Question 1

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Accepted Answer

The presen...

Question 2

Table 27-1
​
   Kevin’s Utility Function 	ext { Kevin&#x27;s Utility Function } Kevin’s Utility Function  
  W ealth  (Dollars)   Utility 50,0003,00051,0003,14052,0003,26653,0003,373\begin{array} { | c | c | } \hline \begin{array} { c } 	ext { W ealth } \	ext { (Dollars)  }\end{array} & 	ext { Utility } \\hline 50,000 & 3,000 \\hline 51,000 & 3,140 \\hline 52,000 & 3,266 \\hline 53,000 & 3,373 \\hline\end{array} W ealth  (Dollars)  ​50,00051,00052,00053,000​ Utility 3,0003,1403,2663,373​​  ​
​
-Refer to Table 27-1. If Kevin's current wealth is $51,000, then

Accepted Answer

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

Question 3

Rashad is risk averse and has $3,000 with which to make a financial investment. He has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $3,307.50 in two years. Option C is a high-risk stock that is expected to be worth about $3,646.52 in four years. Rashad should choose

Accepted Answer

A)  option A.
B)  option B.
C)  option C.
D)  either A or B because they are the same to him.E) B) and D)
F) A) and B)

Question 4

Scenario 27-1
​
Lisa has a utility function
 $$U = W ^ { 1 / 2 }$$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
​
-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $16 million with probability P and pays $4 million with probability (1-P). Given Lisa's utility function, how high does P need to be before Lisa will prefer option B?

Accepted Answer

Lisa will prefer option B if t...

Question 5

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Accepted Answer

A) True 
 B)False

Question 6

On a graph with utility on the vertical axis and wealth on the horizontal axis, diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A)  upward-sloping and has decreasing slope.
B)  upward-sloping and has increasing slope.
C)  downward-sloping and has decreasing slope.
D)  downward-sloping and has increasing slope.E) A) and B)
F) A) and C)

Question 7

Figure 27-4 
-Which of the following is a source of market risk?

Accepted Answer

A)  Holding stocks in many companies carries the risk of a reduced average return.
B)  Real GDP varies over time and sales and profits move with real GDP.
C)  When a paper producer has declining sales, it is likely that so will other paper producers.
D)  If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market.E) A) and B)
F) B) and C)

Question 8

Kevin recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the highest average annual rate of return?

Accepted Answer

A)  A portfolio with a standard deviation of 5%.
B)  A portfolio with a standard deviation of 6%.
C)  A portfolio with a standard deviation of 8%.
D)  A portfolio with a standard deviation of 9%.E) B) and C)
F) A) and D)

Question 9

Figure 27-1
The following figure shows a utility function for Ren. 
-Refer to Figure 27-1. From the appearance of the utility function, we know that

Accepted Answer

A)  Ren enjoys engaging in risky behavior.
B)  Ren gains more 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 Ren.
D)  Ren is risk averse.E) A) and C)
F) B) and C)

Question 10

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Accepted Answer

The reduct...

Question 11

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Accepted Answer

It is worth more if it is received in 5 ...

Question 12

Figure 27-3
The following figure shows a utility function for Dexter. 
-Refer to Figure 27-3. 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 well-being would increase by less than 12 units.
B)  Dexter's subjective measure of his well-being 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 be more likely to buy insurance.E) B) and C)
F) B) and D)

Question 13

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Accepted Answer

A)  $300 paid in two years
B)  $150 paid in one year plus $140 paid in two years
C)  $100 paid today plus $100 paid in one year plus $100 paid in two years
D)  $285 todayE) A) and C)
F) B) and D)

Question 14

List two ways a risk adverse person may attempt to reduce risks.

Accepted Answer

buy insurance
divers...

