

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account. If your accountant is correct what is the current interest rate?

At which interest rate is the present value of $185.71 three years from today equal to $175 today?

According to fundamental analysis, a saver should prefer to buy stocks that are

Which of the following statements best describes the economist's view of finance and the financial system?

Svetlana is risk averse. Which of the following is correct about Svetlana?

Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?

Marcus puts a greater proportion of his portfolio into government bonds. Marcus's action

Eloise deposits $250 into an account and one year later has $272.50. What interest rate was paid on Eloise's deposit?

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

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

Which of the following actions best illustrates adverse selection?

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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