Exam 27: The Basic Tools of Finance

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A) an increase in the size of the payment
B) an increase in the time until the payment is made
C) an increase in the interest rate
D) All of the above are correct.

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A) the first one
B) the second one
C) the third one
D) They all have the same balance.

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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.

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A) 4 percent.
B) 5 percent.
C) 6 percent.
D) None of the above are correct.

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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 careful

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A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) calculations that ignore the phenomenon of compounding for the sake of ease and simplicity.
D) decreases in interest rates over time,while compounding refers to increases in interest rates over time.

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A) both firm-specific risks and market risk fall.
B) firm-specific risks fall;market risk does not.
C) market risk falls;firm-specific risks do not.
D) neither firm-specific risks nor market risk falls.

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A) 4 percent
B) 4.5 percent
C) 5 percent
D) 5.5 percent

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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.

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A) $105.26
B) $105.00
C) $95.24
D) $95.00

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A) A risk averse person might be willing to hold stocks.
B) Other things the same,a portfolio with the stocks of a large number of companies has less risk.
C) Other things the same,the larger a portion of savings a person invests in stocks,the greater his expected return.
D) Diversification can eliminate market risk but not firm-specific risk.

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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.

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