Question 1

If Julieanne is risk-averse,then she will always

Accepted Answer

A)  choose not to play a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1. 
B)  choose not to play a game where she has a 75 percent chance of winning $1 and a 25 percent chance of losing $1. 
C)  choose to play a game where she has a 52 percent chance of winning $1 and a 48 percent chance of losing $1. 
D)  All of the above are correct. 
A)  choose not to play a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1. 
B)  choose not to play a game where she has a 75 percent chance of winning $1 and a 25 percent chance of losing $1. 
C)  choose to play a game where she has a 52 percent chance of winning $1 and a 48 percent chance of losing $1. 
D)  All of the above are correct.

Question 2

Figure 27-1.The figure shows a utility function.  
-Refer to Figure 27-1.For the person to whom this utility function applies,

Accepted Answer

A)  the more wealth she has,the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has,the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. 
A)  the more wealth she has,the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has,the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

Question 3

If the efficient market hypothesis is correct,then

Accepted Answer

A)  index funds should typically beat managed funds,and usually do. 
B)  index fund should typically beat managed funds,but usually do not. 
C)  mutual funds should typically beat index funds,and usually do. 
D)  mutual funds should typically bet index funds,but usually do not. 
A)  index funds should typically beat managed funds,and usually do. 
B)  index fund should typically beat managed funds,but usually do not. 
C)  mutual funds should typically beat index funds,and usually do. 
D)  mutual funds should typically bet index funds,but usually do not.

Question 4

Which of the following best illustrates moral hazard?

Accepted Answer

A)  After a person obtains life insurance,she takes up skydiving. 
B)  A person obtains insurance knowing he is in poor health. 
C)  A person holds stock only in very risky corporations. 
D)  A person holds stocks from only a few corporations. 
A)  After a person obtains life insurance,she takes up skydiving. 
B)  A person obtains insurance knowing he is in poor health. 
C)  A person holds stock only in very risky corporations. 
D)  A person holds stocks from only a few corporations.

Question 5

If stock prices follow a random walk,then stock investors can make large profits by

Accepted Answer

A)  buying stocks whose prices have been falling for several days. 
B)  buying stocks whose prices have been rising for several days. 
C)  performing fundamental analysis of stocks using data contained in annual reports. 
D)  using inside information. 
A)  buying stocks whose prices have been falling for several days. 
B)  buying stocks whose prices have been rising for several days. 
C)  performing fundamental analysis of stocks using data contained in annual reports. 
D)  using inside information.

Question 6

Which of the following has a present value of $100?

Accepted Answer

A)  $110 in two years when the interest rate is 5 percent 
B)  $112.36 in two years when the interest rate is 6 percent 
C)  $117.49 in two years when the interest rate is 7 percent 
D)  None of the above are correct to the nearest cent. 
A)  $110 in two years when the interest rate is 5 percent 
B)  $112.36 in two years when the interest rate is 6 percent 
C)  $117.49 in two years when the interest rate is 7 percent 
D)  None of the above are correct to the nearest cent.

Question 7

Veronica deposited $1,000 into an account two years ago.The first year she earned 7 percent interest;the second year she earned 5 percent.How much money does Veronica have in her account today?

Accepted Answer

A)  $1,133.31 
B)  $1,120.00 
C)  $1,123.50 
D)  None of the above are correct to the nearest cent. 
A)  $1,133.31 
B)  $1,120.00 
C)  $1,123.50 
D)  None of the above are correct to the nearest cent.

Question 8

Which of the following has the highest future value?

Accepted Answer

A)  $100 saved for 2 years at 10 percent interest 
B)  $110 saved for 2 years at 9 percent interest 
C)  $120 saved for 2 years at 8 percent interest 
D)  $130 saved for 2 years at 7 percent interest 
A)  $100 saved for 2 years at 10 percent interest 
B)  $110 saved for 2 years at 9 percent interest 
C)  $120 saved for 2 years at 8 percent interest 
D)  $130 saved for 2 years at 7 percent interest

Question 9

Ben decided to increase the number of stocks in his portfolio.In doing so,Ben reduced

Accepted Answer

A)  both the firm-specific risk and the market risk of his portfolio. 
B)  the firm-specific risk,but not the market risk of his portfolio. 
C)  the market risk,but not the firm-specific risk of his portfolio. 
D)  neither the market risk nor the firm-specific risk of his portfolio. 
A)  both the firm-specific risk and the market risk of his portfolio. 
B)  the firm-specific risk,but not the market risk of his portfolio. 
C)  the market risk,but not the firm-specific risk of his portfolio. 
D)  neither the market risk nor the firm-specific risk of his portfolio.

Question 10

The price of a bond is equal to the sum of the present values of its future payments.Suppose a certain bond pays $50 one year from today and $1,050 two years from today.What is the price of the bond if the interest rate is 5 percent?

Accepted Answer

A)  $1,050.00 
B)  $1,045.35 
C)  $1,000.00 
D)  $945.35 
A)  $1,050.00 
B)  $1,045.35 
C)  $1,000.00 
D)  $945.35

Question 11

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: receive $2,000 five years from now.The interest rate is 15 percent.Rank these three options from highest present value to lowest present value.

Accepted Answer

A)  Option 1;Option 2;Option 3 
B)  Option 3;Option 2;Option 1 
C)  Option 2;Option 3;Option 1 
D)  Option 3;Option 1;Option 2 
A)  Option 1;Option 2;Option 3 
B)  Option 3;Option 2;Option 1 
C)  Option 2;Option 3;Option 1 
D)  Option 3;Option 1;Option 2

Question 12

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 13

Suppose the interest rate is 7 percent.Consider four payment options:
Option A: $500 today.
Option B: $550 one year from today.
Option C: $575 two years from today.
Option D: $600 three years from today.
Which of the payments has the highest present value today?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 14

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 15

If a savings account pays 5 percent annual interest,then the rule of 70 tells us that the account value will double in approximately 14 years.

Accepted Answer

A) True 
 B)False

Question 16

For a risk averse person,

Accepted Answer

A)  the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B)  the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C)  the utility function exhibits the property of increasing marginal utility. 
D)  the utility function gets steeper as wealth increases. 
A)  the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet. 
B)  the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet. 
C)  the utility function exhibits the property of increasing marginal utility. 
D)  the utility function gets steeper as wealth increases.

Exam 27: The Basic Tools of Finance

If Julieanne is risk-averse,then she will always

Figure 27-1.The figure shows a utility function. -Refer to Figure 27-1.For the person to whom this utility function applies,

If the efficient market hypothesis is correct,then

Which of the following best illustrates moral hazard?

If stock prices follow a random walk,then stock investors can make large profits by

Which of the following has a present value of $100?

Veronica deposited $1,000 into an account two years ago.The first year she earned 7 percent interest;the second year she earned 5 percent.How much money does Veronica have in her account today?

Which of the following has the highest future value?

Ben decided to increase the number of stocks in his portfolio.In doing so,Ben reduced

The price of a bond is equal to the sum of the present values of its future payments.Suppose a certain bond pays $50 one year from today and $1,050 two years from today.What is the price of the bond if the interest rate is 5 percent?

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: receive $2,000 five years from now.The interest rate is 15 percent.Rank these three options from highest present value to lowest present value.

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

Suppose the interest rate is 7 percent.Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the highest present value today?

The efficient markets hypothesis implies that

If a savings account pays 5 percent annual interest,then the rule of 70 tells us that the account value will double in approximately 14 years.

For a risk averse 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

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 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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