Question 1

If you believe that stock prices follow a random walk, then probably you

Accepted Answer

A)  do not believe that there is positive relationship between risk and return.
B)  do not believe that stock prices reflect all available information.
C)  believe in the validity of the efficient markets hypothesis.
D)  believe that it is a good idea to engage in fundamental analysis.E) C) and D)
F) A) and D)

Question 2

Diversifying

Accepted Answer

A)  increases the standard deviation of the value of a portfolio indicating its risk has increased.
B)  increases the standard deviation of the value of a portfolio indicating its risk has decreased.
C)  decreases the standard deviation of the value of a portfolio indicating its risk has increased.
D)  decreases the standard deviation of the value of a portfolio indicating its risk has decreased.E) A) and C)
F) C) and D)

Question 3

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Accepted Answer

A)  $110.00 two years from today.
B)  $112.49 three years from today.
C)  $116.00 four years from today.
D)  $123.67 five years from today.E) None of the above
F) B) and D)

Question 4

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

Accepted Answer

A)  X > 1,055.56.
B)  X > 1,120.89.
C)  X > 1,232.89.
D)  X > 1,338.26.E) All of the above
F) C) and D)

Question 5

Figure 27-4. The figure shows a utility function for Alex. 
-Refer to Figure 27-4. If most people's utility functions look like Alex'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) None of the above
F) A) and C)

Question 6

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle 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) C) and D)
F) All of the above

Question 7

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Accepted Answer

A)  You receive the payment 3 years from now and the interest rate is 8 percent.
B)  You receive the payment 3 years from now and the interest rate is 6 percent.
C)  You receive the payment 2 years from now and the interest rate is 8 percent.
D)  You receive the payment 2 years from now and the interest rate is 6 percent.E) B) and D)
F) All of the above

Question 8

The future value of $500 saved for two years at an interest rate of 5% is

Accepted Answer

A)  $550.25.
B)  $550.00.
C)  $551.25.
D)  None of the above are correct.E) B) and D)
F) All of the above

Question 9

Diversification cannot reduce market risk.

Accepted Answer

A) True 
 B)False

Question 10

Rory receives, from an insurance company, a payment of $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called a(n)

Accepted Answer

A)  portfolio.
B)  bond.
C)  dividend.
D)  annuity.E) B) and D)
F) B) and C)

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

According to the efficient market hypothesis

Accepted Answer

A)  changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds.
B)  changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds.
C)  changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds.
D)  changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.E) A) and B)
F) A) and C)

Question 13

Which of the following is correct concerning stock market irrationality?

Accepted Answer

A)  Bubbles could arise, in part, because the price that people pay for stock depends on what they think someone else will pay for it in the future.
B)  Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important.
C)  Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market.
D)  All of the above are correct.E) B) and D)
F) None of the above

Question 14

What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?

Accepted Answer

A)  $105.26
B)  $105.00
C)  $97.24
D)  $94.34E) B) and C)
F) B) and D)

Question 15

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Accepted Answer

A)  the present value of the returns from the mill will fall, so Allen will be less likely to build the mill.
B)  the present value of the returns from the mill will fall, so Allen will be more likely to build the mill.
C)  the present value of the returns from the mill will rise, so Allen will be less likely to build the mill.
D)  the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.E) B) and C)
F) A) and C)

Question 16

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Accepted Answer

A)  $66,225.25
B)  $67,556.42
C)  $68,058.32
D)  $71,428.57E) B) and C)
F) A) and D)

Question 17

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Accepted Answer

A)  and marginal utility function are both upward sloping.
B)  and marginal utility function are both downward sloping.
C)  is upward sloping and her marginal utility function is downward sloping.
D)  is downward sloping and her marginal utility function is upward sloping.E) A) and D)
F) A) and C)

Question 18

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Accepted Answer

Buying stocks in a n...

Question 19

Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?

Accepted Answer

A)  $3,180.00
B)  $3,182.70
C)  $3,183.62
D)  None of the above are correct to the nearest cent.E) B) and C)
F) A) and C)

Question 20

Scenario 27-1
Lisa has a utility function  where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
-Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Accepted Answer

Yes, Lisa is risk averse. The ...

Exam 27: Tools of Finance

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

Correct AnswerverifiedShow Answer

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Correct AnswerverifiedBuying stocks in a n...View AnswerShow Answer

You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?

Correct AnswerverifiedShow Answer

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Correct AnswerverifiedShow Answer

Diversifying

Correct AnswerverifiedShow Answer

Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Is Lisa risk averse? Explain.

Correct AnswerverifiedYes, Lisa is risk averse. The ...View AnswerShow Answer

Rory receives, from an insurance company, a payment of $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called a(n)

Correct AnswerverifiedShow Answer

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Correct AnswerverifiedShow Answer

If you believe that stock prices follow a random walk, then probably you

Correct AnswerverifiedShow Answer

Two years ago Darryl put $3,000 into an account paying 3 percent interest. How much does he have in the account today?

Correct AnswerverifiedShow Answer

According to the efficient market hypothesis

Correct AnswerverifiedShow Answer

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

Correct AnswerverifiedShow Answer

The future value of $500 saved for two years at an interest rate of 5% is

Correct AnswerverifiedShow Answer

You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

Correct AnswerverifiedShow Answer

Diversification cannot reduce market risk.

Correct AnswerverifiedShow Answer

Which of the following is correct concerning stock market irrationality?

Correct AnswerverifiedShow Answer

What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. If most people's utility functions look like Alex's utility function, then it is easy to explain why

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if

Correct AnswerverifiedShow Answer

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Buying stocks in a n...
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Yes, Lisa is risk averse. The ...
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