Exam 14: The Basic Tools of Finance: Part B

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Available evidence indicates that stock prices,even if not exactly a random walk,are very close to a random walk.

From the standpoint of the economy as a whole,the role of insurance is to greatly reduce or eliminate the risks inherent in life.

According to the efficient markets hypothesis,the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Because the statistic called the standard deviation measures the volatility of a variable,it is used to measure the return of a portfolio.

Diversification cannot reduce market risk.

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

The fact that we observe a trade-off between risk and return is puzzling to economists,because that observation conflicts with the notion that most people are risk averse.

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

A person with diminishing marginal utility of wealth is risk averse.

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.

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today.If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years,then ZZL will undertake the project.

A company that can build a project that will cost $50,000,but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Risk-averse individuals like good things more than they dislike comparable bad things.

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Diversification can reduce firm-specific risk.

Actively managed mutual funds usually fail to outperform index funds,and this fact provides evidence in favor of the efficient markets hypothesis.