Question 1

To diversify, a homeowner with a variable-rate mortgage should choose investments that

Accepted Answer

A)   pay higher returns when interest rates rise and lower returns when interest rates fall.
B)   pay lower returns when interest rates rise and higher returns when interest rates fall.
C)   provide a higher return than the market average.
D)   provide a lower return than the market average.E) A) and B)
F) A) and C)

Question 2

Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

Accepted Answer

A)   $540.75
B)   $540.80
C)   $540.85
D)   None of the above are correct to the nearest cent.E) B) and C)
F) A) and B)

Question 3

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. What is measured along the vertical axis?

Accepted Answer

A)   risk aversion
B)   marginal utility
C)   utility
D)   the number of units of a good that can be purchasedE) All of the above
F) None of the above

Question 4

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

Question 5

A person's subjective measure of well­being or satisfaction is called aversion.

Accepted Answer

A) True 
 B)False

Question 6

Lori, 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, Lori 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 C)
F) C) and D)

Question 7

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Accepted Answer

A) True 
 B)False

Question 8

You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

Accepted Answer

A)   lower than about 8 percent.
B)   higher than about 8 percent.
C)   lower than about 10 percent.
D)   higher than about 10 percent.E) B) and C)
F) A) and D)

Question 9

Some people claim that stocks follow a random walk. What does this mean?

Accepted Answer

A)   The price of stock one day is about what it was on the previous day.
B)   Changes in stock prices cannot be predicted from available information.
C)   Stock prices are not determined by market fundamentals such as supply and demand.
D)   Prices of stocks of different firms in the same industry show no or little tendency to move together.E) All of the above
F) A) and C)

Question 10

At which interest rate is the present value of $260.10 two years from today equal to $250 today?

Accepted Answer

A)   2 percent
B)   3 percent
C)   4 percent
D)   5 percentE) A) and C)
F) B) and C)

Question 11

Figure 27-4. The figure shows a utility function for Alex. 
-Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Accepted Answer

A)   the pain that Alex would experience if he lost $500 of his wealth would exceed the pleasure that he would experience if he added $500 to his wealth.
B)   the pleasure that Alex would experience if he added $500 to his wealth would exceed the pain that he would experience if he lost $500 of his wealth.
C)   the property of increasing utility does not apply to Alex.
D)   the property of diminishing marginal utility does not apply to Alex.E) A) and B)
F) None of the above

Question 12

The problem of moral hazard arises because

Accepted Answer

A)   life is full of all sorts of risks.
B)   after people buy insurance, they have less incentive to be careful about their risky behavior.
C)   a high-risk person is more likely to apply for insurance than is a low-risk person.
D)   insurance companies go to great effort to avoid paying claims to their policy holders.E) A) and B)
F) A) and C)

Question 13

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

Accepted Answer

A)   $5001.05) 2 + $500/1.05) 2
B)   $5001.05) 2 + $500
C)   $500 + $500/1.05) 2
D)   $500 + $500E) A) and D)
F) B) and C)

Question 14

Define the efficient markets hypothesis.

Accepted Answer

The efficient market hypothesi...

Question 15

Dividends

Accepted Answer

A)   are the rates of return on mutual funds.
B)   are cash payments that companies make to shareholders.
C)   are the difference between the price and present value per share of a stock.
D)   are the rates of return on a company's capital stock.E) All of the above
F) B) and C)

Question 16

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 17

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn't already done them, what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

Accepted Answer

The client can reduce his risk by furthe...

Question 18

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) C) and D)
F) A) and C)

Question 19

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

Question 20

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Accepted Answer

A) True 
 B)False

Exam 9: The Basic Tools of Finance

To diversify, a homeowner with a variable-rate mortgage should choose investments that

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Dividends

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The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

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Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and the second year he earned 5 percent interest. How much money does Felix have in his account now?

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Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. What is measured along the vertical axis?

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Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

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Lori, 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, Lori will

Correct AnswerverifiedShow Answer

You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

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A person's subjective measure of well­being or satisfaction is called aversion.

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Economists disagree as to whether

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By holding insurance a person

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The problem of moral hazard arises because

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At which interest rate is the present value of $260.10 two years from today equal to $250 today?

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Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that

Correct AnswerverifiedShow Answer

You are better off choosing $100 today rather than $200 in 9 years if the interest rate is

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

Some people claim that stocks follow a random walk. What does this mean?

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Define the efficient markets hypothesis.

Correct AnswerverifiedThe efficient market hypothesi...View AnswerShow Answer

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn't already done them, what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

Correct AnswerverifiedThe client can reduce his risk by furthe...View AnswerShow Answer

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

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A person's subjective measure of wellbeing or satisfaction is called aversion.

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The efficient market hypothesi...
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The client can reduce his risk by furthe...
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