Question 1

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

Accepted Answer

A)   option A.
B)   option B.
C)   option C.
D)   either A or B because they are the same to her.E) None of the above
F) C) and D)

Question 2

In general, as a person includes fewer stocks and more bonds in his portfolio,

Accepted Answer

A)   both risk and expected return rise.
B)   risk rises but expected return falls.
C)   risk falls, but expected return rises.
D)   both risk and expected return fall.E) All of the above
F) C) and D)

Question 3

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Accepted Answer

A)   and the example with Brad illustrate adverse selection.
B)   and the example with Brad illustrate moral hazard.
C)   illustrates adverse selection; the example with Brad illustrates moral hazard.
D)   illustrates moral hazard; the example with Brad illustrates adverse selection.E) B) and D)
F) All of the above

Question 4

The concept of present value helps explain why

Accepted Answer

A)   investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
B)   investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases.
C)   the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases.
D)   None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.E) None of the above
F) A) and B)

Question 5

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 6

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A)   firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
B)   market risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
C)   firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions.
D)   market risk, but still they have reason to worry about their wealth decreasing as a result of recessions.E) C) and D)
F) B) and C)

Question 7

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Accepted Answer

A)   3 years
B)   3.5 years
C)   4 years
D)   4.5 yearsE) A) and B)
F) All of the above

Question 8

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A)   impossible. Many studies find that beating the market is, at best, extremely difficult.
B)   impossible. Many studies find that beating the market is relatively easy.
C)   relatively easy. Many studies find that beating the market is, at best, extremely difficult.
D)   relatively easy. Many studies find that beating the market is relatively easy.E) B) and C)
F) All of the above

Question 9

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

Accepted Answer

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

Question 10

The price of a bond is equal to the sum of the present values of its future payments. Suppose a certain bond pays $50 one year from today and $1,050 two years from today. What is the price of the bond if the interest rate is 5 percent?

Accepted Answer

A)   $1,050.00
B)   $1,045.35
C)   $1,000.00
D)   $945.35E) C) and D)
F) B) and D)

Question 11

The available evidence indicates that

Accepted Answer

A)   about one-half of all managers of active mutual funds consistently outperform index funds.
B)   outperforming the market on a consistent basis is extremely difficult to do.
C)   there is little truth to the notion that there is a trade-off between risk and return.
D)   there is little truth to the efficient markets hypothesis.E) A) and B)
F) None of the above

Question 12

Diversification cannot reduce market risk.

Accepted Answer

A) True 
 B)False

Question 13

Brittany wants to have about $500,000 when she retires in 10 years. She has $200,000 to deposit now. At which of the following interest rates would her deposit come closest to $500,000 after 10 years?

Accepted Answer

A)   9.6 percent
B)   9.8 percent
C)   10 percent
D)   10.2 percentE) All of the above
F) B) and C)

Question 14

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Accepted Answer

A)   market risk by more than an increase from 110 to 120.
B)   market risk by less than an increase from 110 to 120.
C)   firm-specific risk by more than an increase from 110 to 120.
D)   firm-specific risk by less than an increase from 110 to 120.E) B) and C)
F) A) and C)

Question 15

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Accepted Answer

A) True 
 B)False

Question 16

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by ...

Question 17

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 C)
F) B) and D)

Question 18

What is the future value of $375 at an interest rate of 3 percent one year from today?

Accepted Answer

A)   $371.75
B)   $386.25
C)   $393.33
D)   None of the above are correct to the nearest cent.E) B) and C)
F) A) and D)

Question 19

Which of the following is adverse selection?

Accepted Answer

A)   the risk associated with selecting stocks in only a few specific companies
B)   the risk that a person will become overconfident in his ability to select stocks
C)   a high-risk person being more likely to apply for insurance
D)   after obtaining insurance a person having less incentive to be carefulE) C) and D)
F) B) and D)

Question 20

Figure 9-4. The figure shows a utility function for Dexter.
 
-Refer to Figure 9-4. From the appearance of the utility function, we know that

Accepted Answer

A)   Dexter is risk averse.
B)   Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)   the property of decreasing marginal utility applies to Dexter.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Exam 9: The Basic Tools of Finance

The available evidence indicates that

Correct Answer
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In effect, an annuity provides insurance

Correct Answer
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Correct Answer
verified

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Correct Answer
verified

Diversification cannot reduce market risk.

Correct Answer
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Which of the following is adverse selection?

Correct Answer
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Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Correct Answer
verified

Brittany wants to have about $500,000 when she retires in 10 years. She has $200,000 to deposit now. At which of the following interest rates would her deposit come closest to $500,000 after 10 years?

Correct Answer
verified

Figure 9-4. The figure shows a utility function for Dexter. -Refer to Figure 9-4. From the appearance of the utility function, we know that

Correct Answer
verified

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Correct Answer
verified

The concept of present value helps explain why

Correct Answer
verified

List three different ways that a risk-averse person can reduce financial risk.

Correct Answer
verified
A risk-averse person can reduce risk by ...
View Answer

In general, as a person includes fewer stocks and more bonds in his portfolio,

Correct Answer
verified

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

Correct Answer
verified

The efficient markets hypothesis says that beating the market consistently is

Correct Answer
verified

What is the future value of $375 at an interest rate of 3 percent one year from today?

Correct Answer
verified

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct Answer
verified

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Correct Answer
verified

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 Answer
verified

The price of a bond is equal to the sum of the present values of its future payments. Suppose a certain bond pays $50 one year from today and $1,050 two years from today. What is the price of the bond if the interest rate is 5 percent?

Correct Answer
verified

Exam 9: The Basic Tools of Finance

The available evidence indicates that

Correct AnswerverifiedShow Answer

In effect, an annuity provides insurance

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Correct AnswerverifiedShow Answer

Diversification cannot reduce market risk.

Correct AnswerverifiedShow Answer

Which of the following is adverse selection?

Correct AnswerverifiedShow Answer

Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby

Correct AnswerverifiedShow Answer

Brittany wants to have about $500,000 when she retires in 10 years. She has $200,000 to deposit now. At which of the following interest rates would her deposit come closest to $500,000 after 10 years?

Correct AnswerverifiedShow Answer

Figure 9-4. The figure shows a utility function for Dexter. -Refer to Figure 9-4. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

Hector puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Hector wait to check his balance?

Correct AnswerverifiedShow Answer

The concept of present value helps explain why

Correct AnswerverifiedShow Answer

List three different ways that a risk-averse person can reduce financial risk.

Correct AnswerverifiedA risk-averse person can reduce risk by ...View AnswerShow Answer

In general, as a person includes fewer stocks and more bonds in his portfolio,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The efficient markets hypothesis says that beating the market consistently is

Correct AnswerverifiedShow Answer

What is the future value of $375 at an interest rate of 3 percent one year from today?

Correct AnswerverifiedShow Answer

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct AnswerverifiedShow Answer

An increase in the number of corporations in a portfolio from 1 to 10 reduces

Correct AnswerverifiedShow Answer

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

The price of a bond is equal to the sum of the present values of its future payments. Suppose a certain bond pays $50 one year from today and $1,050 two years from today. What is the price of the bond if the interest rate is 5 percent?

Correct AnswerverifiedShow Answer

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A risk-averse person can reduce risk by ...
View Answer

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