Question 1

Matt's Utility Function   If Matt's current wealth is $51,000, then

Accepted Answer

A)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. 
B)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. 
C)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. 
D)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse. 
A)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is risk averse. 
B)  his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. Matt is not risk averse. 
C)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is risk averse. 
D)  his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Matt is not risk averse.

Question 2

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 3

Fundamental analysis is

Accepted Answer

A)  the study of the relation between risk and return of stock portfolios. 
B)  the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C)  the study of a company's accounting statements and future prospects to determine its value. 
D)  a method used to determine how adding stocks to a portfolio will change the risk of the portfolio. 
A)  the study of the relation between risk and return of stock portfolios. 
B)  the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion. 
C)  the study of a company's accounting statements and future prospects to determine its value. 
D)  a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.

Question 4

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Accepted Answer

A)  doubles every 70/X years. 
B)  doubles every 701 - 1/X) years. 
C)  doubles every 70/X2 years. 
D)  doubles every 70/1 - X) years. 
A)  doubles every 70/X years. 
B)  doubles every 701 - 1/X) years. 
C)  doubles every 70/X2 years. 
D)  doubles every 70/1 - X) years.

Question 5

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

Accepted Answer

A)  $302.50 
B)  $306.23 
C)  $308.67 
D)  $309.39 
A)  $302.50 
B)  $306.23 
C)  $308.67 
D)  $309.39

Question 6

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu

Question 7

Why might someone be willing to pay more than the fundamental value for a stock?

Accepted Answer

She may believe that

Question 8

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Accepted Answer

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

Question 9

Discuss the statistical evidence concerning the efficient markets hypothesis.

Accepted Answer

The evidence indicates that stock prices

Question 10

In general, as a person includes fewer stocks and more bonds in his portfolio,

Accepted Answer

A)  both risk and expected return rise. 
B)  risk rises but expected return falls. 
C)  risk falls, but expected return rises. 
D)  both risk and expected return fall. 
A)  both risk and expected return rise. 
B)  risk rises but expected return falls. 
C)  risk falls, but expected return rises. 
D)  both risk and expected return fall.

Question 11

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Accepted Answer

A)  deadweight loss 
B)  present value 
C)  economic growth 
D)  financial intermediation 
A)  deadweight loss 
B)  present value 
C)  economic growth 
D)  financial intermediation

Question 12

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A)  Interest rates rise and truck prices rise. 
B)  Interest rates fall and truck prices rise. 
C)  Interest rates rise and truck prices fall. 
D)  Interest rates fall and truck prices fall. 
A)  Interest rates rise and truck prices rise. 
B)  Interest rates fall and truck prices rise. 
C)  Interest rates rise and truck prices fall. 
D)  Interest rates fall and truck prices fall.

Question 13

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the these things make the price of FineLine Corporation Stock fall?

Accepted Answer

A)  both the interest rate rising and the revenue announcement 
B)  neither the interest rate rising nor the revenue announcement 
C)  only the interest rate rising 
D)  only the revenue announcement 
A)  both the interest rate rising and the revenue announcement 
B)  neither the interest rate rising nor the revenue announcement 
C)  only the interest rate rising 
D)  only the revenue announcement

Question 14

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Accepted Answer

A)  $300 paid in two years 
B)  $150 paid in one year plus $140 paid in two years 
C)  $100 paid today plus $100 paid in one year plus $100 paid in two years 
D)  $285 today 
A)  $300 paid in two years 
B)  $150 paid in one year plus $140 paid in two years 
C)  $100 paid today plus $100 paid in one year plus $100 paid in two years 
D)  $285 today

Question 15

How does adverse selection affect the insurance market?

Accepted Answer

High risk persons ar

Question 16

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 17

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Accepted Answer

A)  $4,531.52 
B)  $4,878.52 
C)  $5,124.50 
D)  $5,516.91 
A)  $4,531.52 
B)  $4,878.52 
C)  $5,124.50 
D)  $5,516.91

Question 18

Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

Accepted Answer

A)  5 percent 
B)  7 percent 
C)  8 percent 
D)  10 percent 
A)  5 percent 
B)  7 percent 
C)  8 percent 
D)  10 percent

Question 19

Diversification reduces

Accepted Answer

A)  only market risk. 
B)  only firm-specific risk. 
C)  neither market or firm-specific risk. 
D)  both market and firm-specific risk. 
A)  only market risk. 
B)  only firm-specific risk. 
C)  neither market or firm-specific risk. 
D)  both market and firm-specific risk.

Question 20

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. For the person to whom this utility function applies,

Accepted Answer

A)  the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. 
A)  the more wealth she has, the less utility she gets from an additional dollar of wealth. 
B)  the more wealth she has, the more utility she gets from an additional dollar of wealth. 
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. 
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

Exam 14: The Basic Tools of Finance

Matt's Utility Function If Matt's current wealth is $51,000, then

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

Fundamental analysis is

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Tonya put $250 into an account three years ago. The first year he earned 6 percent interest, the second year 7 percent, and the third year 8 percent. About how about much does Tonya have in her account now?

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Why might someone be willing to pay more than the fundamental value for a stock?

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Discuss the statistical evidence concerning the efficient markets hypothesis.

In general, as a person includes fewer stocks and more bonds in his portfolio,

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

How does adverse selection affect the insurance market?

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.

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years?

Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

Diversification reduces

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies,

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

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