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If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that


A) the efficient markets hypothesis is not a correct hypothesis.
B) the stock market is informationally efficient.
C) the stock market is informationally inefficient.
D) there is no reason to establish a diversified portfolio of stocks.

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

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The idea of insurance


A) would not appeal to a risk-averse person.
B) is, other things the same, to reduce the probability of a fire, accident, or death.
C) is to share risk.
D) is to provide a sure thing, not a gamble.

E) C) and D)
F) B) and D)

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Compounding refers directly to


A) finding the present value of a future sum of money.
B) finding the future value of a present sum of money.
C) changes in the interest rate over time on a bank account or a similar savings vehicle.
D) interest being earned on previously-earned interest.

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

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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.

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

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Writing in The Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis


A) was responsible for the financial crisis of 2008-2009.
B) was responsible for the Great Depression of the 1930s.
C) claims that prices observed in financial markets are always "right."
D) claims that prices observed in financial markets are mostly "wrong."

E) All of the above
F) A) and B)

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


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)

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What is the present value of a payment of $100 to be made one year from today?


A) $100*1 + r)
B) $100/1 + r)
C) $100 - $100 What is the present value of a payment of $100 to be made one year from today? A) $100*1 + r) B) $100/1 + r) C) $100 - $100 r D) $100 - 1 + r) /$100 r
D) $100 - 1 + r) /$100

E) All of the above
F) A) and C)

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Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is


A) $428.67.
B) $470.00.
C) $580.00. 1.
D) $583.20.

E) A) and C)
F) None of the above

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Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?


A) 9.6 percent
B) 9.9 percent
C) 10.2 percent
D) 10.5 percent

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

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Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?


A) You receive $90.91 two years from today.
B) You receive $82.64 one year from today.
C) You receive $75.13 today.
D) All of these payments have the same present value to the nearest cent.

E) A) and D)
F) B) and D)

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If Joanna is risk averse, then


A) her utility function exhibits the property of decreasing utility.
B) her utility function exhibits the property of increasing marginal utility.
C) she dislikes bad things more than she likes comparable good things.
D) she is unlike most people, because most people are not risk averse.

E) C) and D)
F) B) and D)

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


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) C) and D)
F) All of the above

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Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is


A) 3 percent.
B) 4 percent.
C) 5 percent.
D) None of the above is correct.

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

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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?


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

E) C) and D)
F) B) and D)

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Which of the following is correct concerning stock market irrationality?


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) A) and D)
F) C) and D)

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In the 1990s, several stocks had very, very high price to earnings ratios. These stocks appeared overvalued to many observers. What might the people who bought them have been thinking?

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There are several possibilities. The fir...

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Scenario 27-1 Lisa has a utility function Scenario 27-1 Lisa has a utility function where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer. where W is Lisa's wealth in millions of dollars and U is the utility she obtains. -Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

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The utility Lisa receives from...

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Write the formula for finding the future value of $1,000 today in 10 years if the interest rate is 4 percent.

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Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?


A) $210
B) $300
C) $800
D) $1,010

E) C) and D)
F) All of the above

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


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) A) and B)
F) C) and D)

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