Exam 19: The Basic Tools of Finance

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

Diversifying

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

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.

An asset market is said to experience a speculative bubble when

As the number of stocks in a portfolio rises,

Which of the following changes would decrease the present value of a future payment?

Which of the following actions best illustrates adverse selection?

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

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.

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

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's account worth today?

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

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

A measure of the volatility of a variable is its

The efficient markets hypothesis says that beating the market consistently is

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?