Question 1

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Accepted Answer

A)   doing research such as thoroughly reading and analyzing companies' annual reports
B)   choosing mutual funds that are managed by individuals with good reputations
C)   viewing individual stock prices as unpredictable
D)   relying upon the advice of Wall Street analystsE) A) and B)
F) C) and D)

Question 2

Which of the following actions best illustrates adverse selection?

Accepted Answer

A)   A person adds risky stock to his portfolio.
B)   A person who has narrowly avoided many accidents applies for automobile insurance.
C)   A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)   A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.E) A) and B)
F) None of the above

Question 3

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Accepted Answer

A)   5.50 percent
B)   5.65 percent
C)   6.25 percent
D)   7.05 percentE) A) and B)
F) All of the above

Question 4

A soup manufacturer unexpectedly announces that it has hired a new manager. It is widely believed that this manager will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?

Accepted Answer

A)   the announcement and the rise in interest rates
B)   the announcement but not the rise in interest rates
C)   the rise in interest rates, but not the announcement
D)   neither the announcement nor the rise in interest ratesE) A) and B)
F) All of the above

Question 5

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...

Question 6

Which of the following changes would decrease the present value of a future payment?

Accepted Answer

A)   a decrease in the size of the payment
B)   an increase in the time until the payment is made
C)   an increase in the interest rate
D)   All of the above are correct.E) B) and C)
F) A) and D)

Question 7

You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?

Accepted Answer

A)   the first one
B)   the second one
C)   the third one
D)   They all have the same balance.E) A) and B)
F) All of the above

Question 8

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Accepted Answer

A)   a mutual fund.
B)   an insurance company.
C)   a diversified company.
D)   an equity-financed company.E) B) and C)
F) All of the above

Question 9

In answering which of the following questions would you find it necessary to calculate a future value?

Accepted Answer

A)   If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years?
B)   Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years?
C)   As the winner of a lottery, should Michael choose an immediate payment of $250,000 or should he choose annual payments of $30,000 for each of the next 10 years?
D)   You would find it necessary to calculate a future value in order to answer all of these questions.E) C) and D)
F) None of the above

Question 10

At which interest rate is the present value of $360 three years from today equal to about $310 today?

Accepted Answer

A)   4.7 percent
B)   5.1 percent
C)   5.5 percent
D)   5.9 percentE) B) and D)
F) A) and D)

Question 11

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Accepted Answer

A)   Broker A: "There are risks in holding stocks, even in a highly diversified portfolio."
B)   Broker B: "Portfolios with smaller standard deviations have lower risk."
C)   Broker C: "Stocks with greater risks offer lower average returns."
D)   They all gave her correct advice.E) B) and C)
F) A) and B)

Question 12

Research studies have shown that

Accepted Answer

A)   the correlation between how well a stock does one year and how well it does the next is significantly greater than zero.
B)   managed mutual funds generally outperform indexed mutual funds.
C)   people tend to be overconfident when making investment decisions.
D)   All of the above are correct.E) None of the above
F) All of the above

Question 13

Suppose you win a small lottery and you are given the following choice: You can (1)  receive an immediate payment of $10,000 or (2)  three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is

Accepted Answer

A)   2 percent, but not if the interest rate is 3 percent.
B)   3 percent, but not if the interest rate is 4 percent.
C)   4 percent, but not if the interest rate is 5 percent.
D)   5 percent, but not if the interest rate is 6 percent.E) A) and B)
F) B) and C)

Question 14

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Accepted Answer

A)  $400 × 6 × (1.05) 
B)  $400 × (1.05) 6
C)  $400 × (1.30) 
D)  $400 × (1+0.56) E) A) and D)
F) None of the above

Question 15

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Accepted Answer

A) True 
 B)False

Question 16

Diminishing marginal utility of wealth implies that the utility function is

Accepted Answer

A)   upward-sloping and has decreasing slope.
B)   upward-sloping and has increasing slope.
C)   downward-sloping and has decreasing slope.
D)   downward-sloping and has increasing slope.E) B) and D)
F) B) and C)

Question 17

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Accepted Answer

A)   5 percent
B)   4 percent
C)   3 percent
D)   2 percentE) None of the above
F) A) and B)

Question 18

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 19

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 20

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 C)
F) A) and D)

Exam 9: 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

Diminishing marginal utility of wealth implies that the utility function is

Correct Answer
verified

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Correct Answer
verified

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.

Correct Answer
verified
$1,600/$50 = 32. The rule of 70 says tha...
View Answer

Correct Answer
verified

At which interest rate is the present value of $360 three years from today equal to about $310 today?

Correct Answer
verified

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Correct Answer
verified

Which of the following actions best illustrates adverse selection?

Correct Answer
verified

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Correct Answer
verified

Which of the following changes would decrease the present value of a future payment?

Correct Answer
verified

Which of the following is correct concerning stock market irrationality?

Correct Answer
verified

Research studies have shown that

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

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Correct Answer
verified

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Correct Answer
verified

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Correct Answer
verified

In answering which of the following questions would you find it necessary to calculate a future value?

Correct Answer
verified

A soup manufacturer unexpectedly announces that it has hired a new manager. It is widely believed that this manager will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?

Correct Answer
verified

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Correct Answer
verified

Correct Answer
verified

Exam 9: 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

Diminishing marginal utility of wealth implies that the utility function is

Correct AnswerverifiedShow Answer

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

Correct AnswerverifiedShow Answer

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.

Correct Answerverified$1,600/$50 = 32. The rule of 70 says tha...View AnswerShow Answer

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $360 three years from today equal to about $310 today?

Correct AnswerverifiedShow Answer

You put $150 in the bank two years ago and forgot about it. The bank sends you a notice that you now have $169.34 in your account. What interest rate did you earn?

Correct AnswerverifiedShow Answer

Which of the following actions best illustrates adverse selection?

Correct AnswerverifiedShow Answer

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

Correct AnswerverifiedShow Answer

Which of the following changes would decrease the present value of a future payment?

Correct AnswerverifiedShow Answer

Which of the following is correct concerning stock market irrationality?

Correct AnswerverifiedShow Answer

Research studies have shown that

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

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Correct AnswerverifiedShow Answer

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Correct AnswerverifiedShow Answer

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

Correct AnswerverifiedShow Answer

In answering which of the following questions would you find it necessary to calculate a future value?

Correct AnswerverifiedShow Answer

A soup manufacturer unexpectedly announces that it has hired a new manager. It is widely believed that this manager will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?

Correct AnswerverifiedShow Answer

Which of the following methods of picking stocks is not consistent with fundamental analysis?

Correct AnswerverifiedShow Answer

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

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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