Question 1

Fundamental analysis shows that stock in FaceIt! Cosmetics Corporation has a present value that is higher than its price.

Accepted Answer

A)  This stock is overvalued;you should consider adding it to your portfolio. 
B)  This stock is overvalued;you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued;you should consider adding it to your portfolio. 
D)  This stock is undervalued;you shouldn't consider adding it to your portfolio. 
A)  This stock is overvalued;you should consider adding it to your portfolio. 
B)  This stock is overvalued;you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued;you should consider adding it to your portfolio. 
D)  This stock is undervalued;you shouldn't consider adding it to your portfolio.

Question 2

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Accepted Answer

A) True 
 B)False

Question 3

What is the future value of $450 at an interest rate of 15 percent two years from today?

Accepted Answer

A)  $525.87 
B)  $566.00 
C)  $585.00 
D)  $595.13 
A)  $525.87 
B)  $566.00 
C)  $585.00 
D)  $595.13

Question 4

Mary talked to several stockbrokers and made the following conclusions.Which,if any,of her conclusions are correct?

Accepted Answer

A)  It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B)  Stock prices,even if not exactly a random walk,are very close to it. 
C)  Some people have made a lot of money in the stock market by using insider information,but these cases are not contrary to the efficient markets hypothesis. 
D)  All of Mary's conclusions are correct. 
A)  It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B)  Stock prices,even if not exactly a random walk,are very close to it. 
C)  Some people have made a lot of money in the stock market by using insider information,but these cases are not contrary to the efficient markets hypothesis. 
D)  All of Mary's conclusions are correct.

Question 5

Fundamental analysis is

Accepted Answer

A)  the study of the relation between risk and return of stock portfolios. 
B)  the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C)  the study of a company's accounting statements and future prospects to determine its value. 
D)  a method used to determine how adding stocks to a portfolio will change the risk of the portfolio. 
A)  the study of the relation between risk and return of stock portfolios. 
B)  the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C)  the study of a company's accounting statements and future prospects to determine its value. 
D)  a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.

Question 6

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 7

Roger determines that if Aim Corporation has high revenues,then Zest Corporation will have low revenues,and that if Aim Corporation has low revenues,Zest Corporation will have high revenues.He buys stock in both corporations.

Accepted Answer

A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk,but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk. 
A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk,but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk.

Question 8

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 20 years?

Accepted Answer

A)  $1(1 + .05)20 
B)  $1(1 + .0520)20 
C)  $1(1 + .0520) 
D)  $1(1 + 20/.05)20 
A)  $1(1 + .05)20 
B)  $1(1 + .0520)20 
C)  $1(1 + .0520) 
D)  $1(1 + 20/.05)20

Question 9

Figure 27-1.The figure shows a utility function.  
-Refer to Figure 27-1.Suppose the person to whom this utility function applies begins with $600 in wealth.Starting from there,

Accepted Answer

A)  she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B)  the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth. 
C)  the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth. 
D)  the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth. 
A)  she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B)  the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth. 
C)  the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth. 
D)  the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.

Question 10

As the interest rate increases,what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces

Question 11

Yoyo's Frozen Yogurt,Inc.is thinking of building a new warehouse.They believe that this will given them $50,000 of additional revenue at the end of one year,$60,000 additional revenue at the end of two years,and $70,000 in additional revenue at the end of three years.If the interest rate is 5 percent,Yoyo would be willing to pay

Accepted Answer

A)  $140,000,but not $150,000. 
B)  $150,000,but not $160,000. 
C)  $160,000,but not $170,000. 
D)  $170,000,but not $180,000. 
A)  $140,000,but not $150,000. 
B)  $150,000,but not $160,000. 
C)  $160,000,but not $170,000. 
D)  $170,000,but not $180,000.

Question 12

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 13

According to the rule of 70,if a person's saving doubles in 10 years,what interest rate were they earning?

Accepted Answer

A)  3.5 
B)  7 
C)  14 
D)  None of the above is correct. 
A)  3.5 
B)  7 
C)  14 
D)  None of the above is correct.

Question 14

A person's subjective measure of well-being or satisfaction is called aversion.

Accepted Answer

A) True 
 B)False

Question 15

If the interest rate is 7.5 percent,then what is the present value of $4,000 to be received in 6 years?

Accepted Answer

A)  $2,420.68 
B)  $2,591.85 
C)  $2,996.33 
D)  $3,040.63 
A)  $2,420.68 
B)  $2,591.85 
C)  $2,996.33 
D)  $3,040.63

Question 16

In the late 1990s,Fed Chairperson Alan Greenspan believed that the market was

Accepted Answer

A)  overvalued,but stock prices continued to rise through mid 2002. 
B)  overvalued,and stock prices fell by mid 2002. 
C)  undervalued,but stock prices continued to fall into mid 2002. 
D)  undervalued,but stock prices continued to rise even into mid 2002. 
A)  overvalued,but stock prices continued to rise through mid 2002. 
B)  overvalued,and stock prices fell by mid 2002. 
C)  undervalued,but stock prices continued to fall into mid 2002. 
D)  undervalued,but stock prices continued to rise even into mid 2002.

Question 17

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by

Question 18

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 19

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A)  impossible.Many studies find that beating the market is,at best,extremely difficult. 
B)  impossible.Many studies find that beating the market is relatively easy. 
C)  relatively easy.Many studies find that beating the market is,at best,extremely difficult. 
D)  relatively easy.Many studies find that beating the market is relatively easy. 
A)  impossible.Many studies find that beating the market is,at best,extremely difficult. 
B)  impossible.Many studies find that beating the market is relatively easy. 
C)  relatively easy.Many studies find that beating the market is,at best,extremely difficult. 
D)  relatively easy.Many studies find that beating the market is relatively easy.

Question 20

You put $150 in the bank two years ago and forgot about it.The bank sends you a notice that you now have $166.95 in your account.What interest rate did you earn?

Accepted Answer

A)  5.50 percent 
B)  5.65 percent 
C)  6.25 percent 
D)  7.05 percent 
A)  5.50 percent 
B)  5.65 percent 
C)  6.25 percent 
D)  7.05 percent

Exam 27: The Basic Tools of Finance

Fundamental analysis shows that stock in FaceIt! Cosmetics Corporation has a present value that is higher than its price.

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

What is the future value of $450 at an interest rate of 15 percent two years from today?

Mary talked to several stockbrokers and made the following conclusions.Which,if any,of her conclusions are correct?

Fundamental analysis is

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

Roger determines that if Aim Corporation has high revenues,then Zest Corporation will have low revenues,and that if Aim Corporation has low revenues,Zest Corporation will have high revenues.He buys stock in both corporations.

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 20 years?

Figure 27-1.The figure shows a utility function. -Refer to Figure 27-1.Suppose the person to whom this utility function applies begins with $600 in wealth.Starting from there,

As the interest rate increases,what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Which of the following is not correct?

According to the rule of 70,if a person's saving doubles in 10 years,what interest rate were they earning?

A person's subjective measure of well-being or satisfaction is called aversion.

If the interest rate is 7.5 percent,then what is the present value of $4,000 to be received in 6 years?

In the late 1990s,Fed Chairperson Alan Greenspan believed that the market was

List three different ways that a risk-averse person can reduce financial risk.

Diversification of a portfolio

The efficient markets hypothesis says that beating the market consistently is

You put $150 in the bank two years ago and forgot about it.The bank sends you a notice that you now have $166.95 in your account.What interest rate did you earn?

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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