Question 1

Research studies have shown that

Accepted Answer

A)   the correlation between how well a stock does one year and how well it does the next is significantly greater than zero.
B)   managed mutual funds generally outperform indexed mutual funds.
C)   people tend to be overconfident when making investment decisions.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 2

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth and is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth and is not risk averse.E) None of the above
F) A) and C)

Question 3

Over the past two centuries,the average annual rates of return were about

Accepted Answer

A)   5 percent for stocks and about 1.5 percent for short-term government bonds.
B)   6 percent for stocks and about 2.5 percent for short-term government bonds.
C)   8 percent for stocks and about 3 percent for short-term government bonds.
D)   None of the above is correct.E) A) and B)
F) B) and D)

Question 4

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty.He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher.How much,to the nearest penny,does the riskier bond pay in two years?

Accepted Answer

A)   $1,160.00
B)   $1,166.40
C)   $1,168.65
D)   $1,169.64E) B) and C)
F) A) and C)

Question 5

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 6

Figure 19-1.The figure shows a utility function. 
-Refer to Figure 19-1.What is measured along the vertical axis?

Accepted Answer

A)   risk aversion
B)   marginal utility
C)   utility
D)   the number of units of a good that can be purchasedE) All of the above
F) A) and C)

Question 7

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38.What rate of interest did Robert earn?

Accepted Answer

A)   4.5 percent
B)   5.5 percent
C)   6.5 percent
D)   8.0 percentE) B) and C)
F) A) and D)

Question 8

What is the future value of $375 at an interest rate of 3 percent one year from today?

Accepted Answer

A)   $371.75
B)   $386.25
C)   $393.33
D)   None of the above are correct to the nearest cent.E) C) and D)
F) A) and D)

Question 9

Which of the following make(s) insurance premiums higher than otherwise?

Accepted Answer

A)   adverse selection and moral hazard
B)   adverse selection,but not moral hazard
C)   moral hazard,but not adverse selection
D)   neither adverse selection nor moral hazardE) B) and D)
F) A) and B)

Question 10

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) B) and C)
F) A) and C)

Question 11

Other things the same,as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

A)   risk increases at an increasing rate.
B)   risk increases at a decreasing rate.
C)   risk decreases at an increasing rate.
D)   risk decreases at a decreasing rate.E) All of the above
F) C) and D)

Question 12

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.

Accepted Answer

A) True 
 B)False

Question 13

Cleo promises to pay Jacques $1,000 in two years.If the interest rate is 6 percent,how much is this future payment worth today?

Accepted Answer

A)   $883.60
B)   $887.97
C)   $890.00
D)   None of the above are correct to the nearest cent.E) B) and C)
F) A) and B)

Question 14

Draw graphs showing the following three relationships.
1.The relation between utility and wealth for a risk averse consumer.
2.The relation between standard deviation and the number of stocks in a portfolio.
3.The relation between return and risk.

Accepted Answer

The answer of Draw graphs showing the following three relationships.
1.The...

Question 15

An index fund

Accepted Answer

A)   holds only stocks and bonds that are indexed to inflation.
B)   holds all the stocks in a given stock index.
C)   guarantees a return that follows the index of leading economic indicators.
D)   typically has a lower return than a managed fund.E) A) and D)
F) C) and D)

Question 16

There are many concerns for risk-averse lenders.Consider the following: 1.Lenders are concerned that borrowers with the greatest risk are the ones most likely to actively pursue loans.2.Lenders are concerned that real GDP will decline leading to reduced corporate profits.3.Lenders are concerned that products produced by certain corporations will become obsolete.

Accepted Answer

A)   1 is market risk; 2 is firm-specific risk
B)   2 is market risk; 3 is firm-specific risk
C)   3 is market risk; 1 is firm-specific risk
D)   2 is firm-specific risk; 3 is market riskE) A) and B)
F) All of the above

Question 17

Which of the following is correct?

Accepted Answer

A)   Managed funds typically have a higher return than indexed funds.This tends to refute the efficient market hypothesis.
B)   Managed funds typically have a higher return than indexed funds.This tends to support the efficient market hypothesis.
C)   Index funds typically have a higher rate of return than managed funds.This tends to refute the efficient market hypothesis.
D)   Index funds typically have a higher rate of return than managed funds.This tends to support the efficient market hypothesis.E) A) and C)
F) None of the above

Question 18

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 19

From the standpoint of the economy as a whole,the role of

Accepted Answer

A)   the interest rate is to make sure that the price of bonds increases over time.
B)   diversification is to eliminate market risk.
C)   insurance is to reduce the risks inherent in life.
D)   insurance is to spread risks around more efficiently.E) A) and B)
F) All of the above

Question 20

The available evidence indicates that

Accepted Answer

A)   about one-half of all managers of active mutual funds consistently outperform index funds.
B)   outperforming the market on a consistent basis is extremely difficult to do.
C)   there is little truth to the notion that there is a trade-off between risk and return.
D)   there is little truth to the efficient markets hypothesis.E) B) and C)
F) A) and C)

Exam 19: The Basic Tools of Finance

Which of the following make(s) insurance premiums higher than otherwise?

Correct Answer
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An index fund

Correct Answer
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Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
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Which of the following is correct?

Correct Answer
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The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Correct Answer
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Figure 19-1.The figure shows a utility function. -Refer to Figure 19-1.What is measured along the vertical axis?

Correct Answer
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Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty.He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher.How much,to the nearest penny,does the riskier bond pay in two years?

Correct Answer
verified

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.

Correct Answer
verified

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Correct Answer
verified

From the standpoint of the economy as a whole,the role of

Correct Answer
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Research studies have shown that

Correct Answer
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Draw graphs showing the following three relationships. 1.The relation between utility and wealth for a risk averse consumer. 2.The relation between standard deviation and the number of stocks in a portfolio. 3.The relation between return and risk.

Correct Answer
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Other things the same,as the stocks of a greater number of corporations are held in a portfolio,

Correct Answer
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What is the future value of $375 at an interest rate of 3 percent one year from today?

Correct Answer
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Cleo promises to pay Jacques $1,000 in two years.If the interest rate is 6 percent,how much is this future payment worth today?

Correct Answer
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The available evidence indicates that

Correct Answer
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Over the past two centuries,the average annual rates of return were about

Correct Answer
verified

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38.What rate of interest did Robert earn?

Correct Answer
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Correct Answer
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Which of the following is not correct?

Correct Answer
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Exam 19: The Basic Tools of Finance

Which of the following make(s) insurance premiums higher than otherwise?

Correct AnswerverifiedShow Answer

An index fund

Correct AnswerverifiedShow Answer

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Correct AnswerverifiedShow Answer

Figure 19-1.The figure shows a utility function. -Refer to Figure 19-1.What is measured along the vertical axis?

Correct AnswerverifiedShow Answer

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty.He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher.How much,to the nearest penny,does the riskier bond pay in two years?

Correct AnswerverifiedShow Answer

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.

Correct AnswerverifiedShow Answer

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000.Based on this information,Rolanda has

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole,the role of

Correct AnswerverifiedShow Answer

Research studies have shown that

Correct AnswerverifiedShow Answer

Draw graphs showing the following three relationships. 1.The relation between utility and wealth for a risk averse consumer. 2.The relation between standard deviation and the number of stocks in a portfolio. 3.The relation between return and risk.

Correct AnswerverifiedShow Answer

Other things the same,as the stocks of a greater number of corporations are held in a portfolio,

Correct AnswerverifiedShow Answer

What is the future value of $375 at an interest rate of 3 percent one year from today?

Correct AnswerverifiedShow Answer

Cleo promises to pay Jacques $1,000 in two years.If the interest rate is 6 percent,how much is this future payment worth today?

Correct AnswerverifiedShow Answer

The available evidence indicates that

Correct AnswerverifiedShow Answer

Over the past two centuries,the average annual rates of return were about

Correct AnswerverifiedShow Answer

Robert put $15,000 into an account with a fixed interest rate two years ago and now the account balance is $16,695.38.What rate of interest did Robert earn?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is not correct?

Correct AnswerverifiedShow Answer

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