Question 1

The key to diversification is that the risks should be:

Accepted Answer

A)  positively correlated. 
B)  uncorrelated. 
C)  negatively correlated. 
D)  easy to reduce. 
A)  positively correlated. 
B)  uncorrelated. 
C)  negatively correlated. 
D)  easy to reduce.

Question 2

Compounding:

Accepted Answer

A)  is beneficial to savers, but costly to borrowers. 
B)  is beneficial to borrowers, but costly to savers. 
C)  is beneficial to borrowers and savers alike. 
D)  is costly to both borrowers and savers. 
A)  is beneficial to savers, but costly to borrowers. 
B)  is beneficial to borrowers, but costly to savers. 
C)  is beneficial to borrowers and savers alike. 
D)  is costly to both borrowers and savers.

Question 3

Those who generally have low willingness to take on risk are said to be:

Accepted Answer

A)  risk-seekers. 
B)  risk-averse. 
C)  low-risk players. 
D)  high-compensation players. 
A)  risk-seekers. 
B)  risk-averse. 
C)  low-risk players. 
D)  high-compensation players.

Question 4

The process of accumulation that occurs when interest is paid on previously earned interest is called:

Accepted Answer

A)  present valuation. 
B)  backdating. 
C)  compounding. 
D)  front loading. 
A)  present valuation. 
B)  backdating. 
C)  compounding. 
D)  front loading.

Question 5

In making decisions about insurance:

Accepted Answer

A)  using hindsight is the only way to truly know what the right decision was. 
B)  you must consider it in light of the best information available at the time. 
C)  you need to weigh the cost of the insurance against the benefit of payouts over the life of the contract. 
D)  None of these statements is true. 
A)  using hindsight is the only way to truly know what the right decision was. 
B)  you must consider it in light of the best information available at the time. 
C)  you need to weigh the cost of the insurance against the benefit of payouts over the life of the contract. 
D)  None of these statements is true.

Question 6

Which of the following decisions are complicated by the value of money changing over time?

Accepted Answer

A)  Buying a $100 concert ticket 
B)  Buying a $100 stock 
C)  Buying a $100 sweater 
D)  Buying a $100 blender 
A)  Buying a $100 concert ticket 
B)  Buying a $100 stock 
C)  Buying a $100 sweater 
D)  Buying a $100 blender

Question 7

Value of a loan amount X with interest r after one period equals:

Accepted Answer

A)  (X * 1)/(X * r) 
B)  X * (1 + r) 
C)  X/(1 + r) 
D)  All of these are true. 
A)  (X * 1)/(X * r) 
B)  X * (1 + r) 
C)  X/(1 + r) 
D)  All of these are true.

Question 8

The two big problems facing insurance companies in trying to manage risk are:

Accepted Answer

A)  risk pooling and diversification. 
B)  risk pooling and adverse selection. 
C)  adverse selection and moral hazard. 
D)  moral hazard and diversification. 
A)  risk pooling and diversification. 
B)  risk pooling and adverse selection. 
C)  adverse selection and moral hazard. 
D)  moral hazard and diversification.

Question 9

The foundational principle that makes insurance companies work is called:

Accepted Answer

A)  risk pooling. 
B)  risk assignment. 
C)  catastrophic causation. 
D)  risk analysis. 
A)  risk pooling. 
B)  risk assignment. 
C)  catastrophic causation. 
D)  risk analysis.

Question 10

Diversification involves:

Accepted Answer

A)  investing all your money in one company. 
B)  buying only one kind of stock. 
C)  buying only low-risk bonds. 
D)  None of these statements is true. 
A)  investing all your money in one company. 
B)  buying only one kind of stock. 
C)  buying only low-risk bonds. 
D)  None of these statements is true.

Question 11

Present value is:

Accepted Answer

A)  how much a certain amount of money that will be obtained in the future is worth today. 
B)  how much a certain amount of money that you have in the present will be worth in the future. 
C)  the process of accumulation of additional interest paid on interest that has already been earned. 
D)  how much a certain amount of money needs to be discounted to be meaningful. 
A)  how much a certain amount of money that will be obtained in the future is worth today. 
B)  how much a certain amount of money that you have in the present will be worth in the future. 
C)  the process of accumulation of additional interest paid on interest that has already been earned. 
D)  how much a certain amount of money needs to be discounted to be meaningful.

