Question 1

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Accepted Answer

The reduct...

Question 2

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

Accepted Answer

For example at 3 percent the p...

Question 3

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 4

Scenario 27-2
Suppose Dave has a utility function  where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2.Suppose Dave is faced with a choice between two options.With option A Dave receives a guaranteed $2 million.With option B Dave faces a lottery that pays $0 with probability 0.8 and pays $10 million with probability 0.2.Given Dave's utility function,will he prefer option A or option B? Provide evidence to support your answer.

Accepted Answer

The utility Dave receives from...

Question 5

How does adverse selection affect the insurance market?

Accepted Answer

High risk persons ar...

Question 6

The objective of diversification is to reduce risk.How does a person diversify a stock portfolio? How is risk measured?

Accepted Answer

Buying stocks in a n...

Question 7

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations.What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Accepted Answer

The efficient markets hypothes...

Question 8

Suppose your bank account pays a 4% interest rate.You are considering purchasing a share of stock in ABC Corporation for $500.The stock will pay you a $10 dividend at the end of years 1,2,and 3.You expect to be able to sell the stock at the end of year 3 for $550.Is ABC a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of the inves...

Question 9

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000,with the first payment one year from now,the second payment two years from now,and the third payment three years from now.What is the present value of this stream of payments?

Accepted Answer

The presen...

Question 10

Until recently,shares of stock accounted for 40 percent of Jimmy's savings.A few days ago,Jimmy sold some bonds and bought some additional shares of stock.Now shares of stock account for 70 percent of Jimmy's savings.How did this change affect Jimmy's expected retun on his savings? How did it affect the risks he faces?

Accepted Answer

The increased percentage of st...

Question 11

If the interest rate is 5 percent,then what is the present value of $2,000 to be received in three years?

Accepted Answer

The presen...

Question 12

From the standpoint of the economy as a whole,the role of insurance is not to eliminate the risks inherent in life.Then what is its purpose?

Accepted Answer

To spread these risk...

Question 13

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 14

The nation of Zambonia experiences the same rate of population growth every year.If the population of Zambonia doubles every 35 years,then what is the approximate annual rate of population growth?

Accepted Answer

Using the Rule of 70...

Question 15

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

Accepted Answer

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

Question 16

Jack's Lock and Key is considering remodeling.It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year,$2,500 the second year,$1,500 the third year and have no effect after then.If the interest rate is 5%,should Jack's remodel? Defend your answer by showing your work.

Accepted Answer

Jack’s should remodel. The pre...

Question 17

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years.What interest rate represents the cutoff between profitability and nonprofitability for this project?

Accepted Answer

The present value of the futur...

Question 18

Why might someone be willing to pay more than the fundamental value for a stock?

Accepted Answer

She may believe that...

Question 19

Thompson Corporation is considering the purchase of a new piece of machinery.Thompson expects the new machinery to increase its revenues by $70,000 at the end of year 1,$60,000 at the end of year 2,and $50,000 at the end of year 3 at which point the machinery will have exhausted its useful life.If the interest rate is 4%,what is the most Thompson should be willing to pay today for this piece of machinery?

Accepted Answer

The present value of the futur...

Exam 14: The Basic Tools of Finance: Part A

Why might someone be willing to pay more than the fundamental value for a stock?

Correct Answer
verified
She may believe that...
View Answer

Correct Answer
verified
The increased percentage of st...
View Answer

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years.What interest rate represents the cutoff between profitability and nonprofitability for this project?

Correct Answer
verified
The present value of the futur...
View Answer

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

Correct Answer
verified
Jack’s should remodel. The pre...
View Answer

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Correct Answer
verified
The reduct...
View Answer

The objective of diversification is to reduce risk.How does a person diversify a stock portfolio? How is risk measured?

Correct Answer
verified
Buying stocks in a n...
View Answer

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations.What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Correct Answer
verified
The efficient markets hypothes...
View Answer

Correct Answer
verified
The present value of the futur...
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 work.

Correct Answer
verified
For example at 3 percent the p...
View 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 Answer
verified
An increase in the interest rate reduces...
View Answer

If the interest rate is 5 percent,then what is the present value of $2,000 to be received in three years?

Correct Answer
verified
The presen...
View Answer

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000,with the first payment one year from now,the second payment two years from now,and the third payment three years from now.What is the present value of this stream of payments?

Correct Answer
verified
The presen...
View Answer

The nation of Zambonia experiences the same rate of population growth every year.If the population of Zambonia doubles every 35 years,then what is the approximate annual rate of population growth?

Correct Answer
verified
Using the Rule of 70...
View Answer

Correct Answer
verified
The utility Dave receives from...
View Answer

How does adverse selection affect the insurance market?

Correct Answer
verified
High risk persons ar...
View Answer

Correct Answer
verified
The present value of the inves...
View Answer

Draw graphs showing the following three relationships. 1.The relation between utility and wealth for a risk averse consumer. 2.The relation between standard deviation and the number of stocks in a portfolio. 3.The relation between return and risk.

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.Then what is its purpose?

Correct Answer
verified
To spread these risk...
View Answer

Exam 14: The Basic Tools of Finance: Part A

Why might someone be willing to pay more than the fundamental value for a stock?

Correct AnswerverifiedShe may believe that...View AnswerShow Answer

Correct AnswerverifiedThe increased percentage of st...View AnswerShow Answer

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years.What interest rate represents the cutoff between profitability and nonprofitability for this project?

Correct AnswerverifiedThe present value of the futur...View AnswerShow 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

Correct AnswerverifiedJack’s should remodel. The pre...View AnswerShow Answer

At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

Correct AnswerverifiedThe reduct...View AnswerShow Answer

The objective of diversