Question 1

Give two conditions that are important to the efficient market theory.List one implication of the efficient market theory.

Accepted Answer

The answer of Give two conditions that are important to...

Question 2

Figure 27-2.On the graph,x represents risk and y represents return. 
-Robert is risk averse and has $1,000 with which to make a financial investment.He has three options.Option A is a risk-free government bond that pays 5 percent interest each year for two years.Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years.Option C is a high-risk stock that is expected to be worth about $1,200 in four years.Robert should choose

Accepted Answer

A)  option A. 
B)  option B. 
C)  option C. 
D)  either A or B because they are the same to him.

Question 3

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50.This implies that Thom's

Accepted Answer

A)  marginal utility diminishes as wealth rises,so he must be risk averse. 
B)  marginal utility diminishes as wealth rises,but we can't tell from this if he is risk averse. 
C)  marginal utility increases as wealth rises,so he must be risk averse. 
D)  marginal utility increases as wealth rises,but we can't tell from this if he is risk averse.

Question 4

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 5

The market for insurance is one example of reducing risk by using diversification.

Accepted Answer

A) True 
 B)False

Question 6

The value of a stock is based on the

Accepted Answer

A)  present values of the dividend stream and final price.So,the value of a stock rises when interest rates rise. 
B)  present values of the dividend stream and final price.So,the value of a stock falls when interest rates rise. 
C)  future values of the dividend stream and final price.So,the value of a stock rises when interest rates rises. 
D)  future values of the dividend stream and final price.So,the value of a stock falls when interest rates rise.

Question 7

Risk

Accepted Answer

A)  can be reduced by placing a large number of small bets rather than a small number of large bets. 
B)  can be reduced by increasing the number of stocks in a portfolio. 
C)  Both A and B are correct. 
D)  Neither A nor B are correct.

Question 8

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

Question 9

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Accepted Answer

A) True 
 B)False

Question 10

Assuming the interest rate is 5 percent,which of the following has the greatest present value?

Accepted Answer

A)  $240 paid in three years 
B)  $225 paid in two years 
C)  $210 paid in one year 
D)  $200 today

Question 11

Rita puts $10,000 into each of two different assets.The first asset pays 10 percent interest and the second pays 5 percent.According to the rule of 70,what is the approximate difference in the value of the two assets after 14 years?

Accepted Answer

A)  $12,000 
B)  $14,000 
C)  $15,500 
D)  $20,000

Question 12

Fundamental analysis shows that stock in Wallace Electronics Corporation has a present value that is higher than its price.

Accepted Answer

A)  This stock is overvalued;you should consider adding it to your portfolio. 
B)  This stock is overvalued;you shouldn't consider adding it to your portfolio. 
C)  This stock is undervalued;you should consider adding it to your portfolio. 
D)  This stock is undervalued;you shouldn't consider adding it to your portfolio.

Question 13

You receive $500 today which you plan to save for two years.Also,in two years you will be given another $500.If the interest rate is 5 percent,what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A)  $500(1.05)2 + $500/(1.05)2 
B)  $500(1.05)2 + $500 
C)  $500 + $500/(1.05)2 
D)  $500 + $500

Question 14

An index fund

Accepted Answer

A)  holds only stocks and bonds that are indexed to inflation. 
B)  holds all the stocks in a given stock index. 
C)  guarantees a return that follows the index of leading economic indicators. 
D)  typically has a lower return than a managed fund.

Question 15

What is the future value of $800 one year from today if the interest rate is 7 percent?

Accepted Answer

A)  $747.66 
B)  $756.00 
C)  $856.00 
D)  None of the above are correct to the nearest cent.

Question 16

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)  Her marginal utility of wealth increases as her income increases. 
B)  She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar. 
C)  Her utility function is a straight line. 
D)  None of the above are correct.

Question 18

Dakota rearranges her portfolio so that it has a higher average return.In doing this rearranging,she

Accepted Answer

A)  raised both firm-specific risk and market risk. 
B)  raised firm-specific risk,but not market risk. 
C)  raised market risk,but not firm-specific risk. 
D)  None of the above is correct.

Question 19

At which interest rate is the present value of $260.10 two years from today equal to $250 today?

Accepted Answer

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

Question 20

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

Exam 27: The Basic Tools of Finance

Give two conditions that are important to the efficient market theory.List one implication of the efficient market theory.

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50.This implies that Thom's

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

The market for insurance is one example of reducing risk by using diversification.

The value of a stock is based on the

Risk

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?

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Assuming the interest rate is 5 percent,which of the following has the greatest present value?

Rita puts $10,000 into each of two different assets.The first asset pays 10 percent interest and the second pays 5 percent.According to the rule of 70,what is the approximate difference in the value of the two assets after 14 years?

Fundamental analysis shows that stock in Wallace Electronics Corporation has a present value that is higher than its price.

You receive $500 today which you plan to save for two years.Also,in two years you will be given another $500.If the interest rate is 5 percent,what is the present value of the payment of $500 today and the $500 in two years?

An index fund

What is the future value of $800 one year from today if the interest rate is 7 percent?

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.

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

Dakota rearranges her portfolio so that it has a higher average return.In doing this rearranging,she

At which interest rate is the present value of $260.10 two years from today equal to $250 today?

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?