Question 1

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.

Accepted Answer

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

Question 2

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 3

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

Accepted Answer

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

Question 4

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Accepted Answer

A)   He has reduced firm-specific risk but not market risk.
B)   He has reduced market risk, but not firm-specific risk.
C)   He had reduce both firm-specific risk and market risk.
D)   He has reduced neither firm-specific risk nor market risk.E) A) and C)
F) None of the above

Question 5

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

Accepted Answer

A)   X > 1,055.56.
B)   X > 1,120.89.
C)   X > 1,232.89.
D)   X > 1,338.26.E) A) and D)
F) A) and C)

Question 6

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Accepted Answer

A)   5 years
B)   6 years
C)   7 years
D)   8 yearsE) C) and D)
F) A) and B)

Question 7

Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action

Accepted Answer

A)   increases both risk and the average rate of return.
B)   decreases both risk and the average rate of return.
C)   increases risk, but decreases the average rate of return.
D)   decreases risk, but increases the average rate of return.E) All of the above
F) A) and B)

Question 8

Fundamental analysis is

Accepted Answer

A)   the study of the relation between risk and return of stock portfolios.
B)   the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion.
C)   the study of a company's accounting statements and future prospects to determine its value.
D)   a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.E) None of the above
F) All of the above

Question 9

Diversification

Accepted Answer

A)   increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
B)   increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.
C)   reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
D)   reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.E) C) and D)
F) B) and D)

Question 10

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

Question 11

Laura says that the present value of $700 to be received one year from today if the interest rate is 6 percent is less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Cassie says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

Accepted Answer

A)   Both Laura and Cassie are correct.
B)   Both Laura and Cassie are incorrect.
C)   Only Laura is correct.
D)   Only Cassie is correct.E) A) and B)
F) A) and C)

Question 12

Figure 27-2. The figure shows a utility function for Britney. 
-

Accepted Answer

A)   if Britney owns a house, she would not consider buying fire insurance.
B)   Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.
C)   Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
D)   All of the above are correct.E) B) and C)
F) None of the above

Question 13

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) None of the above
F) All of the above

Question 14

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

Question 15

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Accepted Answer

A) True 
 B)False

Question 16

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Accepted Answer

Buying stocks in a n...

Question 17

Describe the shape of the utility function of a risk averse person.

Accepted Answer

Its slope ...

Question 18

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Accepted Answer

A)   moral hazard and market risk.
B)   moral hazard and firm specific risk.
C)   adverse selection and market risk.
D)   adverse selection and firm specific risk.E) C) and D)
F) A) and C)

Question 19

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

Question 20

In which of the following instances is the present value of the future payment the largest?

Accepted Answer

A)   You will receive $1,000 in 5 years and the annual interest rate is 5 percent.
B)   You will receive $1,000 in 10 years and the annual interest rate is 3 percent.
C)   You will receive $2,000 in 10 years and the annual interest rate is 10 percent.
D)   You will receive $2,400 in 15 years and the annual interest rate is 8 percent.E) All of the above
F) C) and D)

Exam 27: The Basic Tools of Finance

Figure 27-2. The figure shows a utility function for Britney. -

Correct Answer
verified

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Correct Answer
verified

Fundamental analysis is

Correct Answer
verified

Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action

Correct Answer
verified

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Correct Answer
verified

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Correct Answer
verified

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

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 concept of present value helps explain why

Correct Answer
verified

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

Correct Answer
verified

Diversification

Correct Answer
verified

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Correct Answer
verified

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.

Correct Answer
verified
$1,600/$50 = 32. The rule of 70 says tha...
View Answer

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

Correct Answer
verified

In which of the following instances is the present value of the future payment the largest?

Correct Answer
verified

Describe the shape of the utility function of a risk averse person.

Correct Answer
verified
Its slope ...
View Answer

The efficient markets hypothesis says that beating the market consistently is

Correct Answer
verified

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

Correct Answer
verified

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Correct Answer
verified
Buying stocks in a n...
View Answer

Correct Answer
verified

Exam 27: The Basic Tools of Finance

Figure 27-2. The figure shows a utility function for Britney. -

Correct AnswerverifiedShow Answer

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.

Correct AnswerverifiedShow Answer

Fundamental analysis is

Correct AnswerverifiedShow Answer

Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action

Correct AnswerverifiedShow Answer

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Correct AnswerverifiedShow Answer

Lucretia puts $400 into an account when the interest rate is 10 percent. Later she checks her balance and finds it's worth about $708.62. How many years did she wait to check her balance?

Correct AnswerverifiedShow Answer

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

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 concept of present value helps explain why

Correct AnswerverifiedShow Answer

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

Diversification

Correct AnswerverifiedShow Answer

Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations.

Correct AnswerverifiedShow Answer

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.

Correct Answerverified$1,600/$50 = 32. The rule of 70 says tha...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

In which of the following instances is the present value of the future payment the largest?

Correct AnswerverifiedShow Answer

Describe the shape of the utility function of a risk averse person.

Correct AnswerverifiedIts slope ...View AnswerShow Answer

The efficient markets hypothesis says that beating the market consistently is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Correct AnswerverifiedBuying stocks in a n...View AnswerShow Answer

Correct AnswerverifiedShow Answer

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

Correct Answer
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Correct Answer
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Correct Answer
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Its slope ...
View Answer

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Correct Answer
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Correct Answer
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Buying stocks in a n...
View Answer

Correct Answer
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