Question 1

The present value of a payment to be made in the future falls as

Accepted Answer

A)   the interest rate rises and the time until the payment is made increases.
B)   the interest rate rises and the time until the payment is made decreases.
C)   the interest rate falls and the time until the payment is made increases.
D)   the interest rate falls and the time until the payment is made decreases.E) A) and B)
F) A) and C)

Question 2

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Accepted Answer

A)   $X(1 + rN) N
B)   $X(1 + r) N
C)   $X(1 + rN) 
D)   $X(1 + r/N) NE) A) and D)
F) B) and D)

Question 3

At an annual interest rate of 14 percent,about how many years will it take $100 to double in value?

Accepted Answer

A)   3
B)   4
C)   5
D)   7E) B) and D)
F) B) and C)

Question 4

Of the following interest rates,which is the highest one at which the present value of $200 ten years from today is greater than $150?

Accepted Answer

A)   2 percent
B)   4 percent
C)   6 percent
D)   8 percentE) B) and D)
F) B) and C)

Question 5

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Accepted Answer

A)   9% but not 10%
B)   10% but not 11%
C)   11% but not 12%
D)   None of the above is correct; a risk averse person would not accept any of the above bets.E) A) and B)
F) C) and D)

Question 6

Figure 19-1.The figure shows a utility function. 
-Refer to Figure 19-1.Suppose the person to whom this utility function applies begins with $600 in wealth.Starting from there,

Accepted Answer

A)   she would be willing to accept a coin-flip bet that would result in her winning $200 if the result was "heads" or losing $200 if the result was "tails."
B)   the pain of losing $200 of her wealth would equal the pleasure of adding $200 to her wealth.
C)   the pain of losing $200 of her wealth would exceed the pleasure of adding $200 to her wealth.
D)   the pleasure of adding $200 to her wealth would exceed the pain of losing $200 of her wealth.E) A) and B)
F) All of the above

Question 7

The utility function of a risk-averse person has a

Accepted Answer

A)   positive slope and gets steeper as wealth increases.
B)   positive slope but gets flatter as wealth increases.
C)   negative slope but gets steeper as wealth increases.
D)   negative slope and gets flatter as wealth increases.E) All of the above
F) A) and B)

Question 8

April,who currently owns stock in four companies,has decided to expand her portfolio by purchasing stock in virtually every company that sells stock.In doing so,April will

Accepted Answer

A)   increase the risk of her portfolio.
B)   decrease some,but not all,of the risk of her portfolio.
C)   decrease all of the risk of her portfolio.
D)   leave the risk of her portfolio unchanged from its present level.E) A) and D)
F) A) and C)

Question 9

Give two conditions that are important to the efficient market theory.List one implication of the efficient market theory.

Accepted Answer

Efficient market theory says that it sho...

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

Accepted Answer

For example at 3 percent the p...

Question 12

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A)   Stock prices should follow a random walk.
B)   Index funds should typically outperform highly managed funds.
C)   News has no effect on stock prices.
D)   There is little point in spending many hours studying the business pages looking for undervalued stocks.E) None of the above
F) A) and B)

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A)   firm-specific risk,and so they do not need to worry about their wealth decreasing as a result of recessions.
B)   market risk,and so they do not need to worry about their wealth decreasing as a result of recessions.
C)   firm-specific risk,but still they have reason to worry about their wealth decreasing as a result of recessions.
D)   market risk,but still they have reason to worry about their wealth decreasing as a result of recessions.E) B) and D)
F) All of the above

Question 15

If stock prices follow a random walk,then stock investors can make large profits by

Accepted Answer

A)   buying stocks whose prices have been falling for several days.
B)   buying stocks whose prices have been rising for several days.
C)   performing fundamental analysis of stocks using data contained in annual reports.
D)   using inside information.E) A) and B)
F) A) and C)

Question 16

If Cara's utility falls more by losing $600 than it rises by gaining $600,she has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth but is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth but is not risk averse.E) B) and C)
F) A) and D)

Question 17

Tonya put $250 into an account three years ago.The first year he earned 6 percent interest,the second year 7 percent,and the third year 8 percent.About how about much does Tonya have in her account now?

Accepted Answer

A)   $302.50
B)   $306.23
C)   $308.67
D)   $309.39E) C) and D)
F) All of the above

Question 18

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 19

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Accepted Answer

A)   $95.50
B)   $95.24
C)   $95.00
D)   None of the above are correct to the nearest cent.E) B) and C)
F) None of the above

Question 20

Bert put $75 into an account and one year later had $100.What interest rate was paid on Bert's deposit?

Accepted Answer

A)   20 percent
B)   25 percent
C)   28 percent
D)   None of the above is correct.E) A) and C)
F) A) and D)

Exam 19: The Basic Tools of Finance

Tonya put $250 into an account three years ago.The first year he earned 6 percent interest,the second year 7 percent,and the third year 8 percent.About how about much does Tonya have in her account now?

Correct AnswerverifiedShow Answer

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

Correct AnswerverifiedShow Answer

At an annual interest rate of 14 percent,about how many years will it take $100 to double in value?

Correct AnswerverifiedShow Answer

Of the following interest rates,which is the highest one at which the present value of $200 ten years from today is greater than $150?

Correct AnswerverifiedShow Answer

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Correct AnswerverifiedShow Answer

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct AnswerverifiedShow Answer

Give two conditions that are important to the efficient market theory.List one implication of the efficient market theory.

Correct AnswerverifiedEfficient market theory says that it sho...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is the correct way to compute the future value of $X that earns r percent interest for N years?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If stock prices follow a random walk,then stock investors can make large profits by

Correct AnswerverifiedShow Answer

Figure 19-1.The figure shows a utility function. -Refer to Figure 19-1.Suppose the person to whom this utility function applies begins with $600 in wealth.Starting from there,

Correct AnswerverifiedShow Answer

Which of the following is not consistent with the efficient market hypothesis?

Correct AnswerverifiedShow Answer

The utility function of a risk-averse person has a

Correct AnswerverifiedShow Answer

The present value of a payment to be made in the future falls as

Correct AnswerverifiedShow Answer

Bert put $75 into an account and one year later had $100.What interest rate was paid on Bert's deposit?

Correct AnswerverifiedShow Answer

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate.Show your work.

Correct AnswerverifiedFor example at 3 percent the p...View AnswerShow Answer

April,who currently owns stock in four companies,has decided to expand her portfolio by purchasing stock in virtually every company that sells stock.In doing so,April will

Correct AnswerverifiedShow Answer

If Cara's utility falls more by losing $600 than it rises by gaining $600,she has

Correct AnswerverifiedShow Answer

The market for insurance is an example of diversification.

Correct AnswerverifiedShow Answer

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Efficient market theory says that it sho...
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For example at 3 percent the p...
View Answer

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Correct Answer
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