Question 12

Different banks:

Accepted Answer

A)  may offer loans at different rates. 
B)  all offer loans at the same interest rate. 
C)  are mandated to follow the Fed's set interest rate. 
D)  never offer loans at exactly the same rates. 
A)  may offer loans at different rates. 
B)  all offer loans at the same interest rate. 
C)  are mandated to follow the Fed's set interest rate. 
D)  never offer loans at exactly the same rates.

Question 13

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

Accepted Answer

A)  the trade-off between future value and expected value. 
B)  the opportunity cost of the risk involved. 
C)  the trade-off between risk and expected value. 
D)  the opportunity cost of the expected value. 
A)  the trade-off between future value and expected value. 
B)  the opportunity cost of the risk involved. 
C)  the trade-off between risk and expected value. 
D)  the opportunity cost of the expected value.

Question 14

The value of a loan of $100,000 after a year at 5 percent interest is:

Accepted Answer

A)  $5,000. 
B)  $95,000. 
C)  $105,000. 
D)  None of these is true. 
A)  $5,000. 
B)  $95,000. 
C)  $105,000. 
D)  None of these is true.

Question 15

The interest rate you typically earn on a deposit at a bank:

Accepted Answer

A)  represents the price of your loan. 
B)  represents the risk of investing. 
C)  is the opportunity cost to you of lending money. 
D)  is the opportunity cost to a bank of lending money. 
A)  represents the price of your loan. 
B)  represents the risk of investing. 
C)  is the opportunity cost to you of lending money. 
D)  is the opportunity cost to a bank of lending money.

Question 16

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag; if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag; if it is red,they win $20; if it is blue,they win $5; and if it is green,they win $1.Both games cost $5 to play.What is the expected value of the payoff in the first game?

Accepted Answer

A)  $5.75 
B)  $5.00 
C)  $4.75 
D)  $4.50 
A)  $5.75 
B)  $5.00 
C)  $4.75 
D)  $4.50

Question 17

Expected value is:

Accepted Answer

A)  the average of each possible outcome of a future event, weighted by its probability of occurring. 
B)  the average probability of all possible outcomes of a future event occurring, weighted by each possible outcome individually. 
C)  the sum of all probabilities of all possible outcomes of a future event occurring. 
D)  None of these statements is true. 
A)  the average of each possible outcome of a future event, weighted by its probability of occurring. 
B)  the average probability of all possible outcomes of a future event occurring, weighted by each possible outcome individually. 
C)  the sum of all probabilities of all possible outcomes of a future event occurring. 
D)  None of these statements is true.

Question 18

The present value of $250,000 in 10 years at 2 percent interest is approximately:

Accepted Answer

A)  $205,087. 
B)  $212,051. 
C)  $305,194. 
D)  $195,085. 
A)  $205,087. 
B)  $212,051. 
C)  $305,194. 
D)  $195,085.

Question 19

A risk-seeker is likely to:

Accepted Answer

A)  buy a government bond instead of a stock. 
B)  put money in a savings account instead of investing in a start-up company. 
C)  invest in a start-up company instead of putting his money under his mattress. 
D)  put his money under his mattress instead of buying company stock. 
A)  buy a government bond instead of a stock. 
B)  put money in a savings account instead of investing in a start-up company. 
C)  invest in a start-up company instead of putting his money under his mattress. 
D)  put his money under his mattress instead of buying company stock.

Question 20

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

Accepted Answer

A)  $1,120,262 
B)  $1,188,758 
C)  $1,201,204 
D)  $1,176,224 
A)  $1,120,262 
B)  $1,188,758 
C)  $1,201,204 
D)  $1,176,224

Exam 11: Time and Uncertainty

The key to diversification is that the risks should be:

Compounding:

Those who generally have low willingness to take on risk are said to be:

The process of accumulation that occurs when interest is paid on previously earned interest is called:

In making decisions about insurance:

Which of the following decisions are complicated by the value of money changing over time?

Value of a loan amount X with interest r after one period equals:

The two big problems facing insurance companies in trying to manage risk are:

The foundational principle that makes insurance companies work is called:

Diversification involves:

Present value is:

Different banks:

Whenever individuals think about investing money in stocks,bonds,or real estate,they must consider:

The value of a loan of $100,000 after a year at 5 percent interest is:

The interest rate you typically earn on a deposit at a bank:

Expected value is:

The present value of $250,000 in 10 years at 2 percent interest is approximately:

A risk-seeker is likely to:

Which of the following is closest to the future value of an $800,000 deposit earning 2 percent interest annually after 20 years?

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