Question 1

The fee that insurance companies collect in exchange for covering unexpected costs is called a:

Accepted Answer

A)  premium.
B)  ultimatum.
C)  prepaid event charge.
D)  preventative payment.E) All of the above
F) A) and B)

Question 2

Diversification involves:

Accepted Answer

A)  investing all your money in one company.
B)  investing all your money in the same type of financial assets,with the same amount of risk.
C)  investing all your money in a variety of financial assets,with varying amounts of risk.
D)  None of these statements is true.E) None of the above
F) A) and D)

Question 3

Investing all your money in one company is an example of:

Accepted Answer

A)  risk diversification.
B)  risk pooling.
C)  risk aversion.
D)  None of these statements is true.E) A) and D)
F) A) and C)

Question 4

Insurance:

Accepted Answer

A)  reduces the risks inherent in life.
B)  helps individuals avoid certain types of risk.
C)  makes the future more predictable for individuals.
D)  None of these statements is true.E) B) and C)
F) C) and D)

Question 5

Adverse selection:

Accepted Answer

A)  occurs when buyers and sellers have different information about the riskiness of a situation.
B)  can result in failure to complete transactions that would have been possible if both sides had the same information.
C)  refers to the tendency for people with higher risk to be drawn toward insurance.
D)  All of these statements are true.E) A) and B)
F) B) and C)

Question 6

Present value is:

Accepted Answer

A)  how much a certain amount of money that will be obtained in the future is worth today.
B)  how much a certain amount of money that you have in the present will be worth in the future.
C)  the process of accumulation of additional interest paid on interest that has already been earned.
D)  needs to be discounted to be meaningful.E) C) and D)
F) A) and B)

Question 7

The value of a loan of $2,000 after a year at 2 percent interest is:

Accepted Answer

A)  $4,000.
B)  $2,040.
C)  $2,020.
D)  $2,400.E) A) and B)
F) None of the above

Question 8

Calculating a single cost or benefit figure that takes risk into account involves:

Accepted Answer

A)  estimating how likely different outcomes are and estimating the financial implications of each outcome.
B)  calculating expected value.
C)  taking the average of each possible outcome of a future event,weighted by its probability of occurring.
D)  All of these statements are true.E) B) and D)
F) A) and C)

Question 9

To compute the present value of a future value,you must know the _________ and the _________.

Accepted Answer

A)  present value;future value
B)  present value;compounded risk
C)  future value;compounded risk
D)  None of these statements is true.E) A) and B)
F) A) and D)

Question 10

Someone who is risk averse is likely to:

Accepted Answer

A)  buy a government bond instead of a stock.
B)  invest in a start-up company instead of putting her money under her mattress.
C)  buy company stock instead of putting money in a savings account.
D)  All of these statements are true.E) A) and D)
F) A) and C)

Question 11

An insurance policy is a product that:

Accepted Answer

A)  allows people to pay to reduce uncertainty in some aspect of their lives.
B)  involves a company paying individuals very large sums of money if they encounter any risk.
C)  involves individuals paying a company to ensure they don't experience any risk.
D)  involves individuals paying a regular fee in return for an agreement that the insurance company will cover all expenses associated with risky behavior.E) B) and C)
F) All of the above

Question 12

If you knew that an investment was going to pay you $46,370 in 5 years,and you knew that the annual interest rate over that time would be 3 percent,you could calculate the present value to be:

Accepted Answer

A)  $39,999.
B)  $37,000.
C)  $41,998.
D)  $41,600.E) B) and C)
F) C) and D)

Question 13

The interest rate you typically earn on a deposit at a bank:

Accepted Answer

A)  represents the price of your loan.
B)  represents the risk of investing.
C)  is the opportunity cost to you of lending money.
D)  is the opportunity cost to a bank of lending money.E) All of the above
F) A) and B)

Question 14

Insurance companies try to mitigate the problem of adverse selection by:

Accepted Answer

A)  asking potential customers a seemingly endless list of questions to gain as much information as they can about the person's risk aversion.
B)  charging a higher premium to groups with similar ages or behaviors that correlate with risky behavior.
C)  charge a higher price to all individuals to cover the lack of information.
D)  All of these statements are true.E) A) and B)
F) B) and D)

Question 15

The present value of $250,000 in 10 years at 2 percent interest is approximately:

Accepted Answer

A)  $205,087.
B)  $212,051.
C)  $305,194.
D)  $195,085.E) A) and D)
F) None of the above

Question 16

Evaluating risk requires that:

Accepted Answer

A)  we think about different possible outcomes.
B)  we accept that our best guess about future costs and benefits could be wrong.
C)  we consider uncertain costs or benefits of an event or choice.
D)  All of these statements are true.E) None of the above
F) All of the above

Question 17

If someone has a high willingness to take on situations with risk,they are considered:

Accepted Answer

A)  risk-averse.
B)  risk-seekers.
C)  low-risk players.
D)  high-compensation players.E) B) and C)
F) A) and D)

