Question 1

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A)  Stock prices should follow a random walk. 
B)  Index funds should typically outperform highly managed funds. 
C)  News has no effect on stock prices. 
D)  There is little point in spending many hours studying the business pages looking for undervalued stocks. 
A)  Stock prices should follow a random walk. 
B)  Index funds should typically outperform highly managed funds. 
C)  News has no effect on stock prices. 
D)  There is little point in spending many hours studying the business pages looking for undervalued stocks.

Question 2

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Accepted Answer

The presen

Question 3

You have a choice among three options. 
Option 1: receive $900 immediately. 
Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. 
The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Accepted Answer

A)  Option 1; Option 2; Option 3 
B)  Option 3; Option 2; Option 1 
C)  Option 2; Option 3; Option 1 
D)  Option 3; Option 1; Option 2 
A)  Option 1; Option 2; Option 3 
B)  Option 3; Option 2; Option 1 
C)  Option 2; Option 3; Option 1 
D)  Option 3; Option 1; Option 2

Question 4

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Accepted Answer

A)  marginal utility diminishes as wealth rises, so he must be risk averse. 
B)  marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse. 
C)  marginal utility increases as wealth rises, so he must be risk averse. 
D)  marginal utility increases as wealth rises, but we can't tell from this if he is risk averse. 
A)  marginal utility diminishes as wealth rises, so he must be risk averse. 
B)  marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse. 
C)  marginal utility increases as wealth rises, so he must be risk averse. 
D)  marginal utility increases as wealth rises, but we can't tell from this if he is risk averse.

Question 5

Suppose your bank account pays a 4% interest rate. You are considering purchasing a share of stock in ABC Corporation for $500. The stock will pay you a $10 dividend at the end of years 1, 2, and 3. You expect to be able to sell the stock at the end of year 3 for $550. Is ABC a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of the inves

Question 6

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A)  $240.38 
B)  $242.24 
C)  $244.40 
D)  None of the above are correct to the nearest cent. 
A)  $240.38 
B)  $242.24 
C)  $244.40 
D)  None of the above are correct to the nearest cent.

Question 7

If you believe that stock prices follow a random walk, then probably you

Accepted Answer

A)  do not believe that there is positive relationship between risk and return. 
B)  do not believe that stock prices reflect all available information. 
C)  believe in the validity of the efficient markets hypothesis. 
D)  believe that it is a good idea to engage in fundamental analysis. 
A)  do not believe that there is positive relationship between risk and return. 
B)  do not believe that stock prices reflect all available information. 
C)  believe in the validity of the efficient markets hypothesis. 
D)  believe that it is a good idea to engage in fundamental analysis.

Question 8

A risk-averse person has

Accepted Answer

A)  utility and marginal utility curves that slope upward. 
B)  utility and marginal utility curves that slope downward. 
C)  a utility curve that slopes down and a marginal utility curve that slopes upward. 
D)  a utility curve that slopes upward and a marginal utility curve that slopes downward. 
A)  utility and marginal utility curves that slope upward. 
B)  utility and marginal utility curves that slope downward. 
C)  a utility curve that slopes down and a marginal utility curve that slopes upward. 
D)  a utility curve that slopes upward and a marginal utility curve that slopes downward.

Question 9

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Accepted Answer

The answer of Write the formula to find the present...

Question 10

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Accepted Answer

A)  rise, and investment spending rise. 
B)  rise, and investment spending fall. 
C)  fall, and investment spending rise. 
D)  fall, and investment spending fall. 
A)  rise, and investment spending rise. 
B)  rise, and investment spending fall. 
C)  fall, and investment spending rise. 
D)  fall, and investment spending fall.

Question 11

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent

Question 12

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

Accepted Answer

A)  $210 
B)  $220 
C)  $240 
D)  $250 
A)  $210 
B)  $220 
C)  $240 
D)  $250

Question 13

The efficient markets hypothesis implies

Accepted Answer

A)  that all stocks are fairly valued all the time and that no stock is a better buy than any other. 
B)  that all stocks are fairly valued all the time, but that some stocks may be better buys than other. 
C)  that some stocks may be better buys than others and stock experts can determine which ones. 
D)  that no stock is efficiently valued. 
A)  that all stocks are fairly valued all the time and that no stock is a better buy than any other. 
B)  that all stocks are fairly valued all the time, but that some stocks may be better buys than other. 
C)  that some stocks may be better buys than others and stock experts can determine which ones. 
D)  that no stock is efficiently valued.

Question 14

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B)  Simpson announces that its profits were low, but not as low as the market had expected. 
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D)  All of the above would increase the price. 
A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B)  Simpson announces that its profits were low, but not as low as the market had expected. 
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D)  All of the above would increase the price.

Question 15

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Accepted Answer

A) True 
 B)False

Question 16

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

Accepted Answer

A)  The first is lowest; the second is highest. 
B)  The second is lowest; the third is highest. 
C)  The third is lowest; the fourth is highest. 
D)  The fourth is lowest; the first is highest. 
A)  The first is lowest; the second is highest. 
B)  The second is lowest; the third is highest. 
C)  The third is lowest; the fourth is highest. 
D)  The fourth is lowest; the first is highest.

Question 17

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Accepted Answer

A) True 
 B)False

Question 18

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that

Question 19

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Accepted Answer

A) True 
 B)False

Question 20

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Accepted Answer

A)  she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B)  the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C)  the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D)  the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth. 
A)  she would be willing to accept a coin­flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails." 
B)  the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth. 
C)  the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth. 
D)  the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.

Exam 19: The Basic Tools of Finance

Which of the following is not consistent with the efficient market hypothesis?

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

If you believe that stock prices follow a random walk, then probably you

A risk-averse person has

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?

The efficient markets hypothesis implies

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

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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