Question 1

Which of the following is correct concerning diversification?

Accepted Answer

A)   It only reduces firm-specific risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
B)   It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30.
C)   It only reduces market risk, but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
D)   None of the above is correct.E) All of the above
F) B) and C)

Question 2

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A)   Interest rates rise and truck prices rise.
B)   Interest rates fall and truck prices rise.
C)   Interest rates rise and truck prices fall.
D)   Interest rates fall and truck prices fall.E) A) and C)
F) A) and B)

Question 3

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are
Correct?

Accepted Answer

A)   It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in.
B)   Stock prices, even if not exactly a random walk, are very close to it.
C)   Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis.
D)   All of Chloe's conclusions are correct.E) A) and B)
F) B) and C)

Question 4

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

Accepted Answer

A)   $2205
B)   $2200
C)   $1818.18
D)   $1814.06E) A) and B)
F) None of the above

Question 5

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Accepted Answer

A)   The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B.
B)   The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B.
C)   The interest rates on the two loans are the same.
D)   There is not enough information to determine which loan has the higher interest rate.E) All of the above
F) None of the above

Question 6

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. Suppose the vertical distance between the points (0, A)  and (0, B)  is 5. If her wealth increased from $1,050 to $1,350, then

Accepted Answer

A)   Britney's subjective measure of her well­being would increase by less than 5 units.
B)   Britney's subjective measure of her well­being would increase by more than 5 units.
C)   Britney would change from being a risk-averse person into a person who is not risk averse.
D)   Britney would change from being a person who is not risk averse into a risk-averse person.E) A) and B)
F) C) and D)

Question 7

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) C) and D)

Question 8

The possibility of speculative bubbles in the stock market arises in part because

Accepted Answer

A)   stock prices may not depend at all on psychological factors.
B)   fundamental analysis may be the correct way to evaluate the value of stocks.
C)   future streams of dividend payments are very hard to estimate.
D)   the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.E) B) and C)
F) All of the above

Question 9

Suppose the interest rate is 5 percent. Consider three payment options:
1)  $500 today.
2)  $520 one year from today.
"3)  $550 two years from today.
Which of the following is correct?"

Accepted Answer

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

Question 10

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Accepted Answer

The presen...

Question 11

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is

Accepted Answer

A)   $428.67.
B)   $470.00.
C)   $580.00. 1.
D)   $583.20.E) A) and C)
F) A) and B) D

Question 12

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

Question 13

If the efficient markets hypothesis is correct, then

Accepted Answer

A)   the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy.
B)   the stock market is informationally efficient.
C)   stock prices never follow a random walk.
D)   All of the above are correct.E) B) and D)
F) All of the above

Question 14

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. From the appearance of the graph, we know that

Accepted Answer

A)   Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001.
B)   Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001.
C)   Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001.
D)   None of the above answers can be inferred from the appearance of the utility function.E) B) and C)
F) A) and C)

Question 15

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

Question 16

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Accepted Answer

A) True 
 B)False

Question 17

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Accepted Answer

A)   fundamental analysis is an efficient way to go about choosing which stocks to buy or sell.
B)   stock prices move upward and downward "efficiently," rather than following a "random walk."
C)   the stock market is "informationally efficient."
D)   companies employ officers and managers who are well-qualified to perform their jobs.E) B) and C)
F) A) and C) C

Question 18

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Accepted Answer

A)   You receive the payment 3 years from now and the interest rate is 8 percent.
B)   You receive the payment 3 years from now and the interest rate is 6 percent.
C)   You receive the payment 2 years from now and the interest rate is 8 percent.
D)   You receive the payment 2 years from now and the interest rate is 6 percent.E) B) and C)
F) B) and D)

Question 19

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Accepted Answer

For example at 3 percent the p...

Question 20

According to the efficient market hypothesis, which of the following statements is not correct?

Accepted Answer

A)   Stock market prices tend to rise today if they rose yesterday.
B)   As judged by the typical person in the market, all stocks are fairly valued all the time.
C)   At the market price, the number of shares being offered for sale matches the number of shares people want to buy.
D)   All of the above statements are incorrect.E) B) and C)
F) A) and B) A

Exam 9: The Basic Tools of Finance

Which of the following is correct concerning diversification?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Chloe talked to several stockbrokers and made the following conclusions. Which, if any, of Chloe's conclusions are Correct?

Correct AnswerverifiedShow Answer

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

Correct AnswerverifiedShow Answer

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose the vertical distance between the points (0, A) and (0, B) is 5. If her wealth increased from $1,050 to $1,350, then

Correct AnswerverifiedShow Answer

The available evidence indicates that

Correct AnswerverifiedShow Answer

The possibility of speculative bubbles in the stock market arises in part because

Correct AnswerverifiedShow Answer

Suppose the interest rate is 5 percent. Consider three payment options: 1) $500 today. 2) $520 one year from today. "3) $550 two years from today. Which of the following is correct?"

Correct AnswerverifiedShow Answer

If the interest rate is 8 percent, then what is the present value of $5,000 to be received in ten years?

Correct AnswerverifiedThe presen...View AnswerShow Answer

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is

Correct AnswerverifiedD

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

Correct AnswerverifiedShow Answer

If the efficient markets hypothesis is correct, then

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the graph, we know that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Correct AnswerverifiedShow Answer

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

Correct AnswerverifiedC

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Correct AnswerverifiedShow Answer

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Correct AnswerverifiedFor example at 3 percent the p...View AnswerShow Answer

According to the efficient market hypothesis, which of the following statements is not correct?

Correct AnswerverifiedA

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The presen...
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D

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C

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For example at 3 percent the p...
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A