Question 1

Because the statistic called the standard deviation measures the volatility of a variable,it is used to measure the return of a portfolio.

Accepted Answer

A) True 
 B)False

Question 2

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 D)
F) A) and B)

Question 3

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?

Accepted Answer

A)   $22,880.00
B)   $23,200.00
C)   $23,232.00
D)   $23,328.00E) B) and C)
F) A) and D)

Question 4

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by ...

Question 5

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 B)
F) All of the above

Question 6

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years.What is the highest interest rate at which Halvorson would find this project profitable?

Accepted Answer

A)   7%
B)   6%
C)   5%
D)   It is not profitable at any of these interest rates.E) All of the above
F) A) and B)

Question 7

A bank might make mortgages to people in different regions of the country.By doing so

Accepted Answer

A)   the bank reduces the risk it faces from falling house prices in its region and falling prices in all regions.
B)   the bank reduces the risk it faces of falling house prices in its region but not from falling prices in all regions.
C)   the bank reduces the risk it faces of falling house prices in all regions,but not the risk it faces from falling house prices in its regions.
D)   the bank reduces neither the risk it faces from falling house prices in its region nor falling prices in all regions.E) A) and B)
F) All of the above

Question 8

The efficient markets hypothesis says that

Accepted Answer

A)   only individual investors can make money in the stock market.
B)   it should be easy to find stocks whose price differs from their fundamental value.
C)   stock prices follow a random walk.
D)   All of the above are correct.E) A) and C)
F) A) and B)

Question 9

The value of a stock is based on the

Accepted Answer

A)   present values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rise.
B)   present values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise.
C)   future values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rises.
D)   future values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise.E) B) and C)
F) A) and D)

Question 10

The efficient markets hypothesis implies

Accepted Answer

A)   that all stocks are fairly valued all the time and that no stock is a better buy than any other.
B)   that all stocks are fairly valued all the time,but that some stocks may be better buys than other.
C)   that some stocks may be better buys than others and stock experts can determine which ones.
D)   that no stock is efficiently valued.E) All of the above
F) B) and D)

Question 11

Mary Beth is risk averse and has $1,000 with which to make a financial investment.She has three options.Option A is a risk-free government bond that pays 5 percent interest each year for two years.Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years.Option C is a high-risk stock that is expected to be worth about $1,200 in four years.Mary Beth should choose

Accepted Answer

A)   option A.
B)   option B.
C)   option C.
D)   either A or B because they are the same to her.E) None of the above
F) A) and D)

Question 12

Figure 19-1.The figure shows a utility function. 
-Refer to Figure 19-1.For the person to whom this utility function applies,

Accepted Answer

A)   the more wealth she has,the less utility she gets from an additional dollar of wealth.
B)   the more wealth she has,the more utility she gets from an additional dollar of wealth.
C)   her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600.
D)   her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.E) None of the above
F) C) and D)

Question 13

The market for insurance is one example of reducing risk by using diversification.

Accepted Answer

A) True 
 B)False

Question 14

A company that produces golf clubs is considering buying some new equipment that it expects will increase future profits.If the interest rate falls the present value of these future earnings

Accepted Answer

A)   rises.The company is more likely to buy the equipment.
B)   rises.The company is less likely to buy the equipment.
C)   falls.The company is more likely to buy the equipment.
D)   falls.The company is less likely to buy the equipment.E) A) and B)
F) A) and C)

Question 15

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

Accepted Answer

A)   $414.09.
B)   $434.00.
C)   $441.87.
D)   $481.24.E) All of the above
F) B) and C) C

Question 16

The future value of a deposit in a savings account will be smaller

Accepted Answer

A)   the longer a person waits to withdraw the funds.
B)   the lower the interest rate is.
C)   the larger the initial deposit is.
D)   All of the above are correct.E) All of the above
F) None of the above

Question 17

Economists disagree as to whether

Accepted Answer

A)   the stock price of a company should reflect the company's expected profitability.
B)   the basic tools of finance reflect valid ideas.
C)   stock prices reflect rational estimates of a company's true worth.
D)   there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.E) A) and B)
F) C) and D)

Question 18

Assuming the interest rate is 6 percent,which of the following has the greatest present value?

