Question 1

If Joanna is risk averse, then

Accepted Answer

A)   her utility function exhibits the property of decreasing utility.
B)   her utility function exhibits the property of increasing marginal utility.
C)   she dislikes bad things more than she likes comparable good things.
D)   she is unlike most people, because most people are not risk averse.E) B) and D)
F) All of the above

Question 2

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Accepted Answer

A)   and marginal utility function are both upward sloping.
B)   and marginal utility function are both downward sloping.
C)   is upward sloping and her marginal utility function is downward sloping.
D)   is downward sloping and her marginal utility function is upward sloping.E) A) and D)
F) C) and D)

Question 3

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

Accepted Answer

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

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

Question 5

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is

Accepted Answer

A)   overvalued so you should consider buying it.
B)   overvalued so you should not consider buying it.
C)   undervalued so you should consider buying it.
D)   undervalued so you should not consider buying it.E) All of the above
F) C) and D)

Question 6

When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

Accepted Answer

A)   5 years
B)   6 years
C)   7 years
D)   8 yearsE) A) and D)
F) A) and C)

Question 7

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.

Accepted Answer

Yes, Dave is risk averse. The ...

Question 8

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)   $20,000E) None of the above
F) B) and D)

Question 9

The risk of a portfolio

Accepted Answer

A)   increases as the number of stocks in the portfolio increases.
B)   is usually measured using a statistic called the standard diversification.
C)   is positively related to the average return of the portfolio.
D)   bears no relationship to the average return of the portfolio.E) A) and B)
F) A) and C)

Question 10

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. Use the following diagram to graph Lisa's utility function for  .

Accepted Answer

Here is th...

Question 11

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

Accepted Answer

buy insurance divers...

Question 12

Which of the following defines an annuity?

Accepted Answer

A)   For a fee, an insurance company provides you with regular income until you die.
B)   A surcharge is added to life-insurance premiums paid by persons in dangerous occupations.
C)   Annuity is another name for stock funds managed by mutual fund managers.
D)   Annuity is another name for any diversified portfolio.E) B) and C)
F) C) and D)

Question 13

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Accepted Answer

A)   4 percent
B)   6 percent
C)   9 percent
D)   11 percentE) B) and C)
F) A) and D)

Question 14

The idea of insurance

Accepted Answer

A)   would not appeal to a risk-averse person.
B)   is, other things the same, to reduce the probability of a fire, accident, or death.
C)   is to share risk.
D)   is to provide a sure thing, not a gamble.E) None of the above
F) B) and C)

Question 15

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) B) and D)
F) A) and B)

Question 16

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

Accepted Answer

A)   $22,880.00
B)   $23,200.00
C)   $23,232.00
D)   $23,328.00E) All of the above
F) None of the above

Question 17

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A)   raise the price and raise the present value of the corporation's stock.
B)   raise the price and lower the present value of the corporation's stock.
C)   lower the price and raise the present value of the corporation's stock.
D)   lower the price and lower the present value of the corporation's stock.E) All of the above
F) C) and D)

Question 18

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Accepted Answer

The presen...

Question 19

Suppose the interest rate is 8 percent. Consider three payment options. 
1)  $300 today.
2)  $330 one year from today.
3)  $360 two years from today.
Which of the following is correct?

Accepted Answer

A)   1 has the highest present value and 2 has the lowest. 
B)   2 has the highest present value and 3 has the lowest.
C)   3 has the highest present value and 1 has the lowest.
D)   None of the above is correct.E) A) and D)
F) None of the above

Question 20

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Accepted Answer

The future...

Exam 19: The Basic Tools of Finance

The risk of a portfolio

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If Joanna is risk averse, then

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Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

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

Correct Answerverifiedbuy insurance divers...View AnswerShow Answer

Suppose the interest rate is 8 percent. Consider three payment options. 1) $300 today. 2) $330 one year from today. 3) $360 two years from today. Which of the following is correct?

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

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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. Use the following diagram to graph Lisa's utility function for .

Correct AnswerverifiedHere is th...View AnswerShow Answer

The idea of insurance

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Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Correct AnswerverifiedThe presen...View AnswerShow Answer

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.

Correct AnswerverifiedYes, Dave is risk averse. The ...View AnswerShow Answer

Which of the following defines an annuity?

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A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

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When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

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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

Correct AnswerverifiedShow Answer

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is

Correct AnswerverifiedShow Answer

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Correct AnswerverifiedShow Answer

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Correct AnswerverifiedShow Answer

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Correct AnswerverifiedThe future...View AnswerShow Answer

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buy insurance divers...
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Here is th...
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The presen...
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Yes, Dave is risk averse. The ...
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The future...
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