Question 15

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Accepted Answer

A) True 
 B)False

Question 16

The rule of 70 applies to a growing savings account but not to a growing economy.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)  After Nalah purchases insurance, she has less incentive to be careful.
B)  James knows he is a reckless driver and so he applies for automobile insurance.
C)  Xavier dislikes losing $400 more than he likes winning $400.
D)  A person is unwilling to buy a stock when she believes its price has an equal change of rising or falling $10.E) B) and D)
F) None of the above

Question 18

Russell holds stocks in four companies. If he adds stocks of several more companies he will decrease

Accepted Answer

A)  firm-specific risk but not market risk.
B)  firm-specific risk and market risk.
C)  market risk but not firm-specific risk.
D)  neither firm-specific nor market risk.E) A) and B)
F) B) and C)

Question 19

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 20

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Accepted Answer

A)  Interest rates rise and truck prices rise.
B)  Interest rates fall and truck prices rise.
C)  Interest rates rise and truck prices fall.
D)  Interest rates fall and truck prices fall.E) A) and C)
F) A) and D)

Exam 27: Tools of Finance

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 Answer
verified
The client can reduce his risk by furthe...
View Answer

The rule of 70 applies to a growing savings account but not to a growing economy.

Correct Answer
verified

List two ways a risk adverse person may attempt to reduce risks.

Correct Answer
verified
buy insurance
divers...
View Answer

Kevin recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the highest average annual rate of return?

Correct Answer
verified

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. 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

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Correct Answer
verified
The reduct...
View Answer

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Correct Answer
verified

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Correct Answer
verified

Correct Answer
verified

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Correct Answer
verified
It is worth more if it is received in 5 ...
View Answer

Figure 27-4 -Which of the following is a source of market risk?

Correct Answer
verified

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Correct Answer
verified

Which of the following actions best illustrates adverse selection?

Correct Answer
verified

Figure 27-1 The following figure shows a utility function for Ren. -Refer to Figure 27-1. From the appearance of the utility function, we know that

Correct Answer
verified

On a graph with utility on the vertical axis and wealth on the horizontal axis, diminishing marginal utility of wealth implies that the utility function is

Correct Answer
verified

Russell holds stocks in four companies. If he adds stocks of several more companies he will decrease

Correct Answer
verified

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Correct Answer
verified

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Correct Answer
verified
The presen...
View Answer

Correct Answer
verified

Correct Answer
verified
Lisa will prefer option B if t...
View Answer

Exam 27: Tools of Finance

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

The rule of 70 applies to a growing savings account but not to a growing economy.

Correct AnswerverifiedShow Answer

List two ways a risk adverse person may attempt to reduce risks.

Correct Answerverifiedbuy insurancedivers...View AnswerShow Answer

Kevin recently received an inheritance, and he is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the highest average annual rate of return?

Correct AnswerverifiedShow Answer

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. 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

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Correct AnswerverifiedThe reduct...View AnswerShow Answer

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Correct AnswerverifiedIt is worth more if it is received in 5 ...View AnswerShow Answer

Figure 27-4 -Which of the following is a source of market risk?

Correct AnswerverifiedShow Answer

Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates adverse selection?

Correct AnswerverifiedShow Answer

Figure 27-1 The following figure shows a utility function for Ren. -Refer to Figure 27-1. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

On a graph with utility on the vertical axis and wealth on the horizontal axis, diminishing marginal utility of wealth implies that the utility function is

Correct AnswerverifiedShow Answer

Russell holds stocks in four companies. If he adds stocks of several more companies he will decrease

Correct AnswerverifiedShow Answer

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

If the interest rate is 5 percent, then what is the present value of $2,000 to be received in three years?

Correct AnswerverifiedThe presen...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedLisa will prefer option B if t...View AnswerShow Answer

Correct Answer
verified
The client can reduce his risk by furthe...
View Answer

Correct Answer
verified

Correct Answer
verified
buy insurance
divers...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The reduct...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
It is worth more if it is received in 5 ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The presen...
View Answer

Correct Answer
verified

Correct Answer
verified
Lisa will prefer option B if t...
View Answer