Question 1

Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action

Accepted Answer

A)  increases both risk and the average rate of return. 
B)  decreases both risk and the average rate of return. 
C)  increases risk, but decreases the average rate of return. 
D)  decreases risk, but increases the average rate of return. 
A)  increases both risk and the average rate of return. 
B)  decreases both risk and the average rate of return. 
C)  increases risk, but decreases the average rate of return. 
D)  decreases risk, but increases the average rate of return.

Question 2

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 3

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Accepted Answer

A)  5 years 
B)  6 years 
C)  7 years 
D)  8 years 
A)  5 years 
B)  6 years 
C)  7 years 
D)  8 years

Question 4

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Accepted Answer

Buying stocks in a n

Question 5

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Accepted Answer

A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk, but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk. 
A)  He has reduced firm-specific risk but not market risk. 
B)  He has reduced market risk, but not firm-specific risk. 
C)  He had reduce both firm-specific risk and market risk. 
D)  He has reduced neither firm-specific risk nor market risk.

Question 6

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
A)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
B)  increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower. 
C)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher. 
D)  reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.

Question 7

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Accepted Answer

A)  You receive the payment 3 years from now and the interest rate is 8 percent. 
B)  You receive the payment 3 years from now and the interest rate is 6 percent. 
C)  You receive the payment 2 years from now and the interest rate is 8 percent. 
D)  You receive the payment 2 years from now and the interest rate is 6 percent. 
A)  You receive the payment 3 years from now and the interest rate is 8 percent. 
B)  You receive the payment 3 years from now and the interest rate is 6 percent. 
C)  You receive the payment 2 years from now and the interest rate is 8 percent. 
D)  You receive the payment 2 years from now and the interest rate is 6 percent.

Question 8

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

Accepted Answer

A)  X > 1,055.56. 
B)  X > 1,120.89. 
C)  X > 1,232.89. 
D)  X > 1,338.26. 
A)  X > 1,055.56. 
B)  X > 1,120.89. 
C)  X > 1,232.89. 
D)  X > 1,338.26.

Question 9

What is the future value of $375 at an interest rate of 3 percent one year from today?

Accepted Answer

A)  $371.75 
B)  $386.25 
C)  $393.33 
D)  None of the above are correct to the nearest cent. 
A)  $371.75 
B)  $386.25 
C)  $393.33 
D)  None of the above are correct to the nearest cent.

Question 10

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 11

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Accepted Answer

A)  moral hazard and market risk. 
B)  moral hazard and firm specific risk. 
C)  adverse selection and market risk. 
D)  adverse selection and firm specific risk. 
A)  moral hazard and market risk. 
B)  moral hazard and firm specific risk. 
C)  adverse selection and market risk. 
D)  adverse selection and firm specific risk.

Question 12

Laura says that the present value of $700 to be received one year from today if the interest rate is 6 percent is less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Cassie says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

Accepted Answer

A)  Both Laura and Cassie are correct. 
B)  Both Laura and Cassie are incorrect. 
C)  Only Laura is correct. 
D)  Only Cassie is correct. 
A)  Both Laura and Cassie are correct. 
B)  Both Laura and Cassie are incorrect. 
C)  Only Laura is correct. 
D)  Only Cassie is correct.

Question 13

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Accepted Answer

A) True 
 B)False

Question 14

The concept of present value helps explain why

Accepted Answer

A)  investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B)  investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C)  the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D)  None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases. 
A)  investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. 
B)  investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. 
C)  the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. 
D)  None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

Question 15

Describe the shape of the utility function of a risk averse person.

Accepted Answer

Its slope

Question 16

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 17

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Accepted Answer

$1,600/$50 = 32. The rule of 70 says tha

Question 18

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A)  impossible. Many studies find that beating the market is, at best, extremely difficult. 
B)  impossible. Many studies find that beating the market is relatively easy. 
C)  relatively easy. Many studies find that beating the market is, at best, extremely difficult. 
D)  relatively easy. Many studies find that beating the market is relatively easy. 
A)  impossible. Many studies find that beating the market is, at best, extremely difficult. 
B)  impossible. Many studies find that beating the market is relatively easy. 
C)  relatively easy. Many studies find that beating the market is, at best, extremely difficult. 
D)  relatively easy. Many studies find that beating the market is relatively easy.

Question 19

In which of the following instances is the present value of the future payment the largest?

Accepted Answer

A)  You will receive $1,000 in 5 years and the annual interest rate is 5 percent. 
B)  You will receive $1,000 in 10 years and the annual interest rate is 3 percent. 
C)  You will receive $2,000 in 10 years and the annual interest rate is 10 percent. 
D)  You will receive $2,400 in 15 years and the annual interest rate is 8 percent. 
A)  You will receive $1,000 in 5 years and the annual interest rate is 5 percent. 
B)  You will receive $1,000 in 10 years and the annual interest rate is 3 percent. 
C)  You will receive $2,000 in 10 years and the annual interest rate is 10 percent. 
D)  You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

Question 20

Figure 27-2. The figure shows a utility function for Britney.  
-

Accepted Answer

A)  if Britney owns a house, she would not consider buying fire insurance. 
B)  Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C)  Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D)  All of the above are correct. 
A)  if Britney owns a house, she would not consider buying fire insurance. 
B)  Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C)  Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D)  All of the above are correct.

Exam 27: The Basic Tools of Finance

Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Diversification

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

What is the future value of $375 at an interest rate of 3 percent one year from today?

Fundamental analysis is

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

The concept of present value helps explain why

Describe the shape of the utility function of a risk averse person.

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

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

The efficient markets hypothesis says that beating the market consistently is

In which of the following instances is the present value of the future payment the largest?

Figure 27-2. The figure shows a utility function for Britney. -

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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