Question 1

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?

Accepted Answer

There are several possibilities. The fir...

Question 2

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

Accepted Answer

A)   future value.
B)   fair value.
C)   present value.
D)   compound value.
E)   beginning value.F) B) and D)
G) All of the above

Question 3

An investor who buys stock in a company is placing a bet on the ___________of that company.

Accepted Answer

A)   future profitability.
B)   longevity of the CEO.
C)   stakeholders.
D)   All of the above are correct.E) B) and D)
F) B) and C)

Question 4

JCB (which makes agricultural and construction equipment)  has the opportunity to purchase a new factory today that will provide them with a €50 million return four years from now. If prevailing interest rates are 6 percent, what is the maximum that the project can cost for JCB to be willing to undertake the project?

Accepted Answer

A)   €43,456,838
B)   €53,406,002
C)   €34,583,902
D)   €39,604,682
E)   €50,000,000F) D) and E)
G) B) and E)

Question 5

What's the difference between idiosyncratic risk and aggregate risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Aggregate risk refers to economy-wide ri...

Question 6

Demonstrate that whether you would prefer to have €225 today or wait five years for €300 depends on the interest rate. Show your calculations.

Accepted Answer

For example at 3 percent the p...

Question 7

The present value of a future sum is the amount of money today that would be needed, at prevailing interest rates, to produce that future sum.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following reduces risk in a portfolio the greatest?

Accepted Answer

A)   Increasing the number of shares from 10 to 20
B)   All of these answers provide the same amount of risk reduction.
C)   Increasing the number of shares in the portfolio from 1 to 10
D)   Increasing the number of shares from 20 to 30E) C) and D)
F) None of the above

Question 9

Max is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Max should choose investments that

Accepted Answer

A)   provide a higher return than the market average.
B)   provide a lower return than the market average.
C)   pay higher returns when interest rates rise and lower returns when interest rates fall.
D)   pay lower returns when interest rates rise and higher returns when interest rates fall.E) A) and B)
F) C) and D)

Question 10

List three different ways that a risk-averse person can reduce financial risk.

Accepted Answer

A risk-averse person can reduce risk by ...

Question 11

Risk is measured here with a statistic called _______________.

Accepted Answer

A)   under-valuation.
B)   added value.
C)   valuation.
D)   standard deviation.E) C) and D)
F) None of the above D

Question 12

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Accepted Answer

A)   undervalued.
B)   overvalued.
C)   fairly valued.
D)   no longer going to be traded.E) A) and B)
F) None of the above

Question 13

There is a __________ between risk and return which is at the heart of understanding financial decisions

Accepted Answer

A)   rule.
B)   difference.
C)   zero sum game.
D)   trade-off.E) A) and C)
F) All of the above

Question 14

Which of the following does not help reduce the risk that people face?

Accepted Answer

A)   increasing the rate of return within their portfolio
B)   diversifying their portfolio
C)   All of these answers help reduce risk.
D)   buying insuranceE) B) and D)
F) C) and D) A

Question 15

Calculate the future value of €800 one year from today if the interest rate is a) 3% b) 5% c) 7%.

Accepted Answer

a) €8024 b) €8040 c) €8056

Question 16

The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return

Accepted Answer

A)   agrees to accept all or part of the risk.
B)   agrees to accept none of the risk.
C)   does not agrees to accept any risk.
D)   pays out premiums.E) B) and C)
F) A) and D)

Question 17

A market in which prices reflect all available information in a rational way is said to be

Accepted Answer

A)   rationally efficient.
B)   informationally efficient.
C)   hypothetically efficient.
D)   a stock market.E) A) and D)
F) None of the above

Question 18

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

Accepted Answer

A)   adverse selection.
B)   monitoring.
C)   moral hazard.
D)   an optimal contract.E) All of the above
F) A) and D)

Question 19

Which of the following statements is true?

