Question 1

Diversification

Accepted Answer

A)  increases the likely fluctuation in a portfolio's return, but reduces market risk.
B)  increases the likely fluctuation in a portfolio's return, but reduces firm-specific risk..
C)  reduces the likely fluctuation in a portfolio's return and reduces market risk.
D)  reduces the likely fluctuation in a portfolio's return and reduces firm-specific risk.E) B) and C)
F) A) and C)

Question 2

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

Accepted Answer

A)  X = 809.33
B)  X = 855.56
C)  X = 895.42
D)  X = 916.74E) A) and B)
F) A) and C)

Question 3

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

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.E) None of the above
F) A) and B)

Question 4

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 5

Scenario 27-1
Lisa has a utility function  where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Lisa receives from...

Question 6

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Accepted Answer

A)  $400
B)  $800
C)  $1,600
D)  $3,200E) All of the above
F) C) and D)

Question 7

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Accepted Answer

A)  "random walk"
B)  "random bubble"
C)  "speculative bubble"
D)  "speculative hedge"E) None of the above
F) A) and C)

Question 10

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.E) B) and C)
F) A) and D)

Question 11

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Accepted Answer

A)  Interest rates rise and you get the payment sooner.
B)  Interest rates rise and you have to wait longer for the payment.
C)  Interest rates fall and you get the payment sooner.
D)  Interest rates fall and you have to wait longer to get the payment.E) A) and B)
F) B) and C)

Question 12

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.E) A) and D)
F) A) and C)

Question 13

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Accepted Answer

A)  Simpson announces, just as everyone had expected, that it has hired a new highly respected CEO.
B)  Simpson announces that its profits were low, but not as low as the market had expected.
C)  Analysis by a column in a business weekly indicates that Simpson is overvalued.
D)  All of the above would increase the price.E) A) and B)
F) B) and C)

Question 14

By diversifying, the risk of holding stock

Accepted Answer

A)  can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
B)  can be eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.
C)  can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.
D)  can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.E) B) and D)
F) C) and D)

Question 15

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 16

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Accepted Answer

The presen...

Question 17

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. For the person to whom this utility function applies,

Accepted Answer

A)  the more wealth she has, the less utility she gets from an additional dollar of wealth.
B)  the more wealth she has, the more utility she gets from an additional dollar of wealth.
C)  her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600.
D)  her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.E) B) and C)
F) None of the above

Question 18

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 19

Can insurance be thought of as diversification? Defend your answer.

Accepted Answer

Yes. It replaces a l...

Question 20

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.E) B) and C)
F) B) and D)

Exam 27: Tools of Finance

Diversification

Correct Answer
verified

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies,

Correct Answer
verified

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Correct Answer
verified
The presen...
View Answer

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Correct Answer
verified

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Correct Answer
verified

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

Correct Answer
verified

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?

Correct Answer
verified

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

Correct Answer
verified

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Correct Answer
verified

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

Correct Answer
verified

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Correct Answer
verified

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct Answer
verified

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Correct Answer
verified

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

Correct Answer
verified

By diversifying, the risk of holding stock

Correct Answer
verified

Correct Answer
verified
The utility Lisa receives from...
View Answer

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

Correct Answer
verified

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

Correct Answer
verified
A random walk means the path of a variab...
View Answer

Can insurance be thought of as diversification? Defend your answer.

Correct Answer
verified
Yes. It replaces a l...
View Answer

Exam 27: Tools of Finance

Diversification

Correct AnswerverifiedShow Answer

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies,

Correct AnswerverifiedShow Answer

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Correct AnswerverifiedThe presen...View AnswerShow Answer

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, which of the following would increase the price of stock in the Simpson Corporation?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

Correct AnswerverifiedShow Answer

You are expecting to receive $3,500 at some time in the future. Which of the following would unambiguously increase the present value of this future payment?

Correct AnswerverifiedShow Answer

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Correct AnswerverifiedShow Answer

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

Correct AnswerverifiedShow Answer

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

By diversifying, the risk of holding stock

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe utility Lisa receives from...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedA random walk means the path of a variab...View AnswerShow Answer

Can insurance be thought of as diversification? Defend your answer.

Correct AnswerverifiedYes. It replaces a l...View AnswerShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The presen...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The utility Lisa receives from...
View Answer

Correct Answer
verified

Correct Answer
verified
A random walk means the path of a variab...
View Answer

Correct Answer
verified
Yes. It replaces a l...
View Answer