Accepted Answer

A)   $300 paid in two years
B)   $150 paid in one year plus $140 paid in two years
C)   $100 paid today plus $100 paid in one year plus $100 paid in two years
D)   $285 todayE) A) and C)
F) A) and D)

Question 19

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50.This implies that Thom's

Accepted Answer

A)   marginal utility diminishes as wealth rises,so he must be risk averse.
B)   marginal utility diminishes as wealth rises,but we can't tell from this if he is risk averse.
C)   marginal utility increases as wealth rises,so he must be risk averse.
D)   marginal utility increases as wealth rises,but we can't tell from this if he is risk averse.E) A) and B)
F) A) and C) A

Question 20

Which of the following defines an annuity?

Accepted Answer

A)   For a fee,an insurance company provides you with regular income until you die.
B)   A surcharge is added to life-insurance premiums paid by persons in dangerous occupations.
C)   Annuity is another name for stock funds managed by mutual fund managers.
D)   Annuity is another name for any diversified portfolio.E) All of the above
F) B) and C) A

Exam 19: The Basic Tools of Finance

Because the statistic called the standard deviation measures the volatility of a variable,it is used to measure the return of a portfolio.

Correct Answer
verified

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 Answer
verified

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?

Correct Answer
verified

List three different ways that a risk-averse person can reduce financial risk.

Correct Answer
verified
A risk-averse person can reduce risk by ...
View Answer

The concept of present value helps explain why

Correct Answer
verified

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years.What is the highest interest rate at which Halvorson would find this project profitable?

Correct Answer
verified

A bank might make mortgages to people in different regions of the country.By doing so

Correct Answer
verified

The efficient markets hypothesis says that

Correct Answer
verified

The value of a stock is based on the

Correct Answer
verified

The efficient markets hypothesis implies

Correct Answer
verified

Correct Answer
verified

Figure 19-1.The figure shows a utility function. -Refer to Figure 19-1.For the person to whom this utility function applies,

Correct Answer
verified

The market for insurance is one example of reducing risk by using diversification.

Correct Answer
verified

A company that produces golf clubs is considering buying some new equipment that it expects will increase future profits.If the interest rate falls the present value of these future earnings

Correct Answer
verified

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

Correct Answer
verified
C

The future value of a deposit in a savings account will be smaller

Correct Answer
verified

Economists disagree as to whether

Correct Answer
verified

Assuming the interest rate is 6 percent,which of the following has the greatest present value?

Correct Answer
verified

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50.This implies that Thom's

Correct Answer
verified
A

Which of the following defines an annuity?

Correct Answer
verified
A

Exam 19: The Basic Tools of Finance

Because the statistic called the standard deviation measures the volatility of a variable,it is used to measure the return of a portfolio.

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

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?

Correct AnswerverifiedShow Answer

List three different ways that a risk-averse person can reduce financial risk.

Correct AnswerverifiedA risk-averse person can reduce risk by ...View AnswerShow Answer

The concept of present value helps explain why

Correct AnswerverifiedShow Answer

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years.What is the highest interest rate at which Halvorson would find this project profitable?

Correct AnswerverifiedShow Answer

A bank might make mortgages to people in different regions of the country.By doing so

Correct AnswerverifiedShow Answer

The efficient markets hypothesis says that

Correct AnswerverifiedShow Answer

The value of a stock is based on the

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Figure 19-1.The figure shows a utility function. -Refer to Figure 19-1.For the person to whom this utility function applies,

Correct AnswerverifiedShow Answer

The market for insurance is one example of reducing risk by using diversification.

Correct AnswerverifiedShow Answer

A company that produces golf clubs is considering buying some new equipment that it expects will increase future profits.If the interest rate falls the present value of these future earnings

Correct AnswerverifiedShow Answer

Suppose you put $350 into a bank account today.Interest is paid annually and the annual interest rate is 6 percent.The future value of the $350 after 4 years is

Correct AnswerverifiedC

The future value of a deposit in a savings account will be smaller

Correct AnswerverifiedShow Answer

Economists disagree as to whether

Correct AnswerverifiedShow Answer

Assuming the interest rate is 6 percent,which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50.This implies that Thom's

Correct AnswerverifiedA

Which of the following defines an annuity?

Correct AnswerverifiedA

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
A risk-averse person can reduce risk by ...
View Answer

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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C

Correct Answer
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Correct Answer
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Correct Answer
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A

Correct Answer
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A