Question 1

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Accepted Answer

A)  market risk by more than an increase from 1 to 10. 
B)  market risk by less than an increase from 1 to 10. 
C)  firm-specific risk by more than an increase from 1 to 10. 
D)  firm-specific risk by less than an increase from 1 to 10. 
A)  market risk by more than an increase from 1 to 10. 
B)  market risk by less than an increase from 1 to 10. 
C)  firm-specific risk by more than an increase from 1 to 10. 
D)  firm-specific risk by less than an increase from 1 to 10.

Question 2

Which of the following statements is correct?

Accepted Answer

A)  A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B)  A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C)  Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D)  Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection. 
A)  A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. 
B)  A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. 
C)  Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard. 
D)  Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection.

Question 3

Risk aversion helps to explain various things we observe in the economy, including

Accepted Answer

A)  adherence to the old adage, "Don't put all your eggs in one basket." 
B)  insurance. 
C)  the risk-return trade-off. 
D)  All of the above are correct. 
A)  adherence to the old adage, "Don't put all your eggs in one basket." 
B)  insurance. 
C)  the risk-return trade-off. 
D)  All of the above are correct.

Question 4

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

Accepted Answer

A)  5 
B)  7 
C)  9 
D)  11 
A)  5 
B)  7 
C)  9 
D)  11

Question 5

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is

Accepted Answer

A)  no less than 9.48 percent. 
B)  no greater than 9.48 percent. 
C)  no less than 10.83 percent. 
D)  no greater than 10.83 percent. 
A)  no less than 9.48 percent. 
B)  no greater than 9.48 percent. 
C)  no less than 10.83 percent. 
D)  no greater than 10.83 percent.

Question 8

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Accepted Answer

A)  is now lower than it was before, and so Hydro Grow is less likely to build the building. 
B)  is now lower than it was before, and so HydroGrow is more likely to build the building. 
C)  is now higher than it was before, and so HydroGrow is less likely to build the building. 
D)  is now higher than it was before, and so HydroGrow is more likely to build the building. 
A)  is now lower than it was before, and so Hydro Grow is less likely to build the building. 
B)  is now lower than it was before, and so HydroGrow is more likely to build the building. 
C)  is now higher than it was before, and so HydroGrow is less likely to build the building. 
D)  is now higher than it was before, and so HydroGrow is more likely to build the building.

Question 9

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 10

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Accepted Answer

A) True 
 B)False

Question 11

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Accepted Answer

A)  and the example with Brad illustrate adverse selection. 
B)  and the example with Brad illustrate moral hazard. 
C)  illustrates adverse selection; the example with Brad illustrates moral hazard. 
D)  illustrates moral hazard; the example with Brad illustrates adverse selection. 
A)  and the example with Brad illustrate adverse selection. 
B)  and the example with Brad illustrate moral hazard. 
C)  illustrates adverse selection; the example with Brad illustrates moral hazard. 
D)  illustrates moral hazard; the example with Brad illustrates adverse selection.

Question 12

The future value of a deposit in a savings account will be smaller

Accepted Answer

A)  the longer a person waits to withdraw the funds. 
B)  the lower the interest rate is. 
C)  the larger the initial deposit is. 
D)  All of the above are correct. 
A)  the longer a person waits to withdraw the funds. 
B)  the lower the interest rate is. 
C)  the larger the initial deposit is. 
D)  All of the above are correct.

Question 13

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Accepted Answer

A)  9% but not 10% 
B)  10% but not 11% 
C)  11% but not 12% 
D)  None of the above is correct; a risk averse person would not accept any of the above bets. 
A)  9% but not 10% 
B)  10% but not 11% 
C)  11% but not 12% 
D)  None of the above is correct; a risk averse person would not accept any of the above bets.

Question 14

Twenty years ago, Dr. Montgomery borrowed money from her parents to pay her tuition at graduate school. Now she wants to pay them back. She gives them double what they gave her. According to the rule of 70, what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?

Accepted Answer

A)  3.5 percent 
B)  4.5 percent 
C)  5 percent 
D)  7 percent 
A)  3.5 percent 
B)  4.5 percent 
C)  5 percent 
D)  7 percent

Question 15

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?

Accepted Answer

A)  $4 
B)  $8 
C)  $16 
D)  $32 
A)  $4 
B)  $8 
C)  $16 
D)  $32

Question 16

Which of the following best illustrates diversification?

Accepted Answer

A)  A company that produces many different products decides to produce fewer. 
B)  After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C)  Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services. 
D)  A person decides to purchase only stocks that have paid high dividends in the past. 
A)  A company that produces many different products decides to produce fewer. 
B)  After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C)  Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services. 
D)  A person decides to purchase only stocks that have paid high dividends in the past.

Question 17

Rory receives, from an insurance company, a payment of $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called an)

Accepted Answer

A)  portfolio. 
B)  bond. 
C)  dividend. 
D)  annuity. 
A)  portfolio. 
B)  bond. 
C)  dividend. 
D)  annuity.

Question 18

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Accepted Answer

A)  20 percent 
B)  25 percent 
C)  28 percent 
D)  None of the above is correct. 
A)  20 percent 
B)  25 percent 
C)  28 percent 
D)  None of the above is correct.

Question 19

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

Accepted Answer

A)  $1,133.31 
B)  $1,120.00 
C)  $1,123.50 
D)  None of the above are correct to the nearest cent. 
A)  $1,133.31 
B)  $1,120.00 
C)  $1,123.50 
D)  None of the above are correct to the nearest cent.

Question 20

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Accepted Answer

A)  raise the price of the company's stock. 
B)  not affect the price of the company's stock. 
C)  reduce the price of the company's stock. 
D)  More information is needed to answer the question. 
A)  raise the price of the company's stock. 
B)  not affect the price of the company's stock. 
C)  reduce the price of the company's stock. 
D)  More information is needed to answer the question.

Exam 14: The Basic Tools of Finance

An increase in the number of corporations in a portfolio from 110 to 120 reduces

Which of the following statements is correct?

Risk aversion helps to explain various things we observe in the economy, including

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

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

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

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?

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

The future value of a deposit in a savings account will be smaller

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Which of the following best illustrates diversification?

Rory receives, from an insurance company, a payment of $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called an)

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

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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