Question 1

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Accepted Answer

A random walk means the path of a variab...

Question 2

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Accepted Answer

A)   You receive the payment 2 years from now and the interest rate is 6 percent.
B)   You receive the payment 2 years from now and the interest rate is 4 percent.
C)   You receive the payment 3 years from now and the interest rate is 6 percent.
D)   You receive the payment 3 years from now and the interest rate is 4 percent.

Question 3

What is the future value of $500 one year from today if the interest rate is 6 percent?

Accepted Answer

A)   $515
B)   $520
C)   $530
D)   None of the above is correct.

Question 4

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Accepted Answer

A)   Al
B)   Ralph
C)   Stan
D)   They all retire with the same amount.

Question 5

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Accepted Answer

A)   5 percent
B)   4 percent
C)   3 percent
D)   2 percent

Question 6

Which of the following is correct if the interest rate is 6 percent?

Accepted Answer

A)   $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400.
B)   $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400.
C)   $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400.
D)   $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.

Question 7

The efficient markets hypothesis says that beating the market consistently is

Accepted Answer

A)   impossible. Many studies find that beating the market is, at best, extremely difficult.
B)   impossible. Many studies find that beating the market is relatively easy.
C)   relatively easy. Many studies find that beating the market is, at best, extremely difficult.
D)   relatively easy. Many studies find that beating the market is relatively easy.

Question 8

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Accepted Answer

A)   marginal utility diminishes as wealth rises, so he must be risk averse.
B)   marginal utility diminishes as wealth rises, but we can't tell from this if he is risk averse.
C)   marginal utility increases as wealth rises, so he must be risk averse.
D)   marginal utility increases as wealth rises, but we can't tell from this if he is risk averse.

Question 9

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

Accepted Answer

A)   The insurance requirement and the credit check are both designed primarily to reduce adverse selection.
B)   The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard.
C)   The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard.
D)   The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection.

Question 10

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, then what is the current interest rate?

Accepted Answer

A)   6 percent
B)   7 percent
C)   8 percent
D)   9 percent

Question 11

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Accepted Answer

The presen...

Question 14

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Accepted Answer

A)   Abraham Lincoln
B)   Thomas Edison
C)   Benjamin Franklin
D)   Albert Einstein

Question 15

Which of the following has a present value of $100?

Accepted Answer

A)   $109.12 in two years when the interest rate is 4 percent
B)   $113.98 in two years when the interest rate is 6 percent
C)   $116.64 in two years when the interest rate is 8 percent
D)   $123.17 in two years when the interest rate is 10 percent

Question 16

Diversification

Accepted Answer

A)   increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
B)   increases the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.
C)   reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is higher.
D)   reduces the likely fluctuation in a portfolio's return. Thus, the likely standard deviation of the portfolio's return is lower.

Question 17

Describe the shape of the utility function of a risk averse person.

Accepted Answer

Its slope ...

Question 18

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.

Question 19

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Accepted Answer

Yes, according to the efficient markets ...

Question 20

The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?

Accepted Answer

A)   $415,000 if the interest rate is 5%
B)   $419,000 if the interest rate is 4%
C)   K-Nine would buy the equipment in both cases.
D)   K-Nine would not buy the equipment in either case.

Exam 14: The Basic Tools of Finance

Which of the following is correct if the interest rate is 6 percent?

Correct Answer
verified

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Correct Answer
verified
The presen...
View Answer

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Correct Answer
verified

Correct Answer
verified

Diversification

Correct Answer
verified

What is the future value of $500 one year from today if the interest rate is 6 percent?

Correct Answer
verified

Describe the shape of the utility function of a risk averse person.

Correct Answer
verified
Its slope ...
View Answer

The efficient markets hypothesis says that beating the market consistently is

Correct Answer
verified

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 Answer
verified

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Correct Answer
verified

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Correct Answer
verified
A random walk means the path of a variab...
View Answer

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct Answer
verified

Which of the following has a present value of $100?

Correct Answer
verified

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Correct Answer
verified

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Correct Answer
verified
Yes, according to the efficient markets ...
View Answer

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Correct Answer
verified

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Correct Answer
verified

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

Correct Answer
verified

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

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, then what is the current interest rate?

Correct Answer
verified

Exam 14: The Basic Tools of Finance

Which of the following is correct if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

Correct AnswerverifiedThe presen...View AnswerShow Answer

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Diversification

Correct AnswerverifiedShow Answer

What is the future value of $500 one year from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

Describe the shape of the utility function of a risk averse person.

Correct AnswerverifiedIts slope ...View AnswerShow Answer

The efficient markets hypothesis says that beating the market consistently is

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

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Correct AnswerverifiedShow Answer

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Correct AnswerverifiedA random walk means the path of a variab...View AnswerShow Answer

Which famous person referred to compounding as "the greatest mathematical discovery of all time?"

Correct AnswerverifiedShow Answer

Which of the following has a present value of $100?

Correct AnswerverifiedShow Answer

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Correct AnswerverifiedShow Answer

If a friend tells you that he is certain a stock price will rise based on information he heard on television or saw on the Internet, should you be skeptical? Explain.

Correct AnswerverifiedYes, according to the efficient markets ...View AnswerShow Answer

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Correct AnswerverifiedShow Answer

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Financial intermediaries typically require mortgage borrowers to have homeowner's insurance and do credit checks before making the loan.

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, then what is the current interest rate?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
The presen...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Its slope ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A random walk means the path of a variab...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Yes, according to the efficient markets ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified