Question 1

Which of the following is adverse selection?

Accepted Answer

A)   the risk associated with selecting stocks in only a few specific companies
B)   the risk that a person will become overconfident in his ability to select stocks
C)   a high-risk person being more likely to apply for insurance
D)   after obtaining insurance a person having less incentive to be carefulE) A) and B)
F) C) and D)

Question 2

By holding insurance a person

Accepted Answer

A)   reduces the risk of a bad outcome,such as their house burning down.
B)   shares risk and so reduces the burden of risk.
C)   Both A and B are correct.
D)   Neither A nor B are correct.E) A) and C)
F) C) and D)

Question 3

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund,then in three years your $20,000 will grow to $23,152.50.What rate of interest does your financial advisor expect you to earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) B) and C)
F) B) and D)

Question 4

For a risk averse person,

Accepted Answer

A)   the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet.
B)   the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
C)   the utility function exhibits the property of increasing marginal utility.
D)   the utility function gets steeper as wealth increases.E) A) and B)
F) C) and D)

Question 5

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct what is the current interest rate?

Accepted Answer

A)   6 percent
B)   7 percent
C)   8 percent
D)   9 percentE) None of the above
F) C) and D)

Question 6

Discuss the statistical evidence concerning the efficient markets hypothesis.

Accepted Answer

The evidence indicates that stock prices...

Question 7

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

Accepted Answer

A)   Higher average returns come at the price of higher risk.
B)   People who are risk averse should never hold stock.
C)   Diversification cannot eliminate all of the risk in stock portfolio.
D)   None of her conclusions are incorrect.E) A) and B)
F) All of the above

Question 8

The present value of a future payment to be received in three years is $1,000.If the interest rate is 5%,what is the amount that will be paid in three years?

Accepted Answer

A)   $1,150.00
B)   $1,157.63
C)   $1,215.51
D)   $1,250.00E) None of the above
F) B) and C)

Question 9

Twenty years ago,Dr.Montgomery borrowed money from her parents to pay her tuition at graduate school.Now she wants to pay them back.She gives them double what they gave her.According to the rule of 70,what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?

Accepted Answer

A)   3.5 percent
B)   4.5 percent
C)   5 percent
D)   7 percentE) All of the above
F) A) and B)

Question 10

According to fundamental analysis,a saver should prefer to buy stocks that are

Accepted Answer

A)   undervalued.This means the price of the stock is low given the value of the corporation.
B)   undervalued.This means the value of the corporation is low given the price of stock.
C)   overvalued.This means the price of the stock is high given the value of the corporation.
D)   overvalued.This means the value of the corporation is high given the price of stock.E) A) and D)
F) All of the above

Question 11

The financial system

Accepted Answer

A)   involves bank accounts,mortgages,stock prices,and many other items.
B)   involves decisions and actions undertaken by people at a point in time that affect their lives in the future.
C)   coordinates the economy's saving and investment.
D)   All of the above are correct.E) A) and D)
F) A) and C)

Question 12

Sage decides to cash in all his savings to open a recording studio.He has three accounts to cash in.The first earned 9 percent for two years.The second earned 6 percent for three years.And the last earned 3 percent for six years.Supposing he started with $5,000 in each account,from which account will he get the most cash?

Accepted Answer

A)   the two-year account at 9 percent
B)   the three-year account at 6 percent
C)   the six-year account at 3 percent
D)   The accounts are all worth the same.E) C) and D)
F) A) and D)

Question 13

Which of the following is correct concerning diversification?

Accepted Answer

A)   It only reduces firm-specific risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
B)   It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30.
C)   It only reduces market risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
D)   None of the above is correct.E) A) and B)
F) B) and C)

Question 14

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Accepted Answer

A)   $240.38
B)   $242.24
C)   $244.40
D)   None of the above are correct to the nearest cent.E) C) and D)
F) A) and B)

Question 15

Mary talked to several stockbrokers and made the following conclusions.Which,if any,of her conclusions are correct?

Accepted Answer

A)   It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in.
B)   Stock prices,even if not exactly a random walk,are very close to it.
C)   Some people have made a lot of money in the stock market by using insider information,but these cases are not contrary to the efficient markets hypothesis.
D)   All of Mary's conclusions are correct.E) A) and B)
F) A) and C)

Question 16

Imagine that someone offers you $X today or $1,500 in 5 years.If the interest rate is 6 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 > 1,213.33.
D)   X > 1,338.26.E) B) and D)
F) A) and D)

Question 17

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

Accepted Answer

A)   conjectural mistake.
B)   fundamental mishap.
C)   speculative bubble.
D)   temporary inefficiency.E) A) and B)
F) A) and C)

Question 18

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Accepted Answer

A)   doubles every 70/X years.
B)   doubles every 70(1 - 1/X) years.
C)   doubles every 70/X2 years.
D)   doubles every 70/(1 - X) years.E) A) and D)
F) None of the above

Question 19

The efficient markets hypothesis implies that

Accepted Answer

A)   building a portfolio based on a published list of the "most respected" companies is likely to produce a better-than-average return.
B)   if a stock rose in price last year,it is likely to rise in price this year.
C)   managed mutual funds should generally outperform indexed mutual funds.
D)   None of the above are correct.E) C) and D)
F) None of the above

Question 20

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

Accepted Answer

A) True 
 B)False

Exam 19: The Basic Tools of Finance

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Correct Answer
verified

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

Correct Answer
verified

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund,then in three years your $20,000 will grow to $23,152.50.What rate of interest does your financial advisor expect you to earn?

Correct Answer
verified

Discuss the statistical evidence concerning the efficient markets hypothesis.

Correct Answer
verified
The evidence indicates that stock prices...
View Answer

Which of the following is correct concerning diversification?

Correct Answer
verified

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct what is the current interest rate?

Correct Answer
verified

Mary talked to several stockbrokers and made the following conclusions.Which,if any,of her conclusions are correct?

Correct Answer
verified

Which of the following is adverse selection?

Correct Answer
verified

The efficient markets hypothesis implies that

Correct Answer
verified

According to fundamental analysis,a saver should prefer to buy stocks that are

Correct Answer
verified

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

Correct Answer
verified

By holding insurance a person

Correct Answer
verified

The present value of a future payment to be received in three years is $1,000.If the interest rate is 5%,what is the amount that will be paid in three years?

Correct Answer
verified

The financial system

Correct Answer
verified

Correct Answer
verified

Imagine that someone offers you $X today or $1,500 in 5 years.If the interest rate is 6 percent,then you would prefer to take the $X today if and only if

Correct Answer
verified

For a risk averse person,

Correct Answer
verified

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

Correct Answer
verified

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Correct Answer
verified

Correct Answer
verified

Exam 19: The Basic Tools of Finance

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

Correct AnswerverifiedShow Answer

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

Correct AnswerverifiedShow Answer

Your financial advisor tells you that if you earn the historical rate of return on a certain mutual fund,then in three years your $20,000 will grow to $23,152.50.What rate of interest does your financial advisor expect you to earn?

Correct AnswerverifiedShow Answer

Discuss the statistical evidence concerning the efficient markets hypothesis.

Correct AnswerverifiedThe evidence indicates that stock prices...View AnswerShow Answer

Which of the following is correct concerning diversification?

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct what is the current interest rate?

Correct AnswerverifiedShow Answer

Mary talked to several stockbrokers and made the following conclusions.Which,if any,of her conclusions are correct?

Correct AnswerverifiedShow Answer

Which of the following is adverse selection?

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies that

Correct AnswerverifiedShow Answer

According to fundamental analysis,a saver should prefer to buy stocks that are

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

By holding insurance a person

Correct AnswerverifiedShow Answer

The present value of a future payment to be received in three years is $1,000.If the interest rate is 5%,what is the amount that will be paid in three years?

Correct AnswerverifiedShow Answer

The financial system

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Imagine that someone offers you $X today or $1,500 in 5 years.If the interest rate is 6 percent,then you would prefer to take the $X today if and only if

Correct AnswerverifiedShow Answer

For a risk averse person,

Correct AnswerverifiedShow Answer

Angela reads financial advice columns and concludes the following.Which,if any,of her conclusions are incorrect?

Correct AnswerverifiedShow Answer

What is the present value of a payment of $250 one year from today if the interest rate is 4 percent?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The evidence indicates that stock prices...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified