Question 1

Mary talked to several stockbrokers and made the following conclusions. Which, if any, of her conclusions are correct?

Accepted Answer

A)  It is relatively easy to reduce firm-specific risk by increasing the number of companies one holds stock in.
B)  Stock prices, even if not exactly a random walk, are very close to it.
C)  Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis.
D)  All of Mary's conclusions are correct.E) None of the above
F) B) and C)

Question 2

The future value of a deposit in a savings account will be smaller

Accepted Answer

A)  the longer a person waits to withdraw the funds.
B)  the lower the interest rate is.
C)  the larger the initial deposit is.
D)  All of the above are correct.E) None of the above
F) C) and D)

Question 3

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)  rises, so investment spending rises.
B)  falls, so investment spending rises.
C)  rises, so investment spending falls.
D)  falls, so investment spending falls.E) A) and B)
F) All of the above

Question 4

The value of a stock is based on the

Accepted Answer

A)  present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise.
B)  present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.
C)  future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises.
D)  future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.E) None of the above
F) B) and D)

Question 5

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Accepted Answer

A)  rise, and investment spending rise.
B)  rise, and investment spending fall.
C)  fall, and investment spending rise.
D)  fall, and investment spending fall.E) B) and D)
F) None of the above

Question 6

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%.

Accepted Answer

A) True 
 B)False

Question 7

According to the efficient market hypothesis, which of the following statements is not correct?

Accepted Answer

A)  Stock market prices tend to rise today if they rose yesterday.
B)  As judged by the typical person in the market, all stocks are fairly valued all the time.
C)  At the market price, the number of shares being offered for sale matches the number of shares people want to buy.
D)  All of the above statements are incorrect.E) A) and C)
F) A) and B)

Question 8

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Accepted Answer

A) True 
 B)False

Question 9

Toni put $500 into an account and one year later she had $534. What interest rate was paid on Toni's deposit?

Accepted Answer

A)  7.1 percent
B)  5.9 percent
C)  6.8 percent
D)  None of the above is correct.E) B) and D)
F) B) and C)

Question 10

The idea of insurance

Accepted Answer

A)  would not appeal to a risk-averse person.
B)  is, other things the same, to reduce the probability of a fire, accident, or death.
C)  is to share risk.
D)  is to provide a sure thing, not a gamble.E) A) and B)
F) A) and C)

Question 11

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Accepted Answer

A)  firm-specific risk, which will likely raise shareholders' demand for higher return.
B)  firm-specific risk, which will likely not likely raise shareholders' demand for higher return.
C)  market risk, which will likely raise shareholders' demand for higher return.
D)  market risk, which will likely not raise shareholders' demand for higher return.E) C) and D)
F) A) and B)

Question 12

Figure 14-4. The figure shows a utility function for Dexter. 
-Refer to Figure 14-4. From the appearance of the utility function, we know that

Accepted Answer

A)  Dexter is risk averse.
B)  Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)  the property of decreasing marginal utility applies to Dexter.
D)  All of the above are correct.E) C) and D)
F) None of the above

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

What is the present value of a payment of $100 to be made one year from today?

Accepted Answer

A)  $100*(1 + r) 
B)  $100/(1 + r) 
C)  $100 - $100r
D)  $100 - (1 + r) /$100E) All of the above
F) B) and C)

Question 15

Twenty years ago, Dr. Montgomery borrowed money from her parents to pay her tuition at graduate school. Now she wants to pay them back. She gives them double what they gave her. According to the rule of 70, what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?

Accepted Answer

A)  3.5 percent
B)  4.5 percent
C)  5 percent
D)  7 percentE) All of the above
F) A) and B)

Question 16

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Accepted Answer

A)  benefit from fundamental analysis, since the mutual fund requires its shareholders to perform fundamental analysis on their own.
B)  benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
C)  eliminate market risk.
D)  reduce the standard deviation of his or her portfolio to zero.E) A) and B)
F) A) and D)

Question 17

Figure 14-4. The figure shows a utility function for Dexter. 
-Refer to Figure 14-4. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Accepted Answer

A)  the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B)  the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C)  the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D)  This cannot be determined from the graph.E) All of the above
F) B) and C)

Question 18

Greg's Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first year, $4 million the second year and have no value thereafter. Greg's Tasty Ice Cream should build the factory if the interest rate is

Accepted Answer

A)  3% but not if it is 4%.
B)  4% but not if it is 5%.
C)  5% but not if it is 6%.
D)  6% but not if it is 7%.E) A) and C)
F) A) and B)

Question 19

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

Accepted Answer

A)  was responsible for the financial crisis of 2008-2009.
B)  was responsible for the Great Depression of the 1930s.
C)  claims that prices observed in financial markets are always "right."
D)  claims that prices observed in financial markets are mostly "wrong."E) A) and B)
F) A) and C)

Question 20

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Accepted Answer

Efficient market theory says that it sho...

Exam 14: The Basic Tools of Finance

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Correct Answer
verified
Efficient market theory says that it sho...
View Answer

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct Answer
verified

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Correct Answer
verified

Toni put $500 into an account and one year later she had $534. What interest rate was paid on Toni's deposit?

Correct Answer
verified

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

Correct Answer
verified

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Correct Answer
verified

Mary talked to several stockbrokers and made the following conclusions. Which, if any, of her conclusions are correct?

Correct Answer
verified

Correct Answer
verified

The future value of a deposit in a savings account will be smaller

Correct Answer
verified

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Correct Answer
verified

The value of a stock is based on the

Correct Answer
verified

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Correct Answer
verified

Correct Answer
verified

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

Correct Answer
verified

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. From the appearance of the utility function, we know that

Correct Answer
verified

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%.

Correct Answer
verified

According to the efficient market hypothesis, which of the following statements is not correct?

Correct Answer
verified

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Correct Answer
verified

The idea of insurance

Correct Answer
verified

What is the present value of a payment of $100 to be made one year from today?

Correct Answer
verified

Exam 14: The Basic Tools of Finance

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

Correct AnswerverifiedEfficient market theory says that it sho...View AnswerShow Answer

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct AnswerverifiedShow Answer

Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of

Correct AnswerverifiedShow Answer

Toni put $500 into an account and one year later she had $534. What interest rate was paid on Toni's deposit?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Correct AnswerverifiedShow Answer

Mary talked to several stockbrokers and made the following conclusions. Which, if any, of her conclusions are correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The future value of a deposit in a savings account will be smaller

Correct AnswerverifiedShow Answer

Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.

Correct AnswerverifiedShow Answer

The value of a stock is based on the

Correct AnswerverifiedShow Answer

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Writing in the Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis

Correct AnswerverifiedShow Answer

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

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%.

Correct AnswerverifiedShow Answer

According to the efficient market hypothesis, which of the following statements is not correct?

Correct AnswerverifiedShow Answer

Figure 14-4. The figure shows a utility function for Dexter. -Refer to Figure 14-4. Suppose Dexter begins with $1,300 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

The idea of insurance

Correct AnswerverifiedShow Answer

What is the present value of a payment of $100 to be made one year from today?

Correct AnswerverifiedShow Answer

Correct Answer
verified
Efficient market theory says that it sho...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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