Question 1

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A)   firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
B)   market risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
C)   firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions.
D)   market risk, but still they have reason to worry about their wealth decreasing as a result of recessions.E) A) and C)
F) A) and D)

Question 2

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Accepted Answer

A)   20 percent
B)   25 percent
C)   28 percent
D)   None of the above is correct.E) A) and C)
F) A) and B)

Question 3

Which, if any, of the present values below are computed correctly?

Accepted Answer

A)   A payment of $100 to be received one year from today, with a 2 percent interest rate, has a present value of $98.81.
B)   A payment of $200 to be received two years from today, with a 3 percent interest rate, has a present value of $188.52.
C)   A payment of $300 to be received three years from today, with a 4 percent interest rate, has a present value of $234.34.
D)   None of the above are correct to the nearest cent.E) C) and D)
F) A) and B)

Question 4

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Accepted Answer

For example at 3 percent the p...

Question 5

A person's subjective measure of well­being or satisfaction is called aversion.

Accepted Answer

A) True 
 B)False

Question 6

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.E) A) and B)
F) A) and C)

Question 7

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

Accepted Answer

A)   8 years
B)   10 years
C)   12 years
D)   14 yearsE) B) and D)
F) B) and C)

Question 8

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Accepted Answer

The reduct...

Question 9

Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

Accepted Answer

A)   5 percent
B)   7 percent
C)   8 percent
D)   10 percentE) C) and D)
F) A) and D)

Question 10

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Accepted Answer

A)   right, so the price rises.
B)   right, so the price falls.
C)   left, so the price rises.
D)   left, so the price falls.E) A) and D)
F) A) and C)

Question 11

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Accepted Answer

A)   increasing marginal utility of wealth and is risk averse.
B)   increasing marginal utility of wealth and is not risk averse.
C)   decreasing marginal utility of wealth and is risk averse.
D)   decreasing marginal utility of wealth and is not risk averse.E) A) and B)
F) B) and C)

Question 12

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

Accepted Answer

A)   $550 one year from today.
B)   $580 two years from today.
C)   $600 three years from today.
D)   $615 four years from today.E) B) and D)
F) A) and B)

Question 13

If stock prices follow a random walk, then stock investors can make large profits by

Accepted Answer

A)   buying stocks whose prices have been falling for several days.
B)   buying stocks whose prices have been rising for several days.
C)   performing fundamental analysis of stocks using data contained in annual reports.
D)   using inside information.E) C) and D)
F) None of the above

Question 14

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Accepted Answer

A)   $500/1.06) 2
B)   $500 - 5001.06) 2
C)   $500/1.02) 6
D)   None of the above is correct.E) A) and B)
F) B) and C)

Question 15

Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease

Accepted Answer

A)   firm specific risk and market risk.
B)   firm specific risk but not market risk.
C)   market risk but not firm specific risk.
D)   neither firm specific nor market risk.E) A) and B)
F) B) and D)

Question 16

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 an)

Accepted Answer

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

Question 17

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.E) A) and C)
F) B) and D)

Question 18

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

Accepted Answer

A)   increase the risk of her portfolio.
B)   decrease some, but not all, of the risk of her portfolio.
C)   decrease all of the risk of her portfolio.
D)   leave the risk of her portfolio unchanged from its present level.E) A) and D)
F) A) and B)

Question 19

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Accepted Answer

A)   $1,000  1.06) 
B)   $1,0001.06) 
C)   $1,000/1.06) 
D)   None of the above is correct.E) A) and C)
F) A) and D)

Question 20

If a stock or bond is risky

Accepted Answer

A)   risk averse people may be willing to hold it as part of a diversified portfolio.
B)   risk averse people may be willing to hold it if the expected return is high enough.
C)   both A and B are correct.
D)   risk averse people will not hold it.E) A) and D)
F) B) and D)

Exam 19: The Basic Tools of Finance

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Correct AnswerverifiedThe reduct...View AnswerShow Answer

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Correct AnswerverifiedShow Answer

Lori, who currently owns stock in four companies, has decided to expand her portfolio by purchasing stock in virtually every company that sells stock. In doing so, Lori will

Correct AnswerverifiedShow Answer

Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which, if any, of the present values below are computed correctly?

Correct AnswerverifiedShow Answer

If stock prices follow a random walk, then stock investors can make large profits by

Correct AnswerverifiedShow Answer

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

A person's subjective measure of well­being or satisfaction is called aversion.

Correct AnswerverifiedShow Answer

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct AnswerverifiedShow Answer

Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Correct AnswerverifiedFor example at 3 percent the p...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 an)

Correct AnswerverifiedShow Answer

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

Correct AnswerverifiedShow Answer

If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Susan put $375 into an account and one year later had $405. What interest rate was paid on Susan's deposit?

Correct AnswerverifiedShow Answer

The last $2,000 of Rolanda's wealth adds less to her utility than the previous $2,000. Based on this information, Rolanda has

Correct AnswerverifiedShow Answer

Suppose the interest rate is 5 percent. Which of the following payment options has the highest present value today?

Correct AnswerverifiedShow Answer

If a stock or bond is risky

Correct AnswerverifiedShow Answer

Bert put $75 into an account and one year later had $100. What interest rate was paid on Bert's deposit?

Correct AnswerverifiedShow Answer

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The reduct...
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A person's subjective measure of wellbeing or satisfaction is called aversion.

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For example at 3 percent the p...
View Answer

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