Accepted Answer

A)   Diversification reduces idiosyncratic risk but not aggregate risk.
B)   Diversification reduces aggregate risk but not idiosyncratic risk.
C)   Diversification reduces both idiosyncratic risk and aggregate risk but it reduces idiosyncratic risk by more.
D)   Diversification requires an investor to hold at least 100 shares in her portfolio to begin to reduce risk significantly.E) A) and B)
F) B) and C)

Question 20

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

Accepted Answer

A) True 
 B)False

Exam 25: The Basic Tools of Finance

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?

Correct Answer
verified
There are several possibilities. The fir...
View Answer

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

Correct Answer
verified

An investor who buys stock in a company is placing a bet on the ___________of that company.

Correct Answer
verified

Correct Answer
verified

What's the difference between idiosyncratic risk and aggregate risk? Will diversification eliminate one or both? Explain.

Correct Answer
verified
Aggregate risk refers to economy-wide ri...
View Answer

Demonstrate that whether you would prefer to have €225 today or wait five years for €300 depends on the interest rate. Show your calculations.

Correct Answer
verified
For example at 3 percent the p...
View Answer

The present value of a future sum is the amount of money today that would be needed, at prevailing interest rates, to produce that future sum.

Correct Answer
verified

Which of the following reduces risk in a portfolio the greatest?

Correct Answer
verified

Max is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Max should choose investments that

Correct Answer
verified

List three different ways that a risk-averse person can reduce financial risk.

Correct Answer
verified
A risk-averse person can reduce risk by ...
View Answer

Risk is measured here with a statistic called _______________.

Correct Answer
verified
D

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Correct Answer
verified

There is a __________ between risk and return which is at the heart of understanding financial decisions

Correct Answer
verified

Which of the following does not help reduce the risk that people face?

Correct Answer
verified
A

Calculate the future value of €800 one year from today if the interest rate is a) 3% b) 5% c) 7%.

Correct Answer
verified
a) €8024 b) €8040 c) €8056

The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return

Correct Answer
verified

A market in which prices reflect all available information in a rational way is said to be

Correct Answer
verified

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

Correct Answer
verified

Exam 25: The Basic Tools of Finance

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?

Correct AnswerverifiedThere are several possibilities. The fir...View AnswerShow Answer

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

Correct AnswerverifiedShow Answer

An investor who buys stock in a company is placing a bet on the ___________of that company.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What's the difference between idiosyncratic risk and aggregate risk? Will diversification eliminate one or both? Explain.

Correct AnswerverifiedAggregate risk refers to economy-wide ri...View AnswerShow Answer

Demonstrate that whether you would prefer to have €225 today or wait five years for €300 depends on the interest rate. Show your calculations.

Correct AnswerverifiedFor example at 3 percent the p...View AnswerShow Answer

The present value of a future sum is the amount of money today that would be needed, at prevailing interest rates, to produce that future sum.

Correct AnswerverifiedShow Answer

Which of the following reduces risk in a portfolio the greatest?

Correct AnswerverifiedShow Answer

Max is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Max should choose investments that

Correct AnswerverifiedShow Answer

List three different ways that a risk-averse person can reduce financial risk.

Correct AnswerverifiedA risk-averse person can reduce risk by ...View AnswerShow Answer

Risk is measured here with a statistic called _______________.

Correct AnswerverifiedD

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Correct AnswerverifiedShow Answer

There is a __________ between risk and return which is at the heart of understanding financial decisions

Correct AnswerverifiedShow Answer

Which of the following does not help reduce the risk that people face?

Correct AnswerverifiedA

Calculate the future value of €800 one year from today if the interest rate is a) 3% b) 5% c) 7%.

Correct Answerverifieda) €8024 b) €8040 c) €8056

The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return

Correct AnswerverifiedShow Answer

A market in which prices reflect all available information in a rational way is said to be

Correct AnswerverifiedShow Answer

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

Correct AnswerverifiedShow Answer

Correct Answer
verified
There are several possibilities. The fir...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Aggregate risk refers to economy-wide ri...
View Answer

Correct Answer
verified
For example at 3 percent the p...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A risk-averse person can reduce risk by ...
View Answer

Correct Answer
verified
D

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A

Correct Answer
verified
a) €8024 b) €8040 c) €8056

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified