Question 1

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

Accepted Answer

A)   market risk.
B)   moral hazard.
C)   adverse selection.
D)   risk aversion.E) All of the above
F) None of the above

Question 2

According to the efficient markets hypothesis,at any moment in time,the market price is the best estimate of the company's value based on publicly available information.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is correct?

Accepted Answer

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) None of the above
F) All of the above

Question 4

By purchasing shares in a mutual fund that holds a portfolio of stocks,a person can

Accepted Answer

A)   benefit from fundamental analysis,since the mutual fund requires its shareholders to perform fundamental analysis on their own.
B)   benefit from fundamental analysis,since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
C)   eliminate market risk.
D)   reduce the standard deviation of his or her portfolio to zero.E) A) and B)
F) All of the above

Question 5

Your boss asks you to do fundamental analysis of a corporation.What value is she asking for and how would you estimate this value?

Accepted Answer

The boss is asking for an estimate of th...

Question 6

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A)   For Portfolio A,the average return is 6 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 6 percent and the standard deviation is 25 percent.
B)   For Portfolio A,the average return is 5 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 15 percent.
C)   For Portfolio A,the average return is 5 percent and the standard deviation is 25 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 15 percent.
D)   For Portfolio A,the average return is 5 percent and the standard deviation is 15 percent;for Portfolio B,the average return is 8 percent and the standard deviation is 25 percent.E) B) and D)
F) None of the above

Question 7

Jack's Lock and Key is considering remodeling.It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year,$2,500 the second year,$1,500 the third year and have no effect after then.If the interest rate is 5%,should Jack's remodel? Defend your answer by showing your work.

Accepted Answer

Jack's should remodel.The pres...

Question 8

Some people argue that there are two advantages to holding mutual funds.The first is that mutual funds provide an inexpensive way to hold a diversified portfolio.The second is that because of their expertise mutual fund managers should be able to consistently beat the market.Which of the following does the evidence show?

Accepted Answer

A)   Diversification does reduce risk and mutual funds typically outperform the market.
B)   Diversification does reduce risk,but mutual funds do not typically outperform the market.
C)   Diversification does not reduce risk but mutual funds typically outperform the market.
D)   Diversification does not reduce risk and mutual funds do not typically outperform the market.E) A) and D)
F) None 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) A) and B)

Question 10

What is the future value of $450 at an interest rate of 9 percent two years from today?

Accepted Answer

A)   $534.65
B)   $546.35
C)   $565.18
D)   $574.13E) B) and C)
F) C) and D)

Question 11

Figure 14-5.On the graph,x represents risk and y represents return. 
-Refer to Figure 14-5.Which of the following statements is correct?

Accepted Answer

A)   At point A the standard deviation of the portfolio is 3.
B)   A risk averse person always will choose to be at point A.
C)   At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets.
D)   The figure shows that the greater the risk,the greater the return.E) A) and B)
F) B) and D)

Question 12

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

Question 13

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Accepted Answer

A)   doing research such as thoroughly reading and analyzing companies' annual reports
B)   choosing mutual funds that are managed by individuals with good reputations
C)   viewing individual stock prices as unpredictable
D)   relying upon the advice of Wall Street analystsE) A) and B)
F) B) and C)

Question 14

Consider the following two situations.Nicole accepts a job where she will be driving in dangerous traffic,so she seeks auto insurance.After Braden buys health insurance,he visits the gym less frequently.Which of these person's actions illustrates moral hazard?

Accepted Answer

A)   both Nicole's and Braden's
B)   Nicole's but not Braden's
C)   Braden's but not Nicole's
D)   neither Braden's nor Nicole'sE) B) and C)
F) None of the above

Question 15

Figure 14-1.The figure shows a utility function. 
-Refer to Figure 14-1.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) A) and B)
F) B) and C)

Question 16

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

Question 17

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

Accepted Answer

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

Question 18

Three people go to the bank to cash in their accounts.Amy had her money in an account for 25 years at 4 percent interest.Bill had his money in an account for 20 years at 5 percent interest.Celia had her money in an account for 5 years at 20 percent interest.If each of them originally deposited $500 in their accounts,which of them gets the most money when they cash in their accounts?

Accepted Answer

A)   Amy
B)   Bill
C)   Celia
D)   They each get the same amount.E) None of the above
F) C) and D)

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

Its slope ...

Exam 27: The Basic Tools of Finance

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

Correct Answer
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Its slope ...
View Answer

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

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

Correct Answer
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Which of the following methods of picking stocks is not consistent with fundamental analysis?

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

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

Figure 14-5.On the graph,x represents risk and y represents return. -Refer to Figure 14-5.Which of the following statements is correct?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Diversification

Correct Answer
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Consider the following two situations.Nicole accepts a job where she will be driving in dangerous traffic,so she seeks auto insurance.After Braden buys health insurance,he visits the gym less frequently.Which of these person's actions illustrates moral hazard?

Correct Answer
verified

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Correct Answer
verified

According to the efficient markets hypothesis,at any moment in time,the market price is the best estimate of the company's value based on publicly available information.

Correct Answer
verified

What is the future value of $450 at an interest rate of 9 percent two years from today?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Jack's should remodel.The pres...
View Answer

By purchasing shares in a mutual fund that holds a portfolio of stocks,a person can

Correct Answer
verified

Your boss asks you to do fundamental analysis of a corporation.What value is she asking for and how would you estimate this value?

Correct Answer
verified
The boss is asking for an estimate of th...
View Answer

Correct Answer
verified

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

Correct Answer
verified

Figure 14-1.The figure shows a utility function. -Refer to Figure 14-1.For the person to whom this utility function applies,

Correct Answer
verified

Fundamental analysis is

Correct Answer
verified

Exam 27: The Basic Tools of Finance

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

Correct AnswerverifiedIts slope ...View AnswerShow Answer

When you rent a car,you might treat it with less care than you would if it were your own.This is an example of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following methods of picking stocks is not consistent with fundamental analysis?

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

Figure 14-5.On the graph,x represents risk and y represents return. -Refer to Figure 14-5.Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Diversification

Correct AnswerverifiedShow Answer

Consider the following two situations.Nicole accepts a job where she will be driving in dangerous traffic,so she seeks auto insurance.After Braden buys health insurance,he visits the gym less frequently.Which of these person's actions illustrates moral hazard?

Correct AnswerverifiedShow Answer

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis,at any moment in time,the market price is the best estimate of the company's value based on publicly available information.

Correct AnswerverifiedShow Answer

What is the future value of $450 at an interest rate of 9 percent two years from today?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedJack's should remodel.The pres...View AnswerShow Answer

By purchasing shares in a mutual fund that holds a portfolio of stocks,a person can

Correct AnswerverifiedShow Answer

Your boss asks you to do fundamental analysis of a corporation.What value is she asking for and how would you estimate this value?

Correct AnswerverifiedThe boss is asking for an estimate of th...View AnswerShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 14-1.The figure shows a utility function. -Refer to Figure 14-1.For the person to whom this utility function applies,

Correct AnswerverifiedShow Answer

Fundamental analysis is

Correct AnswerverifiedShow Answer

Correct Answer
verified
Its slope ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified
Jack's should remodel.The pres...
View Answer

Correct Answer
verified

Correct Answer
verified
The boss is asking for an estimate of th...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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