Question 1

Which of the following is correct concerning diversification?

Accepted Answer

A)  It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B)  It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C)  It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D)  None of the above is correct. 
A)  It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
B)  It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30. 
C)  It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30. 
D)  None of the above is correct.

Question 2

The utility function of a risk-averse person has a

Accepted Answer

A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases. 
A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases.

Question 3

The market for insurance is one example of reducing risk by using diversification.

Accepted Answer

A) True 
 B)False

Question 4

Diminishing marginal utility of wealth implies that the utility function

Accepted Answer

A)  has increasing slope and a person is risk averse. 
B)  has increasing slope and a person is not risk averse. 
C)  has decreasing slope and a person is risk averse 
D)  has decreasing slope and a person is not risk averse. 
A)  has increasing slope and a person is risk averse. 
B)  has increasing slope and a person is not risk averse. 
C)  has decreasing slope and a person is risk averse 
D)  has decreasing slope and a person is not risk averse.

Question 5

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Accepted Answer

A) True 
 B)False

Question 6

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to 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 7

Draw graphs showing the following three relationships.
1. The relation between utility and wealth for a risk averse consumer.
2. The relation between standard deviation and the number of stocks in a portfolio.
3. The relation between return and risk.

Accepted Answer

The answer of Draw graphs showing the following three relationships.
1....

Question 8

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Accepted Answer

A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk, but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk. 
A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk, but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk.

Question 9

Figure 27-3
The following figure shows the utility function for Paul.  
-Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Accepted Answer

A)  Paul would be willing to accept a coin­flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B)  the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. 
C)  the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. 
D)  the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth. 
A)  Paul would be willing to accept a coin­flip bet that would result in him winning $200 if the result was "heads" or losing $200 if the result was "tails." 
B)  the pain of losing $200 of his wealth would equal the pleasure of adding $200 to his wealth. 
C)  the pain of losing $200 of his wealth would exceed the pleasure of adding $200 to his wealth. 
D)  the pleasure of adding $200 to his wealth would exceed the pain of losing $200 of his wealth.

Question 10

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?

Accepted Answer

The answer of Which of the following is the correct...

Question 11

A risk-averse person

Accepted Answer

A)  has a utility curve where the slope increases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
B)  has a utility curve where the slope increases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
C)  has a utility curve where the slope decreases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
D)  has a utility curve where the slope decreases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
A)  has a utility curve where the slope increases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
B)  has a utility curve where the slope increases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300. 
C)  has a utility curve where the slope decreases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300. 
D)  has a utility curve where the slope decreases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.

Question 12

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

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 13

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.

Accepted Answer

A) True 
 B)False

Question 14

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Accepted Answer

A)  8 percent. 
B)  9 percent. 
C)  10 percent. 
D)  All of the above are correct. 
A)  8 percent. 
B)  9 percent. 
C)  10 percent. 
D)  All of the above are correct.

Question 15

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Accepted Answer

A) True 
 B)False

Question 16

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

Accepted Answer

A)  $51,830.26 
B)  $54,464.96 
C)  $57,188.21 
D)  $58,237.71 
A)  $51,830.26 
B)  $54,464.96 
C)  $57,188.21 
D)  $58,237.71

Question 17

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

Accepted Answer

A) True 
 B)False

Question 18

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

Accepted Answer

A)  no less than 4.53 percent. 
B)  no greater than 4.53 percent. 
C)  no less than 5.81 percent. 
D)  no greater than 5.81 percent. 
A)  no less than 4.53 percent. 
B)  no greater than 4.53 percent. 
C)  no less than 5.81 percent. 
D)  no greater than 5.81 percent.

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

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Accepted Answer

A)  $637.50 after 5 years and $822.09 after 10 years. 
B)  $637.50 after 5 years and $775.00 after 10 years. 
C)  $653.48 after 5 years and $854.07 after 10 years. 
D)  $688.36 after 5 years and $915.56 after 10 years. 
A)  $637.50 after 5 years and $822.09 after 10 years. 
B)  $637.50 after 5 years and $775.00 after 10 years. 
C)  $653.48 after 5 years and $854.07 after 10 years. 
D)  $688.36 after 5 years and $915.56 after 10 years.

Exam 14: The Basic Tools of Finance

Which of the following is correct concerning diversification?

The utility function of a risk-averse person has a

The market for insurance is one example of reducing risk by using diversification.

Diminishing marginal utility of wealth implies that the utility function

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

Draw graphs showing the following three relationships. 1. The relation between utility and wealth for a risk averse consumer. 2. The relation between standard deviation and the number of stocks in a portfolio. 3. The relation between return and risk.

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose Paul begins with $900 in wealth. Starting from there,

Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years?

A risk-averse person

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

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.

Melissa offers you $1,000 today or $1,500 in 5 years. You would prefer to take the $1,500 in 5 years if the interest rate is

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is

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

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

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

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

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters