Question 1

As the number of stocks in a person's portfolio increases,

Accepted Answer

A)  the risk of the portfolio increases, as indicated by the increasing value of the standard deviation of the portfolio. 
B)  the risk of the portfolio increases, as indicated by the decreasing value of the standard deviation of the portfolio. 
C)  the risk of the portfolio decreases, as indicated by the increasing value of the standard deviation of the portfolio. 
D)  the risk of the portfolio decreases, as indicated by the decreasing value of the standard deviation of the portfolio. 
A)  the risk of the portfolio increases, as indicated by the increasing value of the standard deviation of the portfolio. 
B)  the risk of the portfolio increases, as indicated by the decreasing value of the standard deviation of the portfolio. 
C)  the risk of the portfolio decreases, as indicated by the increasing value of the standard deviation of the portfolio. 
D)  the risk of the portfolio decreases, as indicated by the decreasing value of the standard deviation of the portfolio. D

Question 2

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

Accepted Answer

A)  stock prices follow a random walk. 
B)  the stock market is informationally efficient. 
C)  it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D)  All of the above are correct. 
A)  stock prices follow a random walk. 
B)  the stock market is informationally efficient. 
C)  it is better to own stock in 20 companies than it is to own stock in 2 companies. 
D)  All of the above are correct. D

Question 3

How does moral hazard matter in the market for insurance?

Accepted Answer

Once people have insurance, they have less incentive to be careful about risky behavior.

Question 4

If the efficient markets hypothesis is correct, then

Accepted Answer

A)  the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B)  the stock market is informationally efficient. 
C)  stock prices never follow a random walk. 
D)  All of the above are correct. 
A)  the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy. 
B)  the stock market is informationally efficient. 
C)  stock prices never follow a random walk. 
D)  All of the above are correct.

Question 5

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Accepted Answer

$1,600/$50 = 32. The rule of 70 says tha

Question 6

Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.

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. 
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.

Question 7

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Accepted Answer

A)  4 percent 
B)  6 percent 
C)  9 percent 
D)  11 percent 
A)  4 percent 
B)  6 percent 
C)  9 percent 
D)  11 percent

Question 8

Figure 27-5. The figure shows a utility function for Dexter.  
-Refer to Figure 27-5. In what ways) does the graph differ from the usual case?

Accepted Answer

A)  The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping. 
B)  The utility function shown here is bowed downward convex), whereas in the usual case the utility function is bowed upward concave). 
C)  On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D)  On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis. 
A)  The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping. 
B)  The utility function shown here is bowed downward convex), whereas in the usual case the utility function is bowed upward concave). 
C)  On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis. 
D)  On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.

Question 9

Fundamental analysis shows that stock in Stainless Appliance Company 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. 
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.

Question 10

Sometimes On Time SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

Accepted Answer

A)  a decrease in the price of a new jet or a decrease in the interest rate. 
B)  a decrease in the price of a new jet or an increase in the interest rate. 
C)  an increase in the price of a new jet or a decrease in the interest rate. 
D)  an increase in the price of a new jet or an increase in the interest rate. 
A)  a decrease in the price of a new jet or a decrease in the interest rate. 
B)  a decrease in the price of a new jet or an increase in the interest rate. 
C)  an increase in the price of a new jet or a decrease in the interest rate. 
D)  an increase in the price of a new jet or an increase in the interest rate.

Question 11

Suppose that John can buy a savings bond for $500 that matures in ten years and pays John $1,000 with certainty. He is indifferent between this bond and another $500 bond that has some risk but on which the interest rate is 5% higher. How much, to the nearest penny, does the riskier bond pay in ten years?

Accepted Answer

A)  $1,275.91 
B)  $1,422.63 
C)  $1,577.69 
D)  $1,631.17 
A)  $1,275.91 
B)  $1,422.63 
C)  $1,577.69 
D)  $1,631.17

Question 12

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Accepted Answer

It is worth more if it is received in 5

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

Accepted Answer

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

Question 15

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

Accepted Answer

A)  X = 809.33 
B)  X = 855.56 
C)  X = 895.42 
D)  X = 916.74 
A)  X = 809.33 
B)  X = 855.56 
C)  X = 895.42 
D)  X = 916.74

Question 16

A risk-averse person has

Accepted Answer

A)  a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B)  a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C)  a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D)  a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth. 
A)  a utility function whose slope gets flatter as wealth rises. This means they have increasing marginal utility of wealth. 
B)  a utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth. 
C)  a utility function whose slope gets steeper as wealth rises. This means they have increasing marginal utility of wealth. 
D)  a utility function whose slope gets steeper as wealth rises. This means they have diminishing utility of wealth.

Question 17

Figure 27-1. The figure shows a utility function.  
-Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?

Accepted Answer

A)   
B)    
C)    
D)    
A)   
B)    
C)    
D)

Question 18

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is not correct?

Accepted Answer

A)  A risk averse person might be willing to hold stocks. 
B)  Other things the same, a portfolio with the stocks of a large number of companies has less risk. 
C)  Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return. 
D)  Diversification can eliminate market risk but not firm-specific risk. 
A)  A risk averse person might be willing to hold stocks. 
B)  Other things the same, a portfolio with the stocks of a large number of companies has less risk. 
C)  Other things the same, the larger a portion of savings a person invests in stocks, the greater his expected return. 
D)  Diversification can eliminate market risk but not firm-specific risk.

Question 20

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than 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. 
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.

Exam 14: The Basic Tools of Finance

As the number of stocks in a person's portfolio increases,

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal. Ron probably believes that

How does moral hazard matter in the market for insurance?

If the efficient markets hypothesis is correct, then

Write the rule of 70. Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600. Use the rule of 70 to determine about what interest rate she earned.

Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.

A judge requires Harry to make a payment to Sally. The judge says that Harry can pay her either $10,000 today or $12,000 two years from today. Of the following interest rates, which is the highest one at which Harry would be better off paying the money today?

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. In what ways) does the graph differ from the usual case?

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

Sometimes On Time SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

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

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

Suppose Emilio offers you $500 today or $X in 10 years. If the interest rate is 6 percent, then at what value of X would you be indifferent between the two options?

A risk-averse person has

According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.

Which of the following is not correct?

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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