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If you put $125 into an account that paid 3.25 percent interest, then how much money would you have in the account after 20 years?


A) $285.83
B) $236.98
C) $202.04
D) $145.65

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

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Some people argue that there are two advantages to holding mutual funds. The first is that mutual funds provide an inexpensive way to hold a diversified portfolio. The second is that because of their expertise mutual fund managers should be able to consistently beat the market. Which of the following does the evidence show?


A) Diversification does reduce risk and mutual funds typically outperform the market.
B) Diversification does reduce risk, but mutual funds do not typically outperform the market.
C) Diversification does not reduce risk but mutual funds typically outperform the market.
D) Diversification does not reduce risk and mutual funds do not typically outperform the market.

E) All of the above
F) A) and B)

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Which of the following games might a risk-averse person play?


A) a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1
B) a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100
C) a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1
D) a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1

E) B) and C)
F) A) and C)

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Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than


A) $8,225.06.
B) $7,920.94.
C) $7,672.58.
D) $6,998.98.

E) B) and C)
F) A) and B)

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Scenario 27-2 Suppose Dave has a utility function Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability 1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A? where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability 1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?

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Dave will prefer option B if t...

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David's Utility Function David's Utility Function If David's current wealth is $61,000, then A) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk averse. B) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not risk averse. C) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is risk averse. D) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is not risk averse. If David's current wealth is $61,000, then


A) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk averse.
B) his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not risk averse.
C) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is risk averse.
D) his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is not risk averse.

E) A) and C)
F) B) and C)

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Scenario 27-1 Lisa has a utility function 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. 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.

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The utility Lisa receives from...

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You receive $2,000 today which you plan to save for 15 years. If the interest rate is 4 percent, what is the future value of this $2,000?


A) $3,494.40
B) $3,585.85
C) $3,601.89
D) $3,676.14

E) A) and B)
F) A) and C)

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Diversification


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 firm­specific 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 firm­specific risk.

E) A) and B)
F) A) and C)

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If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be


A) overvalued, so its price would rise.
B) overvalued, so its price would fall.
C) undervalued, so its price would rise.
D) undervalued, so its price would fall.

E) A) and B)
F) All of the above

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At which interest rate is the present value of $360 three years from today equal to about $310 today?


A) 4.7 percent
B) 5.1 percent
C) 5.5 percent
D) 5.9 percent

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

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Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.


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.

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

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A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should


A) raise the price of the corporation's stock; if it does not the stock is overvalued.
B) raise the price of the corporation's stock; if it does not the stock is undervalued.
C) reduce the price of the corporation's stock; if it does not the stock is overvalued.
D) reduce the price of the corporation's stock; if it does not the stock is undervalued.

E) All of the above
F) A) and D)

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The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?


A) $415,000 if the interest rate is 5%
B) $419,000 if the interest rate is 4%
C) K-Nine would buy the equipment in both cases.
D) K-Nine would not buy the equipment in either case.

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

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

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Efficient market theory says that it sho...

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Why might someone be willing to pay more than the fundamental value for a stock?

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She may believe that...

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Suppose the interest rate is 4 percent. Which of the following has the greatest present value?


A) $100 today plus $190 one year from today
B) $150 today plus $140 one year from today
C) $200 today plus $90 one year from today
D) $250 today plus $40 one year from today

E) A) and D)
F) B) and D)

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Other things the same, as the stocks of a greater number of corporations are held in a portfolio,


A) risk increases at an increasing rate.
B) risk increases at a decreasing rate.
C) risk decreases at an increasing rate.
D) risk decreases at a decreasing rate.

E) B) and D)
F) A) and D)

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Scenario 27-2 Suppose Dave has a utility function Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Is Dave risk averse? Explain. where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Is Dave risk averse? Explain.

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Yes, Dave is risk averse. The ...

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Which of the following makes) insurance premiums higher than otherwise?


A) adverse selection and moral hazard
B) adverse selection, but not moral hazard
C) moral hazard, but not adverse selection
D) neither adverse selection nor moral hazard

E) A) and D)
F) None of the above

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