Question 1

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)   A person adds risky stock to his portfolio.
B)   A person who has narrowly avoided many accidents applies for automobile insurance.
C)   A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)   A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.E) C) and D)
F) A) and D)

Question 2

When a person engages in detailed analysis of a company to determine its value,he or she is engaging in

Accepted Answer

A)   standard deviation analysis.
B)   informational analysis.
C)   fundamental analysis.
D)   efficiency analysis.E) A) and B)
F) A) and D)

Question 3

Actively managed mutual funds usually fail to outperform index funds,and this fact provides evidence in favor of the efficient markets hypothesis.

Accepted Answer

A) True 
 B)False

Question 4

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Accepted Answer

A)   5
B)   7
C)   9
D)   11E) A) and B)
F) All of the above

Question 5

A person's subjective measure of well-being or satisfaction is called aversion.

Accepted Answer

A) True 
 B)False

Question 6

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

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

Question 7

Which of the following is the largest?

Accepted Answer

A)   the future value of $250 with 3% interest for 2 years
B)   the future value of $250 at 2% interest for 3 years
C)   the present value of $250 to be paid in two years when the interest rate is 3%
D)   the present value of $250 to be paid in three years when the interest rate is 2%E) B) and C)
F) None of the above

Question 8

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 9

At an annual interest rate of 10 percent,about how many years will it take $100 to triple in value?

Accepted Answer

A)   8
B)   10
C)   12
D)   14E) A) and B)
F) B) and C)

Question 10

In effect,an annuity provides insurance

Accepted Answer

A)   against the risk of dying and leaving one's family without a regular income.
B)   against the risk of living too long.
C)   to people who are not risk-averse.
D)   to people whose utility functions do not display the usual properties.E) B) and D)
F) None of the above

Question 11

If the efficient market hypothesis is correct,then

Accepted Answer

A)   index funds should typically beat managed funds,and usually do.
B)   index fund should typically beat managed funds,but usually do not.
C)   mutual funds should typically beat index funds,and usually do.
D)   mutual funds should typically beat index funds,but usually do not.E) B) and C)
F) A) and C)

Question 12

Which of the following is correct?

Accepted Answer

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

Question 13

According to the efficient markets hypothesis,the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Accepted Answer

A) True 
 B)False

Question 14

A risk-averse person has

Accepted Answer

A)   a utility function whose slope gets flatter as wealth rises.This means they have increasing marginal utility of wealth.
B)   a utility function whose slope gets flatter as wealth rises.This means they have diminishing marginal utility of wealth.
C)   a utility function whose slope gets steeper as wealth rises.This means they have increasing marginal utility of wealth.
D)   a utility function whose slope gets steeper as wealth rises.This means they have diminishing utility of wealth.E) A) and D)
F) B) and C)

Question 15

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

Question 16

As the interest rate increases,what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces...

Question 17

Three years ago Heidi put $1,200 into an account paying 2 percent interest.How much is the account worth today?

Accepted Answer

A)   $1,225.38
B)   $1,248.48
C)   $1,264.72
D)   $1,273.45E) B) and C)
F) All of the above

Question 18

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

Accepted Answer

A)   Gerhardt announces,just as everyone had expected,that it has hired a new highly respected CEO.
B)   Gerhardt 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 Gerhardt is overvalued.
D)   All of the above would increase the price.E) A) and B)
F) A) and D)

Question 19

As the number of stocks in a person's portfolio increases,

Accepted Answer

A)   the risk of the portfolio increases,as indicated by the increasing value of the standard deviation of the portfolio.
B)   the risk of the portfolio increases,as indicated by the decreasing value of the standard deviation of the portfolio.
C)   the risk of the portfolio decreases,as indicated by the increasing value of the standard deviation of the portfolio.
D)   the risk of the portfolio decreases,as indicated by the decreasing value of the standard deviation of the portfolio.E) A) and D)
F) C) and D)

Question 20

Which of the following is a source of market risk?

Accepted Answer

A)   Holding stocks in many companies carries the risk of a reduced average return.
B)   Real GDP varies over time and sales and profits move with real GDP.
C)   When a paper producer has declining sales,it is likely that so will other paper producers.
D)   If stockholders become aggravated with the way a CEO runs a company,the price of that company's stock might fall in the stock market.E) A) and C)
F) B) and C)

Exam 19: The Basic Tools of Finance

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

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

Correct AnswerverifiedShow Answer

As the interest rate increases,what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Correct AnswerverifiedAn increase in the interest rate reduces...View AnswerShow Answer

At an annual interest rate of 10 percent,about how many years will it take $100 to double in value?

Correct AnswerverifiedShow Answer

When a person engages in detailed analysis of a company to determine its value,he or she is engaging in

Correct AnswerverifiedShow Answer

Three years ago Heidi put $1,200 into an account paying 2 percent interest.How much is the account worth today?

Correct AnswerverifiedShow Answer

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Correct AnswerverifiedShow Answer

As the number of stocks in a person's portfolio increases,

Correct AnswerverifiedShow Answer

A risk-averse person has

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Which of the following is correct?

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In effect,an annuity provides insurance

Correct AnswerverifiedShow Answer

At an annual interest rate of 10 percent,about how many years will it take $100 to triple in value?

Correct AnswerverifiedShow Answer

A person's subjective measure of well-being or satisfaction is called aversion.

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates adverse selection?

Correct AnswerverifiedShow Answer

Actively managed mutual funds usually fail to outperform index funds,and this fact provides evidence in favor of the efficient markets hypothesis.

Correct AnswerverifiedShow Answer

Which of the following is the largest?

Correct AnswerverifiedShow Answer

If the efficient market hypothesis is correct,then

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Which of the following is a source of market risk?

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

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis,the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Correct AnswerverifiedShow Answer

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An increase in the interest rate reduces...
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