Question 1

Other things the same, as the number of stocks in a portfolio rises,

Accepted Answer

A)  risk increases and the standard deviation of the return rises. 
B)  risk increases and the standard deviation of the return falls. 
C)  risk decreases and the standard deviation of the return rises. 
D)  risk decreases and the standard deviation of the return falls. 
A)  risk increases and the standard deviation of the return rises. 
B)  risk increases and the standard deviation of the return falls. 
C)  risk decreases and the standard deviation of the return rises. 
D)  risk decreases and the standard deviation of the return falls.

Question 2

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall. 
A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall.

Question 3

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 4

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Accepted Answer

A)  These are both examples of adverse selection. 
B)  These are both examples of moral hazard. 
C)  The first example illustrates adverse selection, and the second illustrates moral hazard. 
D)  The first example illustrates moral hazard, and the second illustrates adverse selection. 
A)  These are both examples of adverse selection. 
B)  These are both examples of moral hazard. 
C)  The first example illustrates adverse selection, and the second illustrates moral hazard. 
D)  The first example illustrates moral hazard, and the second illustrates adverse selection.

Question 5

If a person is risk averse, then she has

Accepted Answer

A)  diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
A)  diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

Question 6

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  None of the above would give a present value within a cent of $162.24. 
A)  4 percent 
B)  5 percent 
C)  6 percent 
D)  None of the above would give a present value within a cent of $162.24.

Question 7

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 8

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Accepted Answer

A)  $1,160.00 
B)  $1,166.40 
C)  $1,168.65 
D)  $1,169.64 
A)  $1,160.00 
B)  $1,166.40 
C)  $1,168.65 
D)  $1,169.64

Question 9

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Accepted Answer

A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment. 
A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment.

Question 10

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the lowest present value today?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 11

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu

Question 12

Write the formula for finding the future value in n years of $x today.

Accepted Answer

The answer of Write the formula for finding the future...

Question 13

Which of the following is correct if the interest rate is 6 percent?

Accepted Answer

A)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400. 
B)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400. 
C)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400. 
D)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400. 
A)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400. 
B)  $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400. 
C)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400. 
D)  $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.

Question 14

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the highest present value today?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 15

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

Accepted Answer

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

Question 16

The utility function of a risk-averse person has a

Accepted Answer

A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases. 
A)  positive slope and gets steeper as wealth increases. 
B)  positive slope but gets flatter as wealth increases. 
C)  negative slope but gets steeper as wealth increases. 
D)  negative slope and gets flatter as wealth increases.

Question 17

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Accepted Answer

A)  firm­specific risk, which will likely raise shareholders' demand for higher return. 
B)  firm­specific risk, which will likely not likely raise shareholders' demand for higher return. 
C)  market risk, which will likely raise shareholders' demand for higher return. 
D)  market risk, which will likely not raise shareholders' demand for higher return. 
A)  firm­specific risk, which will likely raise shareholders' demand for higher return. 
B)  firm­specific risk, which will likely not likely raise shareholders' demand for higher return. 
C)  market risk, which will likely raise shareholders' demand for higher return. 
D)  market risk, which will likely not raise shareholders' demand for higher return.

Question 18

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A)  The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B)  The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C)  The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard. 
D)  The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection. 
A)  The insurance requirement and the credit check are both designed primarily to reduce adverse selection. 
B)  The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard. 
C)  The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard. 
D)  The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection.

Question 19

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Accepted Answer

A)  both Irene's and Victor's 
B)  Irene's but not Victor's 
C)  Victor's but not Irene's 
D)  neither Victor's nor Irene's 
A)  both Irene's and Victor's 
B)  Irene's but not Victor's 
C)  Victor's but not Irene's 
D)  neither Victor's nor Irene's

Question 20

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

Accepted Answer

A)  3 percent. 
B)  4 percent. 
C)  5 percent. 
D)  None of the above is correct. 
A)  3 percent. 
B)  4 percent. 
C)  5 percent. 
D)  None of the above is correct.

Exam 27: The Basic Tools of Finance

Other things the same, as the number of stocks in a portfolio rises,

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

If a person is risk averse, then she has

At which interest rate is the present value of $168.54 two years from today equal to $150 today?

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the lowest present value today?

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Write the formula for finding the future value in n years of $x today.

Which of the following is correct if the interest rate is 6 percent?

Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the highest present value today?

You deposit $3,000 into an N-year certificate of deposit that pays 4.5 percent annual interest, and at the end of the N years you have $4,082.59. What is the number of years, N?

The utility function of a risk-averse person has a

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is

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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