Question 1

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower 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

Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?

Accepted Answer

A)  9.6 percent 
B)  9.9 percent 
C)  10.2 percent 
D)  10.5 percent 
A)  9.6 percent 
B)  9.9 percent 
C)  10.2 percent 
D)  10.5 percent

Question 3

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 4

Scenario 27-2
Suppose Dave has a utility function   where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $0 with probability 0.8 and pays $10 million with probability 0.2. Given Dave's utility function, will he prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Dave receives from

Question 5

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

Accepted Answer

The presen

Question 6

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Accepted Answer

A)  fundamental analysis is an efficient way to go about choosing which stocks to buy or sell. 
B)  stock prices move upward and downward "efficiently," rather than following a "random walk." 
C)  the stock market is "informationally efficient." 
D)  companies employ officers and managers who are well-qualified to perform their jobs. 
A)  fundamental analysis is an efficient way to go about choosing which stocks to buy or sell. 
B)  stock prices move upward and downward "efficiently," rather than following a "random walk." 
C)  the stock market is "informationally efficient." 
D)  companies employ officers and managers who are well-qualified to perform their jobs.

Question 7

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 8

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. What is measured along the vertical axis?

Accepted Answer

A)  risk aversion 
B)  marginal utility 
C)  utility 
D)  the number of units of a good that can be purchased 
A)  risk aversion 
B)  marginal utility 
C)  utility 
D)  the number of units of a good that can be purchased

Question 9

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 10

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 11

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

Accepted Answer

A)  Both examples primarily illustrate adverse selection. 
B)  Both examples primarily illustrate moral hazard. 
C)  The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. 
D)  The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection. 
A)  Both examples primarily illustrate adverse selection. 
B)  Both examples primarily illustrate moral hazard. 
C)  The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. 
D)  The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.

Question 12

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 coin­flip 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 coin­flip 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 13

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)  $1001 + .0410) 
B)  $1001 + .04   10) 
C)  $100 × 10   1 + .04) 
D)  $1001 + .04)10 
A)  $1001 + .0410) 
B)  $1001 + .04   10) 
C)  $100 × 10   1 + .04) 
D)  $1001 + .04)10

Question 14

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni'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 15

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

Accepted Answer

A)  undervalued, and evidence later showed that this was clearly correct. 
B)  undervalued, but whether it was remains debatable. 
C)  overvalued, and evidence later showed that this was clearly correct. 
D)  overvalued, but whether it was remains debatable. 
A)  undervalued, and evidence later showed that this was clearly correct. 
B)  undervalued, but whether it was remains debatable. 
C)  overvalued, and evidence later showed that this was clearly correct. 
D)  overvalued, but whether it was remains debatable.

Question 16

If the efficient markets hypothesis is correct, then

Accepted Answer

A)  the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B)  the stock market is informationally efficient. 
C)  stock prices never follow a random walk. 
D)  All of the above are correct. 
A)  the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B)  the stock market is informationally efficient. 
C)  stock prices never follow a random walk. 
D)  All of the above are correct.

Question 17

Figure 27-6. On the graph, x represents risk and y represents return.  
-Refer to Figure 27-6. Which of the following statements is correct?

Accepted Answer

A)  At point A the standard deviation of the portfolio is 3. 
B)  A risk averse person always will choose to be at point A. 
C)  At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D)  The figure shows that the greater the risk, the greater the return. 
A)  At point A the standard deviation of the portfolio is 3. 
B)  A risk averse person always will choose to be at point A. 
C)  At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. 
D)  The figure shows that the greater the risk, the greater the return.

Question 18

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 19

Writing in The Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

Accepted Answer

A)  was responsible for the financial crisis of 2008-2009. 
B)  was responsible for the Great Depression of the 1930s. 
C)  claims that prices observed in financial markets are always "right." 
D)  claims that prices observed in financial markets are mostly "wrong." 
A)  was responsible for the financial crisis of 2008-2009. 
B)  was responsible for the Great Depression of the 1930s. 
C)  claims that prices observed in financial markets are always "right." 
D)  claims that prices observed in financial markets are mostly "wrong."

Question 20

In answering which of the following questions would you find it necessary to calculate a future value?

Accepted Answer

A)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D)  You would find it necessary to calculate a future value in order to answer all of these questions. 
A)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D)  You would find it necessary to calculate a future value in order to answer all of these questions.

Exam 19: The Basic Tools of Finance

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.

Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?

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

Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. What is measured along the vertical axis?

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

The efficient markets hypothesis implies that

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car.

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,

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?

Toni deposited $250 into an account and one year later she had $272.50 in the account. What interest rate was paid on Toni's deposit?

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

If the efficient markets hypothesis is correct, then

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Which of the following statements is correct?

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

Writing in The Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

In answering which of the following questions would you find it necessary to calculate a future value?

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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