Question 1

Compared to a portfolio composed entirely of shares, a portfolio that is 50 per cent government bonds and 50 per cent shares will have a

Accepted Answer

A)   lower return and a lower level of risk.
B)   lower return and a higher level of risk.
C)   higher return and a lower level of risk.
D)   higher return and a higher level of risk.E) All of the above
F) A) and B)

Question 2

Diversification of a portfolio can

Accepted Answer

A)   reduce aggregate risk.
B)   eliminate all risk.
C)   increase the standard deviation of the portfolio's return.
D)   reduce idiosyncratic risk.E) A) and B)
F) A) and C)

Question 3

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life but to

Accepted Answer

A)   pay for them.
B)   spread them around more efficiently.
C)   find good uses for them.
D)   make do with them.E) B) and C)
F) None of the above

Question 4

Someone who is risk averse

Accepted Answer

A)   suffers a reduction in utility if their wealth declines by €100 that is smaller than the gain in utility they would obtain if their wealth increased by €100.
B)   suffers a reduction in utility if their wealth declines by €100 that is larger than the gain in utility they would obtain if their wealth increased by €100.
C)   will always buy insurance against all risks they face, regardless of the price of insurance.
D)   is irrational.E) A) and C)
F) B) and C)

Question 5

Economists have developed models of risk aversion using the concept of utility, which is a person's subjective measure of

Accepted Answer

A)   distance
B)   height.
C)   well-being or satisfaction.
D)   money.E) All of the above
F) A) and C)

Question 6

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)   overvalued, so its price would rise.
B)   overvalued, so its price would fall.
C)   undervalued, so its price would rise.
D)   undervalued, so its price would fall.E) B) and C)
F) None of the above

Question 7

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Accepted Answer

An increase in the interest rate reduces...

Question 8

Which of the following is an example of moral hazard?

Accepted Answer

A)   After Guiseppe buys fire insurance, he begins to smoke cigarettes in bed.
B)   None of these answers demonstrate moral hazard.
C)   Martin has been feeling poorly lately so he seeks health insurance.
D)   Both of Suzanne's parents lost their teeth due to gum disease, so Suzanne buys dental insurance.
E)   All of these answers demonstrate moral hazard.F) B) and C)
G) A) and E)

Question 9

You have a choice among three options. Option 1: receive €900 immediately. Option 2: receive €1,200 one year from now. Option 3: receive €2,000 five years from now. The interest rate is 15% per year. Rank these three options from highest present value to lowest present value.

Accepted Answer

A)   Option 1; Option 2; Option 3
B)   Option 3; Option 2; Option 1
C)   Option 2; Option 3; Option 1
D)   Option 3; Option 1; Option 2E) A) and B)
F) A) and C)

Question 10

You are going to receive a €100,000 inheritance in ten years. If the prevailing interest rate is 6 percent, the present value of your inheritance is €55,839.48.

Accepted Answer

A) True 
 B)False

Question 11

As a person allocates more of his savings to shares and less to government bonds, he will earn a higher rate of return but he must accept additional risk.

Accepted Answer

A) True 
 B)False

Question 12

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that ...

Question 13

The value of a share is based on the present value of the future stream of dividend payments and the final sales price.

Accepted Answer

A) True 
 B)False

Question 14

Draw graphs showing the following three relationships.
a. The relation between utility and wealth for a risk averse consumer.
b. The relation between standard deviation and the number of stocks in a portfolio.
c. The relation between return and risk.

Accepted Answer

The answer of Draw graphs showing the following three relationships.
a....

Question 15

If the prevailing interest rate is 10 per cent, a rational person should be indifferent between receiving €1,000 today and €1,000 one year from today.

Accepted Answer

A) True 
 B)False

Question 16

If interest is compounded annually, €100 placed in a bank account earning 10 percent interest should generate €30 interest after three years.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following factors would a fundamental analyst consider when predicting a firm's share price?

Accepted Answer

A)   recent changes in the share's price
B)   the knowledge and skills of the firm's current management
C)   the marketing strategies of the firm's competitors
D)   Both b and c are correct.E) A) and C)
F) B) and D)

Exam 25: The Basic Tools of Finance

Diversification of a portfolio can

Correct Answer
verified

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct Answer
verified
An example of adverse selection is that ...
View Answer

Which of the following is an example of moral hazard?

