Question 1

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. Suppose the vertical distance between the points (0, A)  and (0, B)  is 12. If his wealth increased from $1,300 to $1,800, then

Accepted Answer

A)   Dexter's subjective measure of his well­being would increase by less than 12 units.
B)   Dexter's subjective measure of his well­being would increase by more than 12 units.
C)   Dexter would change from being a risk-averse person into a person who is not risk averse.
D)   Dexter would forgo the insurance he bought when his wealth was $1,300.E) C) and D)
F) B) and C)

Question 2

David increases the number of companies in which he holds stocks.

Accepted Answer

A)   This reduces risk's standard deviation and firm-specific risk.
B)   This reduces risk's standard deviation and market risk.
C)   This raises market risk, but lowers firm-specific risk. What happens to overall risk is unclear.
D)   This raises firm-specific risk, but lowers market risk. What happens to overall risk is unclear.E) A) and C)
F) C) and D)

Question 3

Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

Accepted Answer

A)   $1,157.90
B)   $1,168.65
C)   $1,176.00
D)   None of the above are correct to the nearest cent.E) A) and B)
F) C) and D)

Question 4

Cleo promises to pay Jacques $1,000 two years from today. If the interest rate is 4 percent, then how much is this future payment worth today?

Accepted Answer

A)   $924.56
B)   $931.44
C)   $937.87
D)   None of the above are correct to the nearest cent.E) None of the above
F) B) and C)

Question 5

Which of the following is not correct?

Accepted Answer

A)   The higher average return on stocks than on bonds comes at the price of higher risk.
B)   Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk.
C)   Insurance markets reduce risk, but not by diversification.
D)   Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.E) All of the above
F) A) and D)

Question 6

You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

Accepted Answer

A)   Option 1; Option 2; Option 3
B)   Option 3; Option 2; Option 1
C)   Option 2; Option 3; Option 1
D)   Option 3; Option 1; Option 2E) A) and B)
F) None of the above

Question 7

In effect, an annuity provides insurance

Accepted Answer

A)   against the risk of dying and leaving one's family without a regular income.
B)   against the risk of living too long.
C)   to people who are not risk-averse.
D)   to people whose utility functions do not display the usual properties.E) A) and B)
F) C) and D)

Question 8

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)   A person adds risky stock to his portfolio.
B)   A person who has narrowly avoided many accidents applies for automobile insurance.
C)   A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)   A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.E) B) and C)
F) A) and C)

Question 9

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

Accepted Answer

A)   $637.50 after 5 years and $822.09 after 10 years.
B)   $637.50 after 5 years and $775.00 after 10 years.
C)   $653.48 after 5 years and $854.07 after 10 years.
D)   $688.36 after 5 years and $915.56 after 10 years.E) All of the above
F) B) and C)

Question 10

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 D)
F) A) and C)

Question 11

When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

Accepted Answer

A)   5 years
B)   6 years
C)   7 years
D)   8 yearsE) A) and C)
F) All of the above

Question 12

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?
A)  $457.14

Accepted Answer

A)   None of the above are correct to the nearest cent.
B)   $468.02
C)   $478.47D) A) and C)
E) A) and B)

Question 13

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A)   Dexter is risk averse.
B)   Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)   the property of diminishing marginal utility does not apply to Dexter.
D)   All of the above are correct.E) None of the above
F) B) and D)

Question 14

If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?

Accepted Answer

A)   $320.69
B)   $324.00
C)   $324.73
D)   $327.81E) None of the above
F) B) and C)

Question 15

Which, if any, of the present values below are correctly computed?

Accepted Answer

A)   A payment of $1,000 to be received one year from today, with a 8 percent interest rate, has a present value of $945.45.
B)   A payment of $1,000 to be received one year from today, with a 9 percent interest rate, has a present value of $911.11.
C)   A payment of $1,000 to be received one year from today, with a 10 percent interest rate, has a present value of $905.06.
D)   None of the above are correct to the nearest cent.E) None of the above
F) A) and B)

Question 16

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

Question 17

David's Utility Function  If David's current wealth is $61,000, then

Accepted Answer

A)   his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is risk averse.
B)   his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. David is not risk averse.
C)   his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is risk averse.
D)   his gain in utility from gaining $1,000 is greater than his loss in utility from losing $1,000. David is not risk averse.E) A) and B)
F) A) and C)

Question 18

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 19

Albert Einstein once referred to compounding as

Accepted Answer

A)   "an obsession among economists that defies explanation."
B)   "the greatest mathematical discovery of all time."
C)   his own discovery.
D)   John Maynard Keynes's greatest contribution.E) A) and B)
F) A) and D)

Question 20

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

Accepted Answer

A)   $550 one year from today.
B)   $580 two years from today.
C)   $600 three years from today.
D)   $615 four years from today.E) B) and C)
F) None of the above

Exam 27: The Basic Tools of Finance

David increases the number of companies in which he holds stocks.

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Albert Einstein once referred to compounding as

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Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

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When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?

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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

If you put $300 into an account paying 2 percent interest, what will be the value of this account in 4 years?

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

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Cleo promises to pay Jacques $1,000 two years from today. If the interest rate is 4 percent, then how much is this future payment worth today?

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Which, if any, of the present values below are correctly computed?

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In effect, an annuity provides insurance

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You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

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Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 5.5 percent. The future value of the $500 is

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If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today? A) $457.14

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Which of the following is not correct?

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David's Utility Function If David's current wealth is $61,000, then

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Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

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Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent interest; the third year he earned 6 percent interest. How much money does Jorge have in his account today?

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Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

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Which of the following actions best illustrates adverse selection?

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

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The client can reduce his risk by furthe...
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