Question 1

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

Accepted Answer

A)  chance of winning $120 in two years and the interest rate was 11%. 
B)  chance of winning $114 in two years and the interest rate was 7%. 
C)  chance of winning $110 in two years and the interest rate was 3%. 
D)  None of the above are correct; a risk averse person would not accept any of the above bets. 
A)  chance of winning $120 in two years and the interest rate was 11%. 
B)  chance of winning $114 in two years and the interest rate was 7%. 
C)  chance of winning $110 in two years and the interest rate was 3%. 
D)  None of the above are correct; a risk averse person would not accept any of the above bets.

Question 2

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 3

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Accepted Answer

A) True 
 B)False

Question 4

In answering which of the following questions would you find it necessary to calculate a present value?

Accepted Answer

A)  Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D)  You would find it necessary to calculate a present value in order to answer all of these questions. 
A)  Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest? 
B)  Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years? 
C)  If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years? 
D)  You would find it necessary to calculate a present value in order to answer all of these questions.

Question 5

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

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 6

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Market risk refers to economy wide risk

Question 7

You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,154 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,477.10 one year from today. In order for the same interest rate to apply to the two loans, X =

Accepted Answer

A)  $2,300.00. 
B)  $2,450.00. 
C)  $2,500.00. 
D)  $2,525.50. 
A)  $2,300.00. 
B)  $2,450.00. 
C)  $2,500.00. 
D)  $2,525.50.

Question 8

A bank might make mortgages to people in different regions of the country. By doing so

Accepted Answer

A)  the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B)  the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C)  the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D)  the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions. 
A)  the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions. 
B)  the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions. 
C)  the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces from falling house prices in its regions. 
D)  the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.

Question 9

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 10

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Accepted Answer

A) True 
 B)False

Question 11

Figure 27-6. On the graph, x represents risk and y represents return.  
-Refer to Figure 27-6. Point A represents a situation in which

Accepted Answer

A)  all of a person's savings are allocated to a class of safe assets. 
B)  the person knows with certainty that his or her return will be 3 percent. 
C)  the standard deviation of the person's portfolio is zero. 
D)  All of the above are correct. 
A)  all of a person's savings are allocated to a class of safe assets. 
B)  the person knows with certainty that his or her return will be 3 percent. 
C)  the standard deviation of the person's portfolio is zero. 
D)  All of the above are correct.

Question 12

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

Accepted Answer

A)  every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B)  every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C)  the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D)  the average risk-averse person will earn a lower rate of return than the average non-risk-averse person. 
A)  every risk-averse person will earn a higher rate of return than every non-risk-averse person. 
B)  every risk-averse person will earn a lower rate of return than every non-risk-averse person. 
C)  the average risk-averse person will earn a higher rate of return than the average non-risk-averse person. 
D)  the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.

Question 13

If a stock or bond is risky

Accepted Answer

A)  risk averse people may be willing to hold it as part of a diversified portfolio. 
B)  risk averse people may be willing to hold it if the expected return is high enough. 
C)  both A and B are correct. 
D)  risk averse people will not hold it. 
A)  risk averse people may be willing to hold it as part of a diversified portfolio. 
B)  risk averse people may be willing to hold it if the expected return is high enough. 
C)  both A and B are correct. 
D)  risk averse people will not hold it.

Question 14

According to the efficient market hypothesis

Accepted Answer

A)  changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds. 
B)  changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds. 
C)  changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds. 
D)  changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds. 
A)  changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds. 
B)  changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds. 
C)  changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds. 
D)  changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.

Question 15

How does moral hazard matter in the market for insurance?

Accepted Answer

Once people have ins

Question 16

Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?

Accepted Answer

A)  the two-year account at 9 percent 
B)  the three-year account at 6 percent 
C)  the six-year account at 3 percent 
D)  The accounts are all worth the same. 
A)  the two-year account at 9 percent 
B)  the three-year account at 6 percent 
C)  the six-year account at 3 percent 
D)  The accounts are all worth the same.

Question 17

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  7 percent

Question 18

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

Accepted Answer

A)  $575.00 
B)  $578.81 
C)  $579.64 
D)  None of the above is correct. 
A)  $575.00 
B)  $578.81 
C)  $579.64 
D)  None of the above is correct.

Question 19

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Accepted Answer

A)  benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own. 
B)  benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund. 
C)  eliminate market risk. 
D)  reduce the standard deviation of his or her portfolio to zero. 
A)  benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own. 
B)  benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund. 
C)  eliminate market risk. 
D)  reduce the standard deviation of his or her portfolio to zero.

Question 20

The risk of a portfolio

Accepted Answer

A)  increases as the number of stocks in the portfolio increases. 
B)  is usually measured using a statistic called the standard diversification. 
C)  is positively related to the average return of the portfolio. 
D)  bears no relationship to the average return of the portfolio. 
A)  increases as the number of stocks in the portfolio increases. 
B)  is usually measured using a statistic called the standard diversification. 
C)  is positively related to the average return of the portfolio. 
D)  bears no relationship to the average return of the portfolio.

Exam 27: The Basic Tools of Finance

Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent

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

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

In answering which of the following questions would you find it necessary to calculate a present value?

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

A bank might make mortgages to people in different regions of the country. By doing so

Which of the following statements is correct?

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Point A represents a situation in which

Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

If a stock or bond is risky

According to the efficient market hypothesis

How does moral hazard matter in the market for insurance?

At which interest rate is the present value of $80.25 one year from today equal to $75 today?

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

The risk of a portfolio

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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