Question 18

If you knew that an investment was going to pay you $1,188,757 in 20 years,and you knew that the annual interest rate over that time would be 2 percent,you could calculate the present value to be:

Accepted Answer

A)  $800,000.
B)  $1,000,000.
C)  $1,500,000.
D)  $905,000.E) All of the above
F) A) and D)

Question 19

Suppose Jack and Kate are at the town fair and are choosing which game to play.The first game has a bag with four marbles in it-1 red marble and 3 blue ones.The player draws one marble from the bag;if it is red,they win $20 and if it is blue,they win $1.The second game has a bag with 10 marbles in it-1 red,4 blue,and 5 green.The player draws one marble from the bag;if it is red,they win $20;if it is blue,they win $5;and if it is green,they win $1.Both games cost $5 to play.What is the expected value of the payoff in the first game?

Accepted Answer

A)  $5.75
B)  $5.00
C)  $4.75
D)  $4.50E) B) and C)
F) A) and D)

Question 20

In general,people are willing to pay more than the expected value of insurance because:

Accepted Answer

A)  they are risk-averse enough to want protection against very large expenses.
B)  the extra amount represents the value of having peace of mind about such occurrences happening.
C)  there is utility gained from having the confidence that,if faced with enormous expenses as a result of risk,they will not lose their home or go bankrupt.
D)  All of these statements are true.E) B) and C)
F) A) and D)

Exam 11: Time and Uncertainty

The present value of $250,000 in 10 years at 2 percent interest is approximately:

Correct Answer
verified

The fee that insurance companies collect in exchange for covering unexpected costs is called a:

Correct Answer
verified

Insurance:

Correct Answer
verified

The value of a loan of $2,000 after a year at 2 percent interest is:

Correct Answer
verified

If someone has a high willingness to take on situations with risk,they are considered:

Correct Answer
verified

Calculating a single cost or benefit figure that takes risk into account involves:

Correct Answer
verified

Correct Answer
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Diversification involves:

Correct Answer
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Insurance companies try to mitigate the problem of adverse selection by:

Correct Answer
verified

Present value is:

Correct Answer
verified

If you knew that an investment was going to pay you $46,370 in 5 years,and you knew that the annual interest rate over that time would be 3 percent,you could calculate the present value to be:

Correct Answer
verified

An insurance policy is a product that:

Correct Answer
verified

The interest rate you typically earn on a deposit at a bank:

Correct Answer
verified

In general,people are willing to pay more than the expected value of insurance because:

Correct Answer
verified

Adverse selection:

Correct Answer
verified

Evaluating risk requires that:

Correct Answer
verified

To compute the present value of a future value,you must know the _ and the _.

Correct Answer
verified

Someone who is risk averse is likely to:

Correct Answer
verified

If you knew that an investment was going to pay you $1,188,757 in 20 years,and you knew that the annual interest rate over that time would be 2 percent,you could calculate the present value to be:

Correct Answer
verified

Investing all your money in one company is an example of:

Correct Answer
verified

Exam 11: Time and Uncertainty

The present value of $250,000 in 10 years at 2 percent interest is approximately:

Correct AnswerverifiedShow Answer

The fee that insurance companies collect in exchange for covering unexpected costs is called a:

Correct AnswerverifiedShow Answer

Insurance:

Correct AnswerverifiedShow Answer

The value of a loan of $2,000 after a year at 2 percent interest is:

Correct AnswerverifiedShow Answer

If someone has a high willingness to take on situations with risk,they are considered:

Correct AnswerverifiedShow Answer

Calculating a single cost or benefit figure that takes risk into account involves:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Diversification involves:

Correct AnswerverifiedShow Answer

Insurance companies try to mitigate the problem of adverse selection by:

Correct AnswerverifiedShow Answer

Present value is:

Correct AnswerverifiedShow Answer

If you knew that an investment was going to pay you $46,370 in 5 years,and you knew that the annual interest rate over that time would be 3 percent,you could calculate the present value to be:

Correct AnswerverifiedShow Answer

An insurance policy is a product that:

Correct AnswerverifiedShow Answer

The interest rate you typically earn on a deposit at a bank:

Correct AnswerverifiedShow Answer

In general,people are willing to pay more than the expected value of insurance because:

Correct AnswerverifiedShow Answer

Adverse selection:

Correct AnswerverifiedShow Answer

Evaluating risk requires that:

Correct AnswerverifiedShow Answer

To compute the present value of a future value,you must know the _________ and the _________.

Correct AnswerverifiedShow Answer

Someone who is risk averse is likely to:

Correct AnswerverifiedShow Answer

If you knew that an investment was going to pay you $1,188,757 in 20 years,and you knew that the annual interest rate over that time would be 2 percent,you could calculate the present value to be:

Correct AnswerverifiedShow Answer

Investing all your money in one company is an example of:

Correct AnswerverifiedShow Answer

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Correct Answer
verified

To compute the present value of a future value,you must know the _ and the _.

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
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