Question 1

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. Suppose the vertical distance between the points (0, A)  and (0, B)  is 12. If his wealth increased from $1,300 to $1,800, then

Accepted Answer

A)  Dexter's subjective measure of his well-being would increase by less than 12 units.
B)  Dexter's subjective measure of his well-being would increase by more than 12 units.
C)  Dexter would change from being a risk-averse person into a person who is not risk averse.
D)  Dexter would forgo the insurance he bought when his wealth was $1,300.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Accepted Answer

A)  lower than about 5.5 percent.
B)  higher than about 5.5 percent.
C)  lower than about 7.5 percent.
D)  higher than about 7.5 percent.

Question 4

The performance of index funds

Accepted Answer

A)  usually falls short of the performance of actively-managed funds.
B)  provides evidence in support of the notion that stock prices do not depend upon supply and demand.
C)  provides evidence in support of the efficient markets hypothesis.
D)  provides evidence in support of the notion that stock-market participants are irrational.

Question 5

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing

Accepted Answer

A)  wealth.
B)  utility.
C)  marginal wealth.
D)  marginal utility.

Question 6

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Accepted Answer

A)  $414.09.
B)  $434.00.
C)  $441.87.
D)  $481.24.

Question 7

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 7% interest rate, the present val...

Question 8

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

Accepted Answer

A)  2 times
B)  3 times
C)  4 times
D)  8 times

Question 9

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Accepted Answer

A)  2 percent
B)  3 percent
C)  4 percent
D)  5 percent

Question 10

An index fund

Accepted Answer

A)  holds only stocks and bonds that are indexed to inflation.
B)  holds all the stocks in a given stock index.
C)  guarantees a return that follows the index of leading economic indicators.
D)  typically has a lower return than a managed fund.

Question 11

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 12

Suppose the interest rate is 8 percent. Consider three payment options.
1)  $300 today.
2)  $330 one year from today.
3)  $360 two years from today.
Which of the following is correct?

Accepted Answer

A)  1 has the highest present value and 2 has the lowest.
B)  2 has the highest present value and 3 has the lowest.
C)  3 has the highest present value and 1 has the lowest.
D)  None of the above is correct.

Question 13

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Accepted Answer

A)  raise the price of the corporation's stock; if it does not the stock is overvalued.
B)  raise the price of the corporation's stock; if it does not the stock is undervalued.
C)  reduce the price of the corporation's stock; if it does not the stock is overvalued.
D)  reduce the price of the corporation's stock; if it does not the stock is undervalued.

Question 14

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Accepted Answer

A)  the present value of the factory rises. It's more likely the company will build the factory.
B)  the present value of the factory rises. It's less likely the company will build the factory.
C)  the present value of the factory falls. It's more likely the company will build the factory.
D)  the present value of the factory falls. It's less likely the company will build the factory.

Question 15

If asset markets are driven by the "animal spirits" of investors, then

Accepted Answer

A)  those markets reflect rational behavior.
B)  those markets reflect irrational behavior.
C)  the efficient markets hypothesis is correct.
D)  the stock market exhibits informational efficiency.

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

Figure 27-2. The figure shows a utility function for Britney. 
-Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Accepted Answer

A)  she would be willing to accept a coin-flip bet that would result in her winning $300 if the result was "heads" or losing $300 if the result was "tails."
B)  the pain of losing $300 of her wealth would equal the pleasure of adding $300 to her wealth.
C)  the pain of losing $300 of her wealth would exceed the pleasure of adding $300 to her wealth.
D)  the pleasure of adding $300 to her wealth would exceed the pain of losing $300 of her wealth.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

From the standpoint of the economy as a whole, the role of insurance is

Accepted Answer

A)  to entice risk-loving people to become risk averse.
B)  to promote the phenomenon of adverse selection.
C)  not to eliminate the risks inherent in life, but to spread them around more efficiently.
D)  not to spread risks, but to eliminate them for individual policy holders.

Question 20

In the 1990s, Fed Chairperson Alan Greenspan questioned whether the stock market

Accepted Answer

A)  boom at that time reflected "irrational exuberance."
B)  decline at that time reflected "irrational funk."
C)  boom at that time reflected "rational exuberance."
D)  decline at that time reflected "rational funk."

Exam 27: Tools of Finance

If asset markets are driven by the "animal spirits" of investors, then

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is

Correct AnswerverifiedShow Answer

The performance of index funds

Correct AnswerverifiedShow Answer

Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. Suppose Britney begins with $1,050 in wealth. Starting from there,

Correct AnswerverifiedShow Answer

You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Suppose the interest rate is 8 percent. Consider three payment options. 1) $300 today. 2) $330 one year from today. 3) $360 two years from today. Which of the following is correct?

Correct AnswerverifiedShow Answer

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing

Correct AnswerverifiedShow Answer

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Correct AnswerverifiedShow Answer

Suppose the parents of a child born in the year 2000 had invested $5,000 at a 10% interest rate to be paid out to the child when she turns 21 years old. Approximately how many times will the investment double by the time it is paid out to the child?

Correct AnswerverifiedShow Answer

In the 1990s, Fed Chairperson Alan Greenspan questioned whether the stock market

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $183.60 two years from today equal to about $173.06 today?

Correct AnswerverifiedShow Answer

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Correct AnswerverifiedWith a 7% interest rate, the present val...View AnswerShow Answer

A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should

Correct AnswerverifiedShow Answer

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Correct AnswerverifiedShow Answer

The market for insurance is an example of diversification.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An index fund

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
With a 7% interest rate, the present val...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified