Question 1

No particular stock is a better buy than any other stock if

Accepted Answer

A)  stock prices are driven by investors' "animal spirits." 
B)  the random-walk theory of stock prices is incorrect. 
C)  the efficient markets hypothesis is correct. 
D)  actively managed mutual funds always outperform index funds. 
A)  stock prices are driven by investors' "animal spirits." 
B)  the random-walk theory of stock prices is incorrect. 
C)  the efficient markets hypothesis is correct. 
D)  actively managed mutual funds always outperform index funds.

Question 2

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B)  Simpson announces that its profits were low, but not as low as the market had expected. 
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D)  All of the above would increase the price. 
A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO. 
B)  Simpson announces that its profits were low, but not as low as the market had expected. 
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued. 
D)  All of the above would increase the price.

Question 3

Which of the following is adverse selection?

Accepted Answer

A)  the risk associated with selecting stocks in only a few specific companies 
B)  the risk that a person will become overconfident in his ability to select stocks 
C)  a high-risk person being more likely to apply for insurance 
D)  after obtaining insurance a person having less incentive to be careful 
A)  the risk associated with selecting stocks in only a few specific companies 
B)  the risk that a person will become overconfident in his ability to select stocks 
C)  a high-risk person being more likely to apply for insurance 
D)  after obtaining insurance a person having less incentive to be careful

Question 4

A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here. 
A)  Option A 
B)  Option B 
C)  Option C 
D)  The answer depends on the rate of interest, which is not specified here.

Question 5

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Accepted Answer

A) True 
 B)False

Question 6

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Accepted Answer

A)  increasing marginal utility of wealth and is risk averse. 
B)  increasing marginal utility of wealth and is not risk averse. 
C)  decreasing marginal utility of wealth and is risk averse. 
D)  decreasing marginal utility of wealth and is not risk averse. 
A)  increasing marginal utility of wealth and is risk averse. 
B)  increasing marginal utility of wealth and is not risk averse. 
C)  decreasing marginal utility of wealth and is risk averse. 
D)  decreasing marginal utility of wealth and is not risk averse.

Question 7

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

Accepted Answer

A)  $240 paid in three years 
B)  $225 paid in two years 
C)  $210 paid in one year 
D)  $200 today 
A)  $240 paid in three years 
B)  $225 paid in two years 
C)  $210 paid in one year 
D)  $200 today

Question 8

After much anticipation a company releases a new smartphone. The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would

Accepted Answer

A)  raise the present value and the price of the corporation's stock. 
B)  raise the present value and reduce the price of the corporation's stock. 
C)  reduce the present value and the price of the corporation's stock. 
D)  reduce the present value and raise the price of the corporation's stock. 
A)  raise the present value and the price of the corporation's stock. 
B)  raise the present value and reduce the price of the corporation's stock. 
C)  reduce the present value and the price of the corporation's stock. 
D)  reduce the present value and raise the price of the corporation's stock.

Question 9

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Accepted Answer

A)  4.5 percent 
B)  5.4 percent 
C)  6.2 percent 
D)  8.0 percent 
A)  4.5 percent 
B)  5.4 percent 
C)  6.2 percent 
D)  8.0 percent

Question 10

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

Accepted Answer

A)  option A. 
B)  option B. 
C)  option C. 
D)  either A or B because they are the same to her. 
A)  option A. 
B)  option B. 
C)  option C. 
D)  either A or B because they are the same to her.

Question 11

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?

Accepted Answer

A)  7 percent 
B)  8 percent 
C)  9 percent 
D)  10 percent 
A)  7 percent 
B)  8 percent 
C)  9 percent 
D)  10 percent

Question 12

Fundamental analysis determines the value of a stock based on

Accepted Answer

A)  dividends. 
B)  the expected final sale price. 
C)  the ability of the corporation to earn profits. 
D)  All of the above are correct. 
A)  dividends. 
B)  the expected final sale price. 
C)  the ability of the corporation to earn profits. 
D)  All of the above are correct.

Question 13

Which of the following games might a risk-averse person play?

Accepted Answer

A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct. 
A)  a game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing $1 
B)  a game where she has a 60 percent chance of winning $100 and a 40 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $2 and a 40 percent chance of losing $1 
D)  All of the above are correct.

Question 14

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

Accepted Answer

A)  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? 
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)  As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D)  You would find it necessary to calculate a future value in order to answer all of these questions. 
A)  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? 
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)  As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years? 
D)  You would find it necessary to calculate a future value in order to answer all of these questions.

Question 15

Diversifying

Accepted Answer

A)  increases the standard deviation of the value of a portfolio indicating its risk has increased. 
B)  increases the standard deviation of the value of a portfolio indicating its risk has decreased. 
C)  decreases the standard deviation of the value of a portfolio indicating its risk has increased. 
D)  decreases the standard deviation of the value of a portfolio indicating its risk has decreased. 
A)  increases the standard deviation of the value of a portfolio indicating its risk has increased. 
B)  increases the standard deviation of the value of a portfolio indicating its risk has decreased. 
C)  decreases the standard deviation of the value of a portfolio indicating its risk has increased. 
D)  decreases the standard deviation of the value of a portfolio indicating its risk has decreased.

Question 16

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Accepted Answer

A)  5.50 percent 
B)  5.65 percent 
C)  6.25 percent 
D)  7.05 percent 
A)  5.50 percent 
B)  5.65 percent 
C)  6.25 percent 
D)  7.05 percent

Question 17

Compounding 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)  changes in the interest rate over time on a bank account or a similar savings vehicle. 
D)  interest being earned on previously-earned interest. 
A)  finding the present value of a future sum of money. 
B)  finding the future value of a present sum of money. 
C)  changes in the interest rate over time on a bank account or a similar savings vehicle. 
D)  interest being earned on previously-earned interest.

Question 18

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Accepted Answer

A)  $540.75 
B)  $540.80 
C)  $540.85 
D)  None of the above are correct to the nearest cent. 
A)  $540.75 
B)  $540.80 
C)  $540.85 
D)  None of the above are correct to the nearest cent.

Question 19

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Accepted Answer

Question 20

Dividends

Accepted Answer

A)  are the rates of return on mutual funds. 
B)  are cash payments that companies make to shareholders. 
C)  are the difference between the price and present value per share of a stock. 
D)  are the rates of return on a company's capital stock. 
A)  are the rates of return on mutual funds. 
B)  are cash payments that companies make to shareholders. 
C)  are the difference between the price and present value per share of a stock. 
D)  are the rates of return on a company's capital stock.

Exam 27: The Basic Tools of Finance

No particular stock is a better buy than any other stock if

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Which of the following is adverse selection?

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Assuming the interest rate is 5 percent, which of the following has the greatest present value?

After much anticipation a company releases a new smartphone. The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting. The unexpectedly negative reaction to the smartphone would

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,917.66. What rate of interest did Robert earn?

Fundamental analysis determines the value of a stock based on

Which of the following games might a risk-averse person play?

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

Diversifying

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Compounding refers directly to

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Dividends

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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