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Figure 27-5. The figure shows a utility function for Dexter. Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. In what ways) does the graph differ from the usual case? A) The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping. B) The utility function shown here is bowed downward convex) , whereas in the usual case the utility function is bowed upward concave) . C) On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. D) On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis. -Refer to Figure 27-5. In what ways) does the graph differ from the usual case?


A) The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping.
B) The utility function shown here is bowed downward convex) , whereas in the usual case the utility function is bowed upward concave) .
C) On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis.
D) On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.

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

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Which of the following is not correct?


A) A risk averse person might be willing to hold stocks.
B) Other things the same, a portfolio with the stocks of a large number of companies has less risk.
C) Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return.
D) Diversification can eliminate market risk but not firm-specific risk.

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

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How does moral hazard matter in the market for insurance?

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Once people have insurance, they have less incentive to be careful about risky behavior.

Suppose that John can buy a savings bond for $500 that matures in ten years and pays John $1,000 with certainty. He is indifferent between this bond and another $500 bond that has some risk but on which the interest rate is 5% higher. How much, to the nearest penny, does the riskier bond pay in ten years?


A) $1,275.91
B) $1,422.63
C) $1,577.69
D) $1,631.17

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

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According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

A) True
B) False

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Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?


A) X = 809.33
B) X = 855.56
C) X = 895.42
D) X = 916.74

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

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Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?


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

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

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Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than 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) None of the above
F) All of the above

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As the number of stocks in a person's portfolio increases,


A) the risk of the portfolio increases, as indicated by the increasing value of the standard deviation of the portfolio.
B) the risk of the portfolio increases, as indicated by the decreasing value of the standard deviation of the portfolio.
C) the risk of the portfolio decreases, as indicated by the increasing value of the standard deviation of the portfolio.
D) the risk of the portfolio decreases, as indicated by the decreasing value of the standard deviation of the portfolio.

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

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D

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?

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It is worth more if it is received in 5 ...

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

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A risk-averse person has


A) a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth.
B) a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth.
C) a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth.
D) a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.

E) C) and D)
F) All 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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If the efficient markets hypothesis is correct, then


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) None of the above
F) All of the above

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Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

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$1,600/$50 = 32. The rule of 70 says tha...

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A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?


A) 4 percent
B) 6 percent
C) 9 percent
D) 11 percent

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

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Sometimes On Time SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either


A) a decrease in the price of a new jet or a decrease in the interest rate.
B) a decrease in the price of a new jet or an increase in the interest rate.
C) an increase in the price of a new jet or a decrease in the interest rate.
D) an increase in the price of a new jet or an increase in the interest rate.

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

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Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.


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 B)

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Figure 27-1. The figure shows a utility function. Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D) -Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?


A) Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)
B) Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)
C) Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)
D) Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600? A) B) C) D)

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

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Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that


A) stock prices follow a random walk.
B) the stock market is informationally efficient.
C) it is better to own stock in 20 companies than it is to own stock in 2 companies.
D) All of the above are correct.

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

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D

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