Question 1

Four years ago Matt deposited some money into an account.He earned 5 percent on this account and now has a balance of about $303.88.How much did he deposit into his account when he opened it?

Accepted Answer

A) about $210 
B) about $220 
C) about $240 
D) about $250

Question 2

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.

Question 3

A person with diminishing marginal utility of wealth is risk averse.

Accepted Answer

A) True 
 B)False

Question 4

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.

Question 5

A company that can build a project that will cost $50,000,but returns $52,000 in one year would make a good decision turning this project down if the interest rate were 3 percent.

Accepted Answer

A) True 
 B)False

Question 6

At an annual interest rate of 20 percent,about how many years will it take $100 to double in value?

Accepted Answer

A) 3.5 
B) 4.5 
C) 5 
D) 6

Question 7

Which of the flowing is correct?

Accepted Answer

A) Risk-averse people will not hold stock. 
B) Diversification cannot reduce firm-specific risk. 
C) The larger the percentage of stock in a portfolio, the greater the risk, but the greater the average return. 
D) Stock prices are determined by fundamental analysis rather than supply and demand.

Question 8

A firm has four 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 $5 million at the end of one year,$10 million at the end of two years,and $15 million at the end of three years.Option C 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 D will give the firm $21 million at the end of one year,nothing at the end of two years,and $9 million at the end of three years.Which of these options has the highest present value if the rate of interest is 5 percent?

Accepted Answer

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

Question 9

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

Accepted Answer

A) $215 a year from today has a present value of over $200, $420 a year from now has a present value over $400 
B) $215 a year from today has a present value of over $200, $420 a year from now has a present value under $400 
C) $215 a year from today has a present value of under $200, $420 a year from now has a present value over $400 
D) $215 a year from today has a present value of under $200, $420 a year from now has a present value under $400

Question 10

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 11

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Accepted Answer

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

Question 12

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Accepted Answer

A) market risk by more than an increase from 110 to 120. 
B) market risk by less than an increase from 110 to 120. 
C) firm-specific risk by more than an increase from 110 to 120. 
D) firm-specific risk by less than an increase from 110 to 120.

Question 13

Which of the following is not correct?

Accepted Answer

A) The higher average return on stocks than on bonds comes at the price of higher risk. 
B) Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk. 
C) Insurance markets reduce risk, but not by diversification. 
D) Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

George has almost $300 in his account.Some years ago he put $213.20 into his account that promised to pay 5 percent interest.How many years ago did he open his account?

Accepted Answer

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

Question 16

Roger determines that if Aim Corporation has high revenues,then Zest Corporation will have low revenues,and that if Aim Corporation has low revenues,Zest Corporation will have high revenues.He 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.

Question 17

The sooner a payment is received and the higher the interest rate,the greater the present value of a future payment.

Accepted Answer

A) True 
 B)False

Question 18

Eddie is risk averse.Which of the following is correct about Eddie?

Accepted Answer

A) His marginal utility of wealth increases as his income increases. 
B) He will not accept bets where his probability of winning and losing a dollar are the same. 
C) Both A and B are correct. 
D) Neither A nor B are correct.

Question 19

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years,you will have about $983.58.If your accountant is correct,what is the current rate of interest?

Accepted Answer

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

Question 20

Jamie deposited $1,000 into an account two years ago.The first year she earned 5 percent interest,the second she earned 6 percent.How much money does she have in her account today?

Accepted Answer

A) $1111.11 
B) $1113.00 
C) $1131.33 
D) None of the above are correct to the nearest penny.

Exam 27: The Basic Tools of Finance

Four years ago Matt deposited some money into an account.He earned 5 percent on this account and now has a balance of about $303.88.How much did he deposit into his account when he opened it?

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

A person with diminishing marginal utility of wealth is risk averse.

If a person is risk averse,then she has

A company that can build a project that will cost $50,000,but returns $52,000 in one year would make a good decision turning this project down if the interest rate were 3 percent.

At an annual interest rate of 20 percent,about how many years will it take $100 to double in value?

Which of the flowing is correct?

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

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Which of the following is not correct?

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

George has almost $300 in his account.Some years ago he put $213.20 into his account that promised to pay 5 percent interest.How many years ago did he open his account?

Roger determines that if Aim Corporation has high revenues,then Zest Corporation will have low revenues,and that if Aim Corporation has low revenues,Zest Corporation will have high revenues.He buys stock in both corporations.

The sooner a payment is received and the higher the interest rate,the greater the present value of a future payment.

Eddie is risk averse.Which of the following is correct about Eddie?

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years,you will have about $983.58.If your accountant is correct,what is the current rate of interest?

Jamie deposited $1,000 into an account two years ago.The first year she earned 5 percent interest,the second she earned 6 percent.How much money does she have in her account today?