Question 1

Which of the following actions best illustrates moral hazard?

Accepted Answer

A)  A person adds risky stock to his portfolio.
B)  A person who has narrowly avoided many accidents applies for automobile insurance.
C)  A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)  A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.E) A) and B)
F) A) and C)

Question 2

Figure 14-3. The figure shows a utility function for Rob. 
-Refer to Figure 14-3. If most people's utility functions look like Rob's utility function, then it is easy to explain why

Accepted Answer

A)  people buy various types of insurance.
B)  we observe a trade-off between risk and return.
C)  most people prefer to hold diversified portfolios of assets to undiversified portfolios of assets.
D)  None of the above are correct.E) B) and C)
F) None of the above

Question 3

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Accepted Answer

A) True 
 B)False

Question 4

Historically, stocks have offered higher rates of return than bonds.

Accepted Answer

A) True 
 B)False

Question 5

For a risk averse person,

Accepted Answer

A)  the pleasure of winning $1,000 on a bet exceeds the pain of losing $1,000 on a bet.
B)  the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
C)  the utility function exhibits the property of increasing marginal utility.
D)  the utility function gets steeper as wealth increases.E) A) and D)
F) A) and C)

Question 6

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Accepted Answer

A)  This stock is overvalued; you should consider adding it to your portfolio.
B)  This stock is overvalued; you shouldn't consider adding it to your portfolio.
C)  This stock is undervalued; you should consider adding it to your portfolio.
D)  This stock is undervalued; you shouldn't consider adding it to your portfolio.E) B) and C)
F) All of the above

Question 7

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Accepted Answer

A)  9% but not 10%
B)  10% but not 11%
C)  11% but not 12%
D)  None of the above is correct; a risk averse person would not accept any of the above bets.E) C) and D)
F) A) and B)

Question 8

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Accepted Answer

A)  5 percent
B)  6 percent
C)  7 percent
D)  8 percentE) A) and D)
F) A) and C)

Question 9

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Accepted Answer

A)  rise, and investment spending rise.
B)  rise, and investment spending fall.
C)  fall, and investment spending rise.
D)  fall, and investment spending fall.E) B) and C)
F) All of the above

Question 10

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

Question 11

Fundamental analysis shows that Moonlight Company is fairly valued. Then Moonlight Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful tea producer. Suppose this has no effect on the price of the stock of Moonlight Company.

Accepted Answer

A)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis.
B)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.
C)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis.
D)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.E) B) and D)
F) A) and C)

Question 12

Suppose you are deciding whether or not to buy a particular bond for $2,990.08. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $5,000. You will buy the bond today if the interest rate is

Accepted Answer

A)  no less than 9.48 percent.
B)  no greater than 9.48 percent.
C)  no less than 10.83 percent.
D)  no greater than 10.83 percent.E) A) and B)
F) A) and C)

Question 13

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

Accepted Answer

A)  5 percent
B)  6 percent
C)  7 percent
D)  8 percentE) A) and B)
F) A) and C)

Question 14

Figure 14-1. The figure shows a utility function. 
-Refer to Figure 14-1. 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) A) and C)
F) A) and B)

Question 15

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Accepted Answer

A)  5 percent
B)  7 percent
C)  10 percent
D)  14 percentE) A) and B)
F) All of the above

Question 16

Figure 14-5. On the graph, x represents risk and y represents return. 
-Refer to Figure 14-5. Which of the following statements is correct?

Accepted Answer

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 D)
F) A) and B)

Question 17

Compounding refers directly to

Accepted Answer

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 C)
F) All of the above

Question 18

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

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

Question 20

Albert Einstein once referred to compounding as

Accepted Answer

A)  "an obsession among economists that defies explanation."
B)  "the greatest mathematical discovery of all time."
C)  his own discovery.
D)  John Maynard Keynes's greatest contribution.E) A) and B)
F) B) and C)

Exam 14: The Basic Tools of Finance

For a risk averse person,

Correct Answer
verified

Figure 14-3. The figure shows a utility function for Rob. -Refer to Figure 14-3. If most people's utility functions look like Rob's utility function, then it is easy to explain why

Correct Answer
verified

Historically, stocks have offered higher rates of return than bonds.

Correct Answer
verified

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Correct Answer
verified

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Correct Answer
verified

Research studies have shown that

Correct Answer
verified

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Correct Answer
verified

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Correct Answer
verified

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct Answer
verified

Fundamental analysis shows that Moonlight Company is fairly valued. Then Moonlight Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful tea producer. Suppose this has no effect on the price of the stock of Moonlight Company.

Correct Answer
verified

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Correct Answer
verified

Compounding refers directly to

Correct Answer
verified

Which of the following actions best illustrates moral hazard?

Correct Answer
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Correct Answer
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Albert Einstein once referred to compounding as

Correct Answer
verified

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. What is measured along the vertical axis?

Correct Answer
verified

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

Correct Answer
verified

Suppose you are deciding whether or not to buy a particular bond for $2,990.08. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $5,000. You will buy the bond today if the interest rate is

Correct Answer
verified

Figure 14-5. On the graph, x represents risk and y represents return. -Refer to Figure 14-5. Which of the following statements is correct?

Correct Answer
verified

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Correct Answer
verified

Exam 14: The Basic Tools of Finance

For a risk averse person,

Correct AnswerverifiedShow Answer

Figure 14-3. The figure shows a utility function for Rob. -Refer to Figure 14-3. If most people's utility functions look like Rob's utility function, then it is easy to explain why

Correct AnswerverifiedShow Answer

Historically, stocks have offered higher rates of return than bonds.

Correct AnswerverifiedShow Answer

A person who is risk averse might accept a 50% chance of losing $100 today in exchange for a 50% chance of winning $125 in two years if the interest rate was

Correct AnswerverifiedShow Answer

You put $75 in the bank one year ago and forgot about it. The bank sends you a notice that you now have $81 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

Research studies have shown that

Correct AnswerverifiedShow Answer

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Correct AnswerverifiedShow Answer

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Correct AnswerverifiedShow Answer

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Correct AnswerverifiedShow Answer

Fundamental analysis shows that Moonlight Company is fairly valued. Then Moonlight Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful tea producer. Suppose this has no effect on the price of the stock of Moonlight Company.

Correct AnswerverifiedShow Answer

Nancy would like to double the money in her retirement account in five years. According to the rule of 70, what rate of interest would she need to earn to attain her objective?

Correct AnswerverifiedShow Answer

Compounding refers directly to

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates moral hazard?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Albert Einstein once referred to compounding as

Correct AnswerverifiedShow Answer

Figure 14-1. The figure shows a utility function. -Refer to Figure 14-1. What is measured along the vertical axis?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose you are deciding whether or not to buy a particular bond for $2,990.08. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $5,000. You will buy the bond today if the interest rate is

Correct AnswerverifiedShow Answer

Figure 14-5. On the graph, x represents risk and y represents return. -Refer to Figure 14-5. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Fundamental analysis shows that stock in Lodgefire Restaurants has a present value below its price.

Correct AnswerverifiedShow Answer

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