Correct Answer
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If interest is compounded annually, €100 placed in a bank account earning 10 percent interest should generate €30 interest after three years.

Correct Answer
verified

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Correct Answer
verified

You are going to receive a €100,000 inheritance in ten years. If the prevailing interest rate is 6 percent, the present value of your inheritance is €55,839.48.

Correct Answer
verified

Economists have developed models of risk aversion using the concept of utility, which is a person's subjective measure of

Correct Answer
verified

You have a choice among three options. Option 1: receive €900 immediately. Option 2: receive €1,200 one year from now. Option 3: receive €2,000 five years from now. The interest rate is 15% per year. Rank these three options from highest present value to lowest present value.

Correct Answer
verified

Which of the following factors would a fundamental analyst consider when predicting a firm's share price?

Correct Answer
verified

As a person allocates more of his savings to shares and less to government bonds, he will earn a higher rate of return but he must accept additional risk.

Correct Answer
verified

Someone who is risk averse

Correct Answer
verified

Draw graphs showing the following three relationships. a. The relation between utility and wealth for a risk averse consumer. b. The relation between standard deviation and the number of stocks in a portfolio. c. The relation between return and risk.

Correct Answer
verified

Compared to a portfolio composed entirely of shares, a portfolio that is 50 per cent government bonds and 50 per cent shares will have a

Correct Answer
verified

The value of a share is based on the present value of the future stream of dividend payments and the final sales price.

Correct Answer
verified

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Correct Answer
verified
An increase in the interest rate reduces...
View Answer

If the prevailing interest rate is 10 per cent, a rational person should be indifferent between receiving €1,000 today and €1,000 one year from today.

Correct Answer
verified

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life but to

Correct Answer
verified

Exam 25: The Basic Tools of Finance

Diversification of a portfolio can

Correct AnswerverifiedShow Answer

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct AnswerverifiedAn example of adverse selection is that ...View AnswerShow Answer

Which of the following is an example of moral hazard?

Correct AnswerverifiedShow Answer

If interest is compounded annually, €100 placed in a bank account earning 10 percent interest should generate €30 interest after three years.

Correct AnswerverifiedShow Answer

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Correct AnswerverifiedShow Answer

You are going to receive a €100,000 inheritance in ten years. If the prevailing interest rate is 6 percent, the present value of your inheritance is €55,839.48.

Correct AnswerverifiedShow Answer

Economists have developed models of risk aversion using the concept of utility, which is a person's subjective measure of

Correct AnswerverifiedShow Answer

You have a choice among three options. Option 1: receive €900 immediately. Option 2: receive €1,200 one year from now. Option 3: receive €2,000 five years from now. The interest rate is 15% per year. Rank these three options from highest present value to lowest present value.

Correct AnswerverifiedShow Answer

Which of the following factors would a fundamental analyst consider when predicting a firm's share price?

Correct AnswerverifiedShow Answer

As a person allocates more of his savings to shares and less to government bonds, he will earn a higher rate of return but he must accept additional risk.

Correct AnswerverifiedShow Answer

Someone who is risk averse

Correct AnswerverifiedShow Answer

Draw graphs showing the following three relationships. a. The relation between utility and wealth for a risk averse consumer. b. The relation between standard deviation and the number of stocks in a portfolio. c. The relation between return and risk.

Correct AnswerverifiedShow Answer

Compared to a portfolio composed entirely of shares, a portfolio that is 50 per cent government bonds and 50 per cent shares will have a

Correct AnswerverifiedShow Answer

The value of a share is based on the present value of the future stream of dividend payments and the final sales price.

Correct AnswerverifiedShow Answer

As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.

Correct AnswerverifiedAn increase in the interest rate reduces...View AnswerShow Answer

If the prevailing interest rate is 10 per cent, a rational person should be indifferent between receiving €1,000 today and €1,000 one year from today.

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life but to

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
An example of adverse selection is that ...
View Answer

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Correct Answer
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Correct Answer
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An increase in the interest rate reduces...
View Answer

Correct Answer
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Correct Answer
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