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Exam 9: The Basic Tools of Finance

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Question 201

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Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Point A represents a situation in which

A) all of a person's savings are allocated to a class of safe assets.
B) the person knows with certainty that his or her return will be 3 percent.
C) the standard deviation of the person's portfolio is zero.
D) All of the above are correct.

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

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Question 202

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Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund, then in three years your $20,000 will grow to $23,152.50. What rate of interest does your financial advisor expect you to earn?

A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent

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

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Question 203

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You have a bond that entitles you to a one-time payment of $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?

Which of the following actions best illustrates moral hazard?

Write the formula to find the present value of $x to be paid in n years.

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

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?

If stock prices follow a random walk, it means

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $0 with probability 0.8 and pays $10 million with probability 0.2. Given Dave's utility function, will he prefer option A or option B? Provide evidence to support your answer.

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

Imagine that two years ago you inherited $20,000 and put it into an account paying a fixed 8 percent annual interest rate. How much money do you have in your account now?

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

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel argued that, in the years leading up to the financial crisis of 2008-2009,

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if

If a person is risk averse, then she has