Question 1

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A)  the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B)  the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C)  the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D)  This cannot be determined from the graph.E) A) and D)
F) B) and D)

Question 2

The utility function of a risk-averse person has a

Accepted Answer

A)  positive slope and gets steeper as wealth increases.
B)  positive slope but gets flatter as wealth increases.
C)  negative slope but gets steeper as wealth increases.
D)  negative slope and gets flatter as wealth increases.E) All of the above
F) A) and C)

Question 3

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Accepted Answer

Efficient market theory says that it sho...

Question 4

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Accepted Answer

A)  $725.62. It would be higher if the interest rate were higher.
B)  $727.28. It would be higher if the interest rate were higher.
C)  $725.62. It would be lower if the interest rate were higher.
D)  $727.28. It would be lower if the interest rate were higher.E) A) and D)
F) None of the above

Question 5

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Accepted Answer

A)  the efficient markets hypothesis is not a correct hypothesis.
B)  the stock market is informationally efficient.
C)  the stock market is informationally inefficient.
D)  there is no reason to establish a diversified portfolio of stocks.E) A) and C)
F) A) and D)

Question 6

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 7

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A)  firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
B)  market risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
C)  firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions.
D)  market risk, but still they have reason to worry about their wealth decreasing as a result of recessions.E) B) and C)
F) A) and D)

Question 8

Figure 27-6. On the graph, x represents risk and y represents return. 
-Refer to Figure 27-6. Point A represents a situation in which

Accepted Answer

A)  all of a person's savings are allocated to a class of safe assets.
B)  the person knows with certainty that his or her return will be 3 percent.
C)  the standard deviation of the person's portfolio is zero.
D)  All of the above are correct.E) A) and C)
F) All of the above

Question 9

​Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

Accepted Answer

A)  The company should not construct the new facility because the future value of the construction cost is only $1,628,894.63.
B)  ​The company should not construct the new facility because the future value of the construction cost is $1,783,267.42.
C)  ​The company should construct the new facility because the present value of the future payoff is $1,092,734.95.
D)  ​The company should construct the new facility because the present value of the future payoff is $1,043,652.53.E) C) and D)
F) A) and B)

Question 10

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Accepted Answer

A)  market risk.
B)  moral hazard.
C)  adverse selection.
D)  risk aversion.E) None of the above
F) All of the above

Question 11

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Accepted Answer

A)  This stock is undervalued; you should consider adding it to your portfolio.
B)  This stock is undervalued; you shouldn't consider adding it to your portfolio.
C)  This stock is overvalued; you should consider adding it to your portfolio.
D)  This stock is overvalued; you shouldn't consider adding it to your portfolio.E) None of the above
F) C) and D)

Question 12

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.E) B) and C)
F) None of the above

Question 13

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Accepted Answer

A)  raise the price of the company's stock.
B)  not affect the price of the company's stock.
C)  reduce the price of the company's stock.
D)  More information is needed to answer the question.E) A) and C)
F) All of the above

Question 14

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Accepted Answer

A)  4 percent
B)  5 percent
C)  6 percent
D)  7 percentE) C) and D)
F) None of the above

Question 15

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 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)  10 percentE) B) and D)
F) C) and D)

Question 16

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) None of the above

Question 17

If the efficient markets hypothesis is correct, then

Accepted Answer

A)  the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy.
B)  the stock market is informationally efficient.
C)  stock prices never follow a random walk.
D)  All of the above are correct.E) All of the above
F) A) and B)

Question 18

Which of the following statements is correct?

Accepted Answer

A)  A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection.
B)  A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection.
C)  Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard.
D)  Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection.E) A) and B)
F) None of the above

Question 19

One way to characterize the difference between compounding and discounting is to say that

Accepted Answer

A)  compounding involves the assumption that the interest rate is zero, whereas discounting does not involve that assumption.
B)  discounting involves the assumption that the interest rate is zero, whereas compounding does not involve that assumption.
C)  the process of compounding produces a future value, whereas the process of discounting produces a present value.
D)  the process of compounding produces a present value, whereas the process of discounting produces a future value.E) A) and B)
F) C) and D)

Question 20

Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?

Accepted Answer

A)  Amy
B)  Bill
C)  Celia
D)  They each get the same amount.E) All of the above
F) A) and B)

Exam 27: Tools of Finance

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Correct Answer
verified

The efficient markets hypothesis says that beating the market consistently is

Correct Answer
verified

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Correct Answer
verified

Which of the following is not correct?

Correct Answer
verified

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Point A represents a situation in which

Correct Answer
verified

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct Answer
verified

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Correct Answer
verified
Efficient market theory says that it sho...
View Answer

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Correct Answer
verified

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Correct Answer
verified

The utility function of a risk-averse person has a

Correct Answer
verified

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Correct Answer
verified

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Correct Answer
verified

One way to characterize the difference between compounding and discounting is to say that

Correct Answer
verified

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Correct Answer
verified

Correct Answer
verified

Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

Correct Answer
verified

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

If the efficient markets hypothesis is correct, then

Correct Answer
verified

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Correct Answer
verified

Exam 27: Tools of Finance

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Correct AnswerverifiedShow Answer

The efficient markets hypothesis says that beating the market consistently is

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

Which of the following is not correct?

Correct AnswerverifiedShow Answer

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Point A represents a situation in which

Correct AnswerverifiedShow Answer

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct AnswerverifiedShow Answer

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Correct AnswerverifiedEfficient market theory says that it sho...View AnswerShow Answer

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Correct AnswerverifiedShow Answer

The utility function of a risk-averse person has a

Correct AnswerverifiedShow Answer

Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this future payment is

Correct AnswerverifiedShow Answer

When you rent a car, you might treat it with less care than you would if it were your own. This is an example of

Correct AnswerverifiedShow Answer

One way to characterize the difference between compounding and discounting is to say that

Correct AnswerverifiedShow Answer

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

​Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

If the efficient markets hypothesis is correct, then

Correct AnswerverifiedShow Answer

A company unexpectedly announces a product recall due to safety concerns about its product. According to the efficient markets hypothesis, this news should

Correct AnswerverifiedShow Answer

Correct Answer
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Efficient market theory says that it sho...
View Answer

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

Correct Answer
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Correct Answer
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