Question 1

Which of the following is not correct?

Accepted Answer

A)   The higher average return on stocks than on bonds comes at the price of higher risk.
B)   Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk.
C)   Insurance markets reduce risk, but not by diversification.
D)   Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.E) A) and B)
F) A) and C)

Question 2

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

Accepted Answer

A)   $500/(1.04) 2
B)   $500 - 500(1.04) 2
C)   $500 - $500/(.04) 2
D)   None of the above is correct.E) C) and D)
F) All of the above

Question 3

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth but is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth but is not risk averse.E) A) and B)
F) A) and C)

Question 4

Which of the following best illustrates moral hazard?

Accepted Answer

A)   After a person obtains life insurance, she takes up skydiving.
B)   A person obtains insurance knowing he is in poor health.
C)   A person holds stock only in very risky corporations.
D)   A person holds stocks from only a few corporations.E) All of the above
F) B) and C)

Question 5

Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Accepted Answer

A)   $907.03 to be paid in two years
B)   $1,000.01 to be paid in two years
C)   $1,100.01 to be paid in two years
D)   $1,102.51 to be paid in two yearsE) C) and D)
F) B) and D)

Question 6

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Accepted Answer

A)   benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own.
B)   benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
C)   eliminate market risk.
D)   reduce the standard deviation of his or her portfolio to zero.E) A) and C)
F) B) and C)

Question 7

As the number of stocks in a portfolio rises,

Accepted Answer

A)   both firm-specific risks and market risk fall.
B)   firm-specific risks fall; market risk does not.
C)   market risk falls; firm-specific risks do not.
D)   neither firm-specific risks nor market risk falls.E) C) and D)
F) None of the above

Question 8

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 9

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) All of the above

Question 10

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

Accepted Answer

A)   about 6.3 years
B)   about 7 years
C)   about 7.7 years
D)   about 10 yearsE) B) and C)
F) A) and C)

Question 11

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that ...

Question 12

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Accepted Answer

A)   is now lower than it was before, and so Hydro Grow is less likely to build the building.
B)   is now lower than it was before, and so HydroGrow is more likely to build the building.
C)   is now higher than it was before, and so HydroGrow is less likely to build the building.
D)   is now higher than it was before, and so HydroGrow is more likely to build the building.E) A) and B)
F) C) and D)

Question 13

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Accepted Answer

A) True 
 B)False

Question 14

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Accepted Answer

A)   These are both examples of adverse selection.
B)   These are both examples of moral hazard.
C)   The first example illustrates adverse selection, and the second illustrates moral hazard.
D)   The first example illustrates moral hazard, and the second illustrates adverse selection.E) B) and D)
F) C) and D)

Question 15

Which of the following is not correct?

Accepted Answer

A)   There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks.
B)   The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds.
C)   Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions.
D)   If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis.E) All of the above
F) B) and D)

Question 16

The future value of a deposit in a savings account will be larger

Accepted Answer

A)   the longer a person waits to withdraw the funds.
B)   the higher the interest rate is.
C)   the larger the initial deposit is.
D)   All of the above are correct.E) None of the above
F) A) and C)

Question 17

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $998.25 in your account. If your accountant is correct, what is the current interest rate?

Accepted Answer

A)   9 percent
B)   10 percent
C)   11 percent
D)   12 percentE) All of the above
F) A) and B)

Question 18

If you believe that stock prices follow a random walk, then probably you

Accepted Answer

A)   do not believe that there is positive relationship between risk and return.
B)   do not believe that stock prices reflect all available information.
C)   believe in the validity of the efficient markets hypothesis.
D)   believe that it is a good idea to engage in fundamental analysis.E) B) and D)
F) A) and B)

Question 19

Figure 9-5. On the graph, x represents risk and y represents return.
 
-Refer to Figure 9-5. Which of the following statements is correct?

Accepted Answer

A)   At point A the standard deviation of the portfolio is 3.
B)   A risk averse person always will choose to be at point A.
C)   At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets.
D)   The figure shows that the greater the risk, the greater the return.E) A) and C)
F) A) and B)

Question 20

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?

Accepted Answer

A)   3.5
B)   7
C)   14
D)   None of the above is correct.E) None of the above
F) A) and B)

Exam 9: The Basic Tools of Finance

Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.

Correct AnswerverifiedShow Answer

If Cara's utility falls more by losing $600 than it rises by gaining $600, she has

Correct AnswerverifiedShow Answer

Which of the following is not correct?

Correct AnswerverifiedShow Answer

Which of the following best illustrates moral hazard?

Correct AnswerverifiedShow Answer

Which of the following is not correct?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Correct AnswerverifiedShow Answer

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Correct AnswerverifiedShow Answer

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct AnswerverifiedAn example of adverse selection is that ...View AnswerShow Answer

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 4 percent?

Correct AnswerverifiedShow Answer

Figure 9-5. On the graph, x represents risk and y represents return. -Refer to Figure 9-5. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?

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The future value of a deposit in a savings account will be larger

Correct AnswerverifiedShow Answer

If you believe that stock prices follow a random walk, then probably you

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As the number of stocks in a portfolio rises,

Correct AnswerverifiedShow Answer

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

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Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $998.25 in your account. If your accountant is correct, what is the current interest rate?

Correct AnswerverifiedShow Answer

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Correct AnswerverifiedShow Answer

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An example of adverse selection is that ...
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