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If Joanna is risk averse, then


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

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Suppose your bank account pays a 5% interest rate. You are considering purchasing a share of stock in DH Corporation for $250. The stock will pay you a $10 dividend at the end of years 1, 2, 3, 4, and 5. You expect to be able to sell the stock at the end of year 5 for $300. Is DH a good investment? Provide evidence to support your answer.

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The present value of...

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Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is


A) $725.62. It would be higher if the interest rate were higher.
B) $727.28. It would be higher if the interest rate were higher.
C) $725.62. It would be lower if the interest rate were higher.
D) $727.28. It would be lower if the interest rate were higher.

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

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Four years ago Ollie deposited some money into an account. He earned 5 percent interest on this account and now it has a balance of $303.88. About how much money did Ollie deposit into his account when he opened it?


A) $210
B) $220
C) $240
D) $250

E) None of the above
F) All of the above

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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.

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An increase in the interest rate reduces...

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Which of the following is correct concerning stock market irrationality?


A) Bubbles could arise, in part, because the price that people pay for stock depends on what they think someone else will pay for it in the future.
B) Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important.
C) Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market.
D) All of the above are correct.

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

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John has been a sky diver for many years. When the company John works for offers its employees the option to purchase a life insurance policy, John purchases a policy. This illustrates the problem of


A) moral hazard.
B) adverse selection.
C) risk-return tradeoff.
D) diversification.

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

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Until recently, shares of stock accounted for 40 percent of Jimmy's savings. A few days ago, Jimmy sold some bonds and bought some additional shares of stock. Now shares of stock account for 70 percent of Jimmy's savings. How did this change affect Jimmy's expected retun on his savings? How did it affect the risks he faces?

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The increased percentage of st...

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Historically, stocks have offered higher rates of return than bonds.

A) True
B) False

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You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?


A) $66,225.25
B) $67,556.42
C) $68,058.32
D) $71,428.57

E) None of the above
F) A) and D)

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Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?


A) $1,000 Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent? A) $1,000 (1.06) B) C) $1,000/(1.06) D) None of the above is correct. (1.06)
B) Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent? A) $1,000 (1.06) B) C) $1,000/(1.06) D) None of the above is correct.
C) $1,000/(1.06)
D) None of the above is correct.

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

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Risk-averse individuals like good things more than they dislike comparable bad things.

A) True
B) False

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Cash payments that companies make to shareholders are called


A) annuities.
B) dividends.
C) premiums.
D) favorables.

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

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Suppose you purchase a savings bond today for $25. In seven years you may cash in the savings bond for $50. What is the approximate interest rate paid by the savings bond?


A) 5%
B) 10%
C) 15%
D) 20%

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

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Which of the following statements is correct?


A) A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection.
B) A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection.
C) Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard.
D) Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection.

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

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Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.


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) B) and C)
F) A) and C)

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The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?


A) $1,150.00
B) $1,157.63
C) $1,215.51
D) $1,250.00

E) C) and D)
F) B) and D)

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Figure 27-4. The figure shows a utility function for Alex. Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain Why A) people buy various types of insurance. B) we observe a trade-off between risk and return. C) most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets. D) None of the above are correct. -Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain Why


A) people buy various types of insurance.
B) we observe a trade-off between risk and return.
C) most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets.
D) None of the above are correct.

E) A) and C)
F) None of the above

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If you put $250 into an account with a 4 percent interest rate, how many years would you have to wait to have $432.92?


A) 10
B) 14
C) 17
D) 20

E) B) and D)
F) B) and C)

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Risk aversion helps to explain various things we observe in the economy, including


A) adherence to the old adage, "Don't put all your eggs in one basket."
B) insurance.
C) the risk-return trade-off.
D) All of the above are correct.

E) A) and D)
F) None of the above

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