Question 1

Risk is measured here with a statistic called _______________.

Accepted Answer

A)  under-valuation. 
B)  added value. 
C)  valuation. 
D)  standard deviation. 
A)  under-valuation. 
B)  added value. 
C)  valuation. 
D)  standard deviation. D

Question 2

Calculate the future value of €800 one year from today if the interest rate is a) 3% b) 5% c) 7%.

Accepted Answer

a) €8024 b) €8040 c) €8056

Question 3

Which of the following does not help reduce the risk that people face?

Accepted Answer

A)  increasing the rate of return within their portfolio 
B)  diversifying their portfolio 
C)  All of these answers help reduce risk. 
D)  buying insurance 
A)  increasing the rate of return within their portfolio 
B)  diversifying their portfolio 
C)  All of these answers help reduce risk. 
D)  buying insurance A

Question 4

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by

Question 5

A market in which prices reflect all available information in a rational way is said to be

Accepted Answer

A)  rationally efficient. 
B)  informationally efficient. 
C)  hypothetically efficient. 
D)  a stock market. 
A)  rationally efficient. 
B)  informationally efficient. 
C)  hypothetically efficient. 
D)  a stock market.

Question 6

The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return

Accepted Answer

A)  agrees to accept all or part of the risk. 
B)  agrees to accept none of the risk. 
C)  does not agrees to accept any risk. 
D)  pays out premiums. 
A)  agrees to accept all or part of the risk. 
B)  agrees to accept none of the risk. 
C)  does not agrees to accept any risk. 
D)  pays out premiums.

Question 7

Demonstrate that whether you would prefer to have €225 today or wait five years for €300 depends on the interest rate. Show your calculations.

Accepted Answer

For example at 3 percent the p

Question 8

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

Accepted Answer

There are several possibilities. The fir

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

There is a __________ between risk and return which is at the heart of understanding financial decisions

Accepted Answer

A)  rule. 
B)  difference. 
C)  zero sum game. 
D)  trade-off. 
A)  rule. 
B)  difference. 
C)  zero sum game. 
D)  trade-off.

Question 11

What's the difference between idiosyncratic risk and aggregate risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Aggregate risk refers to economy-wide ri

Question 12

An investor who buys stock in a company is placing a bet on the ___________of that company.

Accepted Answer

A)  future profitability. 
B)  longevity of the CEO. 
C)  stakeholders. 
D)  All of the above are correct. 
A)  future profitability. 
B)  longevity of the CEO. 
C)  stakeholders. 
D)  All of the above are correct.

Question 13

Which of the following reduces risk in a portfolio the greatest?

Accepted Answer

A)  Increasing the number of shares from 10 to 20 
B)  All of these answers provide the same amount of risk reduction. 
C)  Increasing the number of shares in the portfolio from 1 to 10 
D)  Increasing the number of shares from 20 to 30 
A)  Increasing the number of shares from 10 to 20 
B)  All of these answers provide the same amount of risk reduction. 
C)  Increasing the number of shares in the portfolio from 1 to 10 
D)  Increasing the number of shares from 20 to 30

Question 14

Max is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Max should choose investments that

Accepted Answer

A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall. 
A)  provide a higher return than the market average. 
B)  provide a lower return than the market average. 
C)  pay higher returns when interest rates rise and lower returns when interest rates fall. 
D)  pay lower returns when interest rates rise and higher returns when interest rates fall.

Question 15

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

Accepted Answer

A)  future value. 
B)  fair value. 
C)  present value. 
D)  compound value. 
E)  beginning value. 
A)  future value. 
B)  fair value. 
C)  present value. 
D)  compound value. 
E)  beginning value.

Question 16

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

Accepted Answer

A) True 
 B)False

Question 17

JCB (which makes agricultural and construction equipment) has the opportunity to purchase a new factory today that will provide them with a €50 million return four years from now. If prevailing interest rates are 6 percent, what is the maximum that the project can cost for JCB to be willing to undertake the project?

Accepted Answer

A)  €43,456,838 
B)  €53,406,002 
C)  €34,583,902 
D)  €39,604,682 
E)  €50,000,000 
A)  €43,456,838 
B)  €53,406,002 
C)  €34,583,902 
D)  €39,604,682 
E)  €50,000,000

Question 18

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Accepted Answer

A)  undervalued. 
B)  overvalued. 
C)  fairly valued. 
D)  no longer going to be traded. 
A)  undervalued. 
B)  overvalued. 
C)  fairly valued. 
D)  no longer going to be traded.

Question 19

Which of the following statements is true?

Accepted Answer

A)  Diversification reduces idiosyncratic risk but not aggregate risk. 
B)  Diversification reduces aggregate risk but not idiosyncratic risk. 
C)  Diversification reduces both idiosyncratic risk and aggregate risk but it reduces idiosyncratic risk by more. 
D)  Diversification requires an investor to hold at least 100 shares in her portfolio to begin to reduce risk significantly. 
A)  Diversification reduces idiosyncratic risk but not aggregate risk. 
B)  Diversification reduces aggregate risk but not idiosyncratic risk. 
C)  Diversification reduces both idiosyncratic risk and aggregate risk but it reduces idiosyncratic risk by more. 
D)  Diversification requires an investor to hold at least 100 shares in her portfolio to begin to reduce risk significantly.

Question 20

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

Accepted Answer

A)  adverse selection. 
B)  monitoring. 
C)  moral hazard. 
D)  an optimal contract. 
A)  adverse selection. 
B)  monitoring. 
C)  moral hazard. 
D)  an optimal contract.

Exam 25: The Basic Tools of Finance

Risk is measured here with a statistic called _______________.

Calculate the future value of €800 one year from today if the interest rate is a) 3% b) 5% c) 7%.

Which of the following does not help reduce the risk that people face?

List three different ways that a risk-averse person can reduce financial risk.

A market in which prices reflect all available information in a rational way is said to be

The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return

Demonstrate that whether you would prefer to have €225 today or wait five years for €300 depends on the interest rate. Show your calculations.

In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

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

There is a __________ between risk and return which is at the heart of understanding financial decisions

What's the difference between idiosyncratic risk and aggregate risk? Will diversification eliminate one or both? Explain.

An investor who buys stock in a company is placing a bet on the ___________of that company.

Which of the following reduces risk in a portfolio the greatest?

Max is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Max should choose investments that

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Which of the following statements is true?

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

Issues in Financial Markets

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

The Financial Crisis and Sovereign Debt

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