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List two ways a risk adverse person may attempt to reduce risks.

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buy insurance divers...

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Suppose that fundamental analysis indicates a particular company's stock is overvalued.


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

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Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?


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

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

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


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

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Which of the following is correct?


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 by supply and demand.

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

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Fundamental analysis determines the value of a stock based on


A) dividends.
B) the expected final sale price.
C) the ability of the corporation to earn profits.
D) All of the above are correct.

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

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Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?


A) $1001 + Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years? A) $1001 + B) $1001 + ( .04 10) C) $100 × 10 (1 + .04) D) $1001 +
B) $1001 + ( .04 Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years? A) $1001 + B) $1001 + ( .04 10) C) $100 × 10 (1 + .04) D) $1001 + 10)
C) $100 × 10 Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years? A) $1001 + B) $1001 + ( .04 10) C) $100 × 10 (1 + .04) D) $1001 + (1 + .04)
D) $1001 +Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years? A) $1001 + B) $1001 + ( .04 10) C) $100 × 10 (1 + .04) D) $1001 +

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

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David increases the number of companies in which he holds stocks.


A) This reduces risk's standard deviation and firm-specific risk.
B) This reduces risk's standard deviation and market risk.
C) This raises market risk, but lowers firm-specific risk. What happens to overall risk is unclear.
D) This raises firm-specific risk, but lowers market risk. What happens to overall risk is unclear.

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

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Clint puts $200 into an account when the interest rate is 8 percent. Later he checks his balance and finds that he has a balance of about $272.10. How many years did Clint wait to check his balance?


A) 3 years
B) 3.5 years
C) 4 years
D) 4.5 years

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

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Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?


A) Amy
B) Bill
C) Celia
D) They each get the same amount.

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

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Figure 27-1. The figure shows a utility function. Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing A) wealth. B) utility. C) marginal wealth. D) marginal utility. -Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing


A) wealth.
B) utility.
C) marginal wealth.
D) marginal utility.

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

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Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

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The efficient markets hypothes...

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When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?


A) $1,200.00
B) $1,111.77
C) $983.58
D) $859.09

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

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Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.


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) None of the above
F) A) and C)

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Risk-averse persons will take no risks.

A) True
B) False

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From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

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To spread these risk...

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Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent


A) chance of winning $120 in two years and the interest rate was 11%.
B) chance of winning $114 in two years and the interest rate was 7%.
C) chance of winning $110 in two years and the interest rate was 3%.
D) None of the above are correct; a risk averse person would not accept any of the above bets.

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

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Most financial decisions involve two related elements:


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

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

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A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits


A) rises. The company is more likely to buy the equipment.
B) rises. The company is less likely to buy the equipment.
C) falls. The company is more likely to buy the equipment.
D) falls. The company is less likely to buy the equipment.

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

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You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?


A) 5.50 percent
B) 5.65 percent
C) 6.25 percent
D) 7.05 percent

E) All of the above
F) None of the above

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