Question 1

The risk of a portfolio

Accepted Answer

A)  increases as the number of stocks in the portfolio increases. 
B)  is usually measured using a statistic called the standard diversification. 
C)  is positively related to the average return of the portfolio. 
D)  bears no relationship to the average return of the portfolio. 
A)  increases as the number of stocks in the portfolio increases. 
B)  is usually measured using a statistic called the standard diversification. 
C)  is positively related to the average return of the portfolio. 
D)  bears no relationship to the average return of the portfolio.

Question 2

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Accepted Answer

A)  5 percent 
B)  6 percent 
C)  7 percent 
D)  8 percent 
A)  5 percent 
B)  6 percent 
C)  7 percent 
D)  8 percent

Question 3

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. Is Dave risk averse? Explain.

Accepted Answer

Yes, Dave is risk averse. The

Question 4

Which of the following defines an annuity?

Accepted Answer

A)  For a fee, an insurance company provides you with regular income until you die. 
B)  A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C)  Annuity is another name for stock funds managed by mutual fund managers. 
D)  Annuity is another name for any diversified portfolio. 
A)  For a fee, an insurance company provides you with regular income until you die. 
B)  A surcharge is added to life-insurance premiums paid by persons in dangerous occupations. 
C)  Annuity is another name for stock funds managed by mutual fund managers. 
D)  Annuity is another name for any diversified portfolio.

Question 5

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Accepted Answer

A)  $8,225.06. 
B)  $7,920.94. 
C)  $7,672.58. 
D)  $6,998.98. 
A)  $8,225.06. 
B)  $7,920.94. 
C)  $7,672.58. 
D)  $6,998.98.

Question 6

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Accepted Answer

A)  and marginal utility function are both upward sloping. 
B)  and marginal utility function are both downward sloping. 
C)  is upward sloping and her marginal utility function is downward sloping. 
D)  is downward sloping and her marginal utility function is upward sloping. 
A)  and marginal utility function are both upward sloping. 
B)  and marginal utility function are both downward sloping. 
C)  is upward sloping and her marginal utility function is downward sloping. 
D)  is downward sloping and her marginal utility function is upward sloping.

Question 7

When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

Accepted Answer

A)  5 years 
B)  6 years 
C)  7 years 
D)  8 years 
A)  5 years 
B)  6 years 
C)  7 years 
D)  8 years

Question 8

The idea of insurance

Accepted Answer

A)  would not appeal to a risk-averse person. 
B)  is, other things the same, to reduce the probability of a fire, accident, or death. 
C)  is to share risk. 
D)  is to provide a sure thing, not a gamble. 
A)  would not appeal to a risk-averse person. 
B)  is, other things the same, to reduce the probability of a fire, accident, or death. 
C)  is to share risk. 
D)  is to provide a sure thing, not a gamble.

Question 9

Suppose the interest rate is 8 percent. Consider three payment options. 
1) $300 today.
2) $330 one year from today.
3) $360 two years from today.
Which of the following is correct?

Accepted Answer

A)  1 has the highest present value and 2 has the lowest. 
B)  2 has the highest present value and 3 has the lowest. 
C)  3 has the highest present value and 1 has the lowest. 
D)  None of the above is correct. 
A)  1 has the highest present value and 2 has the lowest. 
B)  2 has the highest present value and 3 has the lowest. 
C)  3 has the highest present value and 1 has the lowest. 
D)  None of the above is correct.

Question 10

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Accepted Answer

A)  4 percent 
B)  6 percent 
C)  9 percent 
D)  11 percent 
A)  4 percent 
B)  6 percent 
C)  9 percent 
D)  11 percent

Question 11

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Accepted Answer

The future

Question 12

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A)  raise the price and raise the present value of the corporation's stock. 
B)  raise the price and lower the present value of the corporation's stock. 
C)  lower the price and raise the present value of the corporation's stock. 
D)  lower the price and lower the present value of the corporation's stock. 
A)  raise the price and raise the present value of the corporation's stock. 
B)  raise the price and lower the present value of the corporation's stock. 
C)  lower the price and raise the present value of the corporation's stock. 
D)  lower the price and lower the present value of the corporation's stock.

Question 13

Scenario 27-1
Lisa has a utility function   where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for   .

Accepted Answer

Here is th

Question 14

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is

Accepted Answer

A)  overvalued so you should consider buying it. 
B)  overvalued so you should not consider buying it. 
C)  undervalued so you should consider buying it. 
D)  undervalued so you should not consider buying it. 
A)  overvalued so you should consider buying it. 
B)  overvalued so you should not consider buying it. 
C)  undervalued so you should consider buying it. 
D)  undervalued so you should not consider buying it.

Question 15

List two ways a risk adverse person may attempt to reduce risks.

Accepted Answer

buy insurance divers

Question 16

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

Accepted Answer

A)  $12,000 
B)  $14,000 
C)  $15,500 
D)  $20,000 
A)  $12,000 
B)  $14,000 
C)  $15,500 
D)  $20,000

Question 17

If Joanna is risk averse, then

Accepted Answer

A)  her utility function exhibits the property of decreasing utility. 
B)  her utility function exhibits the property of increasing marginal utility. 
C)  she dislikes bad things more than she likes comparable good things. 
D)  she is unlike most people, because most people are not risk averse. 
A)  her utility function exhibits the property of decreasing utility. 
B)  her utility function exhibits the property of increasing marginal utility. 
C)  she dislikes bad things more than she likes comparable good things. 
D)  she is unlike most people, because most people are not risk averse.

Question 18

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Accepted Answer

The presen

Question 19

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Accepted Answer

A)  $22,880.00 
B)  $23,200.00 
C)  $23,232.00 
D)  $23,328.00 
A)  $22,880.00 
B)  $23,200.00 
C)  $23,232.00 
D)  $23,328.00

Question 20

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Accepted Answer

A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent 
A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent

Exam 19: The Basic Tools of Finance

The risk of a portfolio

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

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. Is Dave risk averse? Explain.

Which of the following defines an annuity?

Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

The idea of insurance

Suppose the interest rate is 8 percent. Consider three payment options. 1) $300 today. 2) $330 one year from today. 3) $360 two years from today. Which of the following is correct?

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Use the following diagram to graph Lisa's utility function for .

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is

List two ways a risk adverse person may attempt to reduce risks.

Rita puts $10,000 into each of two different assets. The first asset pays 10 percent interest and the second pays 5 percent. According to the rule of 70, what is the approximate difference in the value of the two assets after 14 years?

If Joanna is risk averse, then

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

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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