Question 1

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Accepted Answer

A random walk means the path of a variab

Question 2

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False

Question 3

An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer. It is widely believed that the presence of this individual will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?

Accepted Answer

A)  the announcement and the rise in interest rates 
B)  the announcement but not the rise in interest rates 
C)  the rise in interest rates, but not the announcement 
D)  neither the announcement nor the rise in interest rates 
A)  the announcement and the rise in interest rates 
B)  the announcement but not the rise in interest rates 
C)  the rise in interest rates, but not the announcement 
D)  neither the announcement nor the rise in interest rates

Question 4

Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay

Accepted Answer

A)  $140,000, but not $150,000. 
B)  $150,000, but not $160,000. 
C)  $160,000, but not $170,000. 
D)  $170,000, but not $180,000. 
A)  $140,000, but not $150,000. 
B)  $150,000, but not $160,000. 
C)  $160,000, but not $170,000. 
D)  $170,000, but not $180,000.

Question 5

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 6

Write the formula to find the present value of $x to be paid in n years.

Accepted Answer

The answer of Write the formula to find the present...

Question 7

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A)  Dexter is risk averse. 
B)  Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C)  the property of decreasing marginal utility applies to Dexter. 
D)  All of the above are correct. 
A)  Dexter is risk averse. 
B)  Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars. 
C)  the property of decreasing marginal utility applies to Dexter. 
D)  All of the above are correct.

Question 8

The future value of $500 saved for two years at an interest rate of 5% is

Accepted Answer

A)  $550.25. 
B)  $550.00. 
C)  $551.25. 
D)  None of the above are correct. 
A)  $550.25. 
B)  $550.00. 
C)  $551.25. 
D)  None of the above are correct.

Question 9

Which of the following is the largest?

Accepted Answer

A)  the future value of $250 with 3% interest for 2 years 
B)  the future value of $250 at 2% interest for 3 years 
C)  the present value of $250 to be paid in two years when the interest rate is 3% 
D)  the present value of $250 to be paid in three years when the interest rate is 2% 
A)  the future value of $250 with 3% interest for 2 years 
B)  the future value of $250 at 2% interest for 3 years 
C)  the present value of $250 to be paid in two years when the interest rate is 3% 
D)  the present value of $250 to be paid in three years when the interest rate is 2%

Question 10

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Accepted Answer

A)  Al 
B)  Ralph 
C)  Stan 
D)  They all retire with the same amount. 
A)  Al 
B)  Ralph 
C)  Stan 
D)  They all retire with the same amount.

Question 11

A measure of the volatility of a variable is its

Accepted Answer

A)  present value. 
B)  future value. 
C)  return. 
D)  standard deviation. 
A)  present value. 
B)  future value. 
C)  return. 
D)  standard deviation.

Question 12

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A)  Stock prices should follow a random walk. 
B)  Index funds should typically outperform highly managed funds. 
C)  News has no effect on stock prices. 
D)  There is little point in spending many hours studying the business pages looking for undervalued stocks. 
A)  Stock prices should follow a random walk. 
B)  Index funds should typically outperform highly managed funds. 
C)  News has no effect on stock prices. 
D)  There is little point in spending many hours studying the business pages looking for undervalued stocks.

Question 13

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

Accepted Answer

A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio. 
A)  This means its present value is less than its price. You should consider adding the stock to your portfolio. 
B)  This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. 
C)  This means its present value is more than its price. You should consider adding the stock to your portfolio. 
D)  This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.

Question 14

Suppose your bank account pays a 5% interest rate. You are considering purchasing a share of stock in DH Corporation for $250. The stock will pay you a $10 dividend at the end of years 1, 2, 3, 4, and 5. You expect to be able to sell the stock at the end of year 5 for $300. Is DH a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of

Question 15

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Accepted Answer

A)  5 percent 
B)  4 percent 
C)  3 percent 
D)  2 percent 
A)  5 percent 
B)  4 percent 
C)  3 percent 
D)  2 percent

Question 16

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations. What does the efficient markets hypothesis predict will happen to Johnson's stock price.

Accepted Answer

The efficient markets hypothes

Question 17

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Accepted Answer

A)  undervalued, and evidence later showed that this was clearly correct. 
B)  undervalued, but whether it was remains debatable. 
C)  overvalued, and evidence later showed that this was clearly correct. 
D)  overvalued, but whether it was remains debatable. 
A)  undervalued, and evidence later showed that this was clearly correct. 
B)  undervalued, but whether it was remains debatable. 
C)  overvalued, and evidence later showed that this was clearly correct. 
D)  overvalued, but whether it was remains debatable.

Question 18

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Accepted Answer

A)  $98.18 
B)  $100.96 
C)  $102.04 
D)  $103.24 
A)  $98.18 
B)  $100.96 
C)  $102.04 
D)  $103.24

Question 19

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Accepted Answer

A)  The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. 
B)  The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. 
C)  The interest rates on the two loans are the same. 
D)  There is not enough information to determine which loan has the higher interest rate. 
A)  The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B. 
B)  The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B. 
C)  The interest rates on the two loans are the same. 
D)  There is not enough information to determine which loan has the higher interest rate.

Question 20

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A)  firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
B)  market risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
C)  firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions. 
D)  market risk, but still they have reason to worry about their wealth decreasing as a result of recessions. 
A)  firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
B)  market risk, and so they do not need to worry about their wealth decreasing as a result of recessions. 
C)  firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions. 
D)  market risk, but still they have reason to worry about their wealth decreasing as a result of recessions.

Exam 27: The Basic Tools of Finance

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

The future value of $1 saved today is $1/(1 + r).

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

Write the formula to find the present value of $x to be paid in n years.

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

The future value of $500 saved for two years at an interest rate of 5% is

Which of the following is the largest?

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

A measure of the volatility of a variable is its

Which of the following is not consistent with the efficient market hypothesis?

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Suppose the Johnson Corporation releases an earnings report that beats the market's expectations. What does the efficient markets hypothesis predict will happen to Johnson's stock price.

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

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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