Question 1

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Accepted Answer

A random walk means the path of a variab

Question 2

Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

Accepted Answer

A)  $1,157.90 
B)  $1,168.65 
C)  $1,176.00 
D)  None of the above are correct to the nearest cent. 
A)  $1,157.90 
B)  $1,168.65 
C)  $1,176.00 
D)  None of the above are correct to the nearest cent.

Question 3

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim 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 4

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

Accepted Answer

A)  $766.50 
B)  $768.75 
C)  $770.23 
D)  None of the above are correct to the nearest cent. 
A)  $766.50 
B)  $768.75 
C)  $770.23 
D)  None of the above are correct to the nearest cent.

Question 5

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Accepted Answer

A)  $285.83 
B)  $236.98 
C)  $202.04 
D)  $145.65 
A)  $285.83 
B)  $236.98 
C)  $202.04 
D)  $145.65

Question 6

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Accepted Answer

A)  Higher average returns come at the price of higher risk. 
B)  People who are risk averse should never hold stock. 
C)  Diversification cannot eliminate all of the risk in stock portfolio. 
D)  None of her conclusions are incorrect. 
A)  Higher average returns come at the price of higher risk. 
B)  People who are risk averse should never hold stock. 
C)  Diversification cannot eliminate all of the risk in stock portfolio. 
D)  None of her conclusions are incorrect.

Question 7

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

Accepted Answer

A)  It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B)  Stock prices, even if not exactly a random walk, are very close to it. 
C)  Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis. 
D)  All of Chloe's conclusions are correct. 
A)  It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in. 
B)  Stock prices, even if not exactly a random walk, are very close to it. 
C)  Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis. 
D)  All of Chloe's conclusions are correct.

Question 8

What is the present value of a payment of $100 to be made one year from today?

Accepted Answer

A)  $100*1 + r) 
B)  $100/1 + r) 
C)  $100 - $100   r 
D)  $100 - 1 + r)/$100 
A)  $100*1 + r) 
B)  $100/1 + r) 
C)  $100 - $100   r 
D)  $100 - 1 + r)/$100

Question 9

At which interest rate is the present value of $260.10 two years from today equal to $250 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

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 $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from 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

Question 11

At which interest rate is the present value of $360 three years from today equal to about $310 today?

Accepted Answer

A)  4.7 percent 
B)  5.1 percent 
C)  5.5 percent 
D)  5.9 percent 
A)  4.7 percent 
B)  5.1 percent 
C)  5.5 percent 
D)  5.9 percent

Question 12

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

Accepted Answer

A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment. 
A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment.

Question 13

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Accepted Answer

A) True 
 B)False

Question 14

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Accepted Answer

A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment. 
A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment.

Question 15

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Accepted Answer

A) True 
 B)False

Question 16

A risk-averse person has

Accepted Answer

A)  a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B)  a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C)  a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D)  a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth. 
A)  a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B)  a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C)  a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D)  a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.

Question 17

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Accepted Answer

Yes, according to the efficient markets

Question 18

Compounding refers directly to

Accepted Answer

A)  finding the present value of a future sum of money. 
B)  finding the future value of a present sum of money. 
C)  changes in the interest rate over time on a bank account or a similar savings vehicle. 
D)  interest being earned on previously-earned interest. 
A)  finding the present value of a future sum of money. 
B)  finding the future value of a present sum of money. 
C)  changes in the interest rate over time on a bank account or a similar savings vehicle. 
D)  interest being earned on previously-earned interest.

Question 19

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Accepted Answer

A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio. 
A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.

Question 20

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Accepted Answer

A)  $540.75 
B)  $540.80 
C)  $540.85 
D)  None of the above are correct to the nearest cent. 
A)  $540.75 
B)  $540.80 
C)  $540.85 
D)  None of the above are correct to the nearest cent.

Exam 19: The Basic Tools of Finance

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?

Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are correct?

What is the present value of a payment of $100 to be made one year from today?

At which interest rate is the present value of $260.10 two years from today equal to $250 today?

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?

At which interest rate is the present value of $360 three years from today equal to about $310 today?

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

A risk-averse person has

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Compounding refers directly to

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

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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