Question 1

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Accepted Answer

A) 6 
B) 8 
C) 10 
D) 12

Question 2

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.

Question 3

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?

Accepted Answer

A) $12,579.84 
B) $12,596.80 
C) $12,597.12 
D) None of the above are correct to the nearest cent.

Question 4

Of the following interest rates, which is the highest one at which the present value of $200 ten years from today is greater than $150?

Accepted Answer

A) 2 percent 
B) 4 percent 
C) 6 percent 
D) 8 percent

Question 5

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Accepted Answer

A) $457.14 
B) $468.02 
C) $478.47 
D) None of the above are correct to the nearest cent.

Question 6

Most financial decisions involve two related elements:

Accepted Answer

A) advice and consent. 
B) investment and taxes. 
C) time and risk. 
D) saving and consumption.

Question 7

Over the past two centuries, the average annual rates of return were about

Accepted Answer

A) 5 percent for stocks and about 1.5 percent for short-term government bonds. 
B) 6 percent for stocks and about 2.5 percent for short-term government bonds. 
C) 8 percent for stocks and about 3 percent for short-term government bonds. 
D) None of the above is correct.

Question 8

Diversification reduces

Accepted Answer

A) only market risk. 
B) only firm-specific risk. 
C) neither market or firm-specific risk. 
D) both market and firm-specific risk.

Question 9

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.

Question 10

Natasha put $275 in the bank one year ago and forgot about it. Today, the bank sent her a notice indicating that she now has $291.50 in her account. What interest rate did she earn?

Accepted Answer

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

Question 11

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

Accepted Answer

A) 7% 
B) 6% 
C) 5% 
D) It is not profitable at any of these interest rates.

Question 12

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Accepted Answer

A) doubles every 70/X years. 
B) doubles every 70(1 - 1/X) years. 
C) doubles every 70/X2 years. 
D) doubles every 70/(1 - X) years.

Question 13

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A) $240.38 
B) $242.24 
C) $244.40 
D) None of the above are correct to the nearest cent.

Question 14

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.

Question 15

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.

Question 16

If the interest rate is r percent, then the rule of 70 says that your savings will double about every

Accepted Answer

A) 70/(1 - r) years. 
B) 70/(1 + r) years. 
C) 70/r years. 
D) 70(1 + r)/r years.

Question 17

Figure 14-3. The figure shows a utility function for Rob. 
-Refer to Figure 14-3. From the appearance of Rob's utility function, we know that

Accepted Answer

A) the pain that Rob would experience if he lost $200 of his wealth would exceed the pleasure that he would experience if he added $200 to his wealth. 
B) the pleasure that Rob would experience if he added $200 to his wealth would exceed the pain that he would experience if he lost $200 of his wealth. 
C) the property of increasing utility does not apply to Rob. 
D) the property of diminishing marginal utility does not apply to Rob.

Question 18

If you believe that stock prices follow a random walk, then probably you

Accepted Answer

A) do not believe that there is positive relationship between risk and return. 
B) do not believe that stock prices reflect all available information. 
C) believe in the validity of the efficient markets hypothesis. 
D) believe that it is a good idea to engage in fundamental analysis.

Question 19

Which of the following best illustrates diversification?

Accepted Answer

A) A company that produces many different products decides to produce fewer. 
B) After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C) Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services. 
D) A person decides to purchase only stocks that have paid high dividends in the past.

Question 20

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

Accepted Answer

A) the first one 
B) the second one 
C) the third one 
D) They all have the same balance.

Exam 14: The Basic Tools of Finance