Question 1

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Accepted Answer

Only news that changes the pub

Question 2

Suppose you win a small lottery and you are given the following choice: You can 1) receive an immediate payment of $10,000 or 2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Accepted Answer

A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent. 
A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent.

Question 3

What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?

Accepted Answer

A)  $105.26 
B)  $105.00 
C)  $97.24 
D)  $94.34 
A)  $105.26 
B)  $105.00 
C)  $97.24 
D)  $94.34

Question 4

The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

Accepted Answer

Using the Rule of 70

Question 5

Which of the following is correct concerning a risk-averse person?

Accepted Answer

A)  She would not play games where the probability of winning and losing a dollar are the same. 
B)  She might not buy health insurance if she thinks her risks are low. 
C)  Her marginal utility of wealth decreases as her income increases. 
D)  All of the above are correct. 
A)  She would not play games where the probability of winning and losing a dollar are the same. 
B)  She might not buy health insurance if she thinks her risks are low. 
C)  Her marginal utility of wealth decreases as her income increases. 
D)  All of the above are correct.

Question 6

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 lowest 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 7

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

Accepted Answer

A) True 
 B)False

Question 8

A risk-averse person

Accepted Answer

A)  has a utility curve where the slope increases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
B)  has a utility curve where the slope increases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
C)  has a utility curve where the slope decreases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
D)  has a utility curve where the slope decreases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
A)  has a utility curve where the slope increases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
B)  has a utility curve where the slope increases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
C)  has a utility curve where the slope decreases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
D)  has a utility curve where the slope decreases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.

Question 9

If asset markets are driven by the "animal spirits" of investors, then

Accepted Answer

A)  those markets reflect rational behavior. 
B)  those markets reflect irrational behavior. 
C)  the efficient markets hypothesis is correct. 
D)  the stock market exhibits informational efficiency. 
A)  those markets reflect rational behavior. 
B)  those markets reflect irrational behavior. 
C)  the efficient markets hypothesis is correct. 
D)  the stock market exhibits informational efficiency.

Question 10

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

Accepted Answer

A)  70/1 - r) years. 
B)  70/1 + r) years. 
C)  70/r years. 
D)  701 + r)/r years. 
A)  70/1 - r) years. 
B)  70/1 + r) years. 
C)  70/r years. 
D)  701 + r)/r years.

Question 11

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 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

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 14

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Accepted Answer

A) True 
 B)False

Question 15

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

Accepted Answer

A)  3 
B)  4 
C)  5 
D)  7 
A)  3 
B)  4 
C)  5 
D)  7

Question 16

The market for insurance is one example of reducing risk by using diversification.

Accepted Answer

A) True 
 B)False

Question 17

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

A) True 
 B)False

Question 18

Over the past two centuries, the average annual rates of return were about

Accepted Answer

A)  5 percent for stocks and about 1.5 percent for short-term government bonds. 
B)  6 percent for stocks and about 2.5 percent for short-term government bonds. 
C)  8 percent for stocks and about 3 percent for short-term government bonds. 
D)  None of the above is correct. 
A)  5 percent for stocks and about 1.5 percent for short-term government bonds. 
B)  6 percent for stocks and about 2.5 percent for short-term government bonds. 
C)  8 percent for stocks and about 3 percent for short-term government bonds. 
D)  None of the above is correct.

Question 19

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.

Accepted Answer

A)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
A)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Question 20

The utility function of a risk-averse person has a

Accepted Answer

A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases. 
A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases.

Exam 19: The Basic Tools of Finance

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?

The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

Which of the following is correct concerning a risk-averse person?

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 lowest present value today?

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

A risk-averse person

If asset markets are driven by the "animal spirits" of investors, then

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

The available evidence indicates that

Which of the following is not correct?

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

If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

The market for insurance is one example of reducing risk by using diversification.

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Over the past two centuries, the average annual rates of return were about

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.

The utility function of a risk-averse person has a

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 Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

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