Question 1

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Accepted Answer

A)  both the firm-specific risk and the market risk of his portfolio. 
B)  the firm-specific risk, but not the market risk of his portfolio. 
C)  the market risk, but not the firm-specific risk of his portfolio. 
D)  neither the market risk nor the firm-specific risk of his portfolio. 
A)  both the firm-specific risk and the market risk of his portfolio. 
B)  the firm-specific risk, but not the market risk of his portfolio. 
C)  the market risk, but not the firm-specific risk of his portfolio. 
D)  neither the market risk nor the firm-specific risk of his portfolio. B

Question 2

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Accepted Answer

A) True 
 B)False  False

Question 3

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

Accepted Answer

She may believe that others will pay even a higher price for it in the future.

Question 4

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Accepted Answer

A) True 
 B)False

Question 5

If stock prices follow a random walk, it means

Accepted Answer

A)  long periods of declining prices are followed by long periods of rising prices. 
B)  the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day. 
C)  stock prices are unrelated to random events that shock the economy. 
D)  stock prices are just as likely to rise as to fall at any given time. 
A)  long periods of declining prices are followed by long periods of rising prices. 
B)  the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day. 
C)  stock prices are unrelated to random events that shock the economy. 
D)  stock prices are just as likely to rise as to fall at any given time.

Question 6

Figure 27-2. The figure shows a utility function for Britney.  
-Refer to Figure 27-2. From the appearance of the utility function, we know that

Accepted Answer

A)  Britney is risk averse. 
B)  Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of diminishing marginal utility applies to Britney. 
D)  All of the above are correct. 
A)  Britney is risk averse. 
B)  Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. 
C)  the property of diminishing marginal utility applies to Britney. 
D)  All of the above are correct.

Question 7

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

Approximat

Question 8

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 9

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 10

Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.

Accepted Answer

A)  This stock is overvalued; you should consider adding it to your portfolio. 
B)  This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued; you should consider adding it to your portfolio. 
D)  This stock is undervalued; you shouldn't consider adding it to your portfolio. 
A)  This stock is overvalued; you should consider adding it to your portfolio. 
B)  This stock is overvalued; you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued; you should consider adding it to your portfolio. 
D)  This stock is undervalued; you shouldn't consider adding it to your portfolio.

Question 11

Which of the following is not correct?

Accepted Answer

A)  A risk averse person might be willing to hold stocks. 
B)  Other things the same, a portfolio with the stocks of a large number of companies has less risk. 
C)  Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return. 
D)  Diversification can eliminate market risk but not firm-specific risk. 
A)  A risk averse person might be willing to hold stocks. 
B)  Other things the same, a portfolio with the stocks of a large number of companies has less risk. 
C)  Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return. 
D)  Diversification can eliminate market risk but not firm-specific risk.

Question 12

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 13

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Accepted Answer

A)  $1,000   (1.06) 
B)  $1,000(1.06) 
C)  $1,000/(1.06) 
D)  None of the above is correct. 
A)  $1,000   (1.06) 
B)  $1,000(1.06) 
C)  $1,000/(1.06) 
D)  None of the above is correct.

Question 14

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Accepted Answer

A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent 
A)  5 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent

Question 15

Risk-averse individuals like good things more than they dislike comparable bad things.

Accepted Answer

A) True 
 B)False

Question 16

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Accepted Answer

The future

Question 17

Discounting 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)  calculations that ignore the phenomenon of compounding for the sake of ease and simplicity. 
D)  decreases in interest rates over time, while compounding refers to increases in interest rates over time. 
A)  finding the present value of a future sum of money. 
B)  finding the future value of a present sum of money. 
C)  calculations that ignore the phenomenon of compounding for the sake of ease and simplicity. 
D)  decreases in interest rates over time, while compounding refers to increases in interest rates over time.

Question 18

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 19

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 20

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.

Exam 27: The Basic Tools of Finance

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

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

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

If stock prices follow a random walk, it means

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that

If a savings account pays 7% interest, then according to the rule of 70 how long will it take for the account balance to double?

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?

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

Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.

Which of the following is not correct?

Which of the following is correct concerning diversification?

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Risk-averse individuals like good things more than they dislike comparable bad things.

Suppose you place $1,000 into a savings account that will pay you 4% interest per year. What will be the future value of the savings account in 10 years?

Discounting refers directly to

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

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

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?

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 Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

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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