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Figure 27-6. On the graph, x represents risk and y represents return. Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Which of the following statements is correct? A) At point A the standard deviation of the portfolio is 3. B) A risk averse person always will choose to be at point A. C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets. D) The figure shows that the greater the risk, the greater the return. -Refer to Figure 27-6. Which of the following statements is correct?


A) At point A the standard deviation of the portfolio is 3.
B) A risk averse person always will choose to be at point A.
C) At point D the portfolio consists of about 15 percent stocks and 85 percent safe assets.
D) The figure shows that the greater the risk, the greater the return.

E) A) and B)
F) C) and D)

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


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

E) A) and D)
F) A) and C)

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If you believe that stock prices follow a random walk, then probably you


A) do not believe that there is positive relationship between risk and return.
B) do not believe that stock prices reflect all available information.
C) believe in the validity of the efficient markets hypothesis.
D) believe that it is a good idea to engage in fundamental analysis.

E) B) and D)
F) C) and D)

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Which of the following changes would increase the present value of a future payment?


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

E) B) and D)
F) B) and C)

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Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent.


A) Both Vince and Terri are correct.
B) Only Vince is correct.
C) Only Terri is correct.
D) Neither Vince nor Terri is correct.

E) All of the above
F) B) and D)

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A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $11,000 two years from today. Of the following interest rates, which is the lowest one at which Harry would be better off paying $11,000 two years from today?


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

E) A) and D)
F) A) and B)

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When he was 18, Hussam put $100 into an account at an interest rate of 8 percent. He now has $158.69 in this account. For how many years did Hussam leave this money in his account?


A) 5 years
B) 6 years
C) 7 years
D) 8 years

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

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Figure 27-1. The figure shows a utility function. Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies, A) the more wealth she has, the less utility she gets from an additional dollar of wealth. B) the more wealth she has, the more utility she gets from an additional dollar of wealth. C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. -Refer to Figure 27-1. For the person to whom this utility function applies,


A) the more wealth she has, the less utility she gets from an additional dollar of wealth.
B) the more wealth she has, the more utility she gets from an additional dollar of wealth.
C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600.
D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

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

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If Cara's utility falls more by losing $600 than it rises by gaining $600, she has


A) increasing marginal utility of wealth and is risk averse.
B) increasing marginal utility of wealth but is not risk averse.
C) decreasing marginal utility of wealth and is risk averse.
D) decreasing marginal utility of wealth but is not risk averse.

E) B) and C)
F) A) and D)

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Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?


A) $550 one year from today.
B) $580 two years from today.
C) $600 three years from today.
D) $615 four years from today.

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

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Figure 27-3 The following figure shows the utility function for Paul. Figure 27-3 The following figure shows the utility function for Paul. -Refer to Figure 27-3. Suppose the vertical distance between the points (0, A) and (0, B) is 10. If his wealth increased from $700 to $900, then A) Paul's utility would increase by less than 10 units. B) Paul's utility would increase by more than 10 units. C) Paul's utility would increase by exactly 10 units. D) Any of the above could be correct. -Refer to Figure 27-3. Suppose the vertical distance between the points (0, A) and (0, B) is 10. If his wealth increased from $700 to $900, then


A) Paul's utility would increase by less than 10 units.
B) Paul's utility would increase by more than 10 units.
C) Paul's utility would increase by exactly 10 units.
D) Any of the above could be correct.

E) None of the above
F) A) and B)

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What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?


A) $95.50
B) $95.24
C) $95.00
D) None of the above are correct to the nearest cent.

E) B) and D)
F) All of the above

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Suppose the interest rate is 3% and that you are to receive three annual payments of $1,000, with the first payment today, the second payment one year from now, and the third payment two years from now. What is the present value of this stream of payments?

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The presen...

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Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay


A) $140,000, but not $150,000.
B) $150,000, but not $160,000.
C) $160,000, but not $170,000.
D) $170,000, but not $180,000.

E) None of the above
F) C) and D)

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Suppose the interest rate is 8 percent. Consider three payment options. 1) $300 today. 2) $330 one year from today. "3) $360 two years from today. Which of the following is correct?"


A) 1 has the highest present value and 2 has the lowest.
B) 2 has the highest present value and 3 has the lowest.
C) 3 has the highest present value and 1 has the lowest.
D) None of the above is correct.

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

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Compounding refers directly to


A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) changes in the interest rate over time on a bank account or a similar savings vehicle.
D) interest being earned on previously-earned interest.

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

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


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.

E) B) and D)
F) B) and C)

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By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can


A) benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own.
B) benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
C) eliminate market risk.
D) reduce the standard deviation of his or her portfolio to zero.

E) B) and D)
F) A) and D)

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Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

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Not necessarily. Historically bonds have...

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If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

A) True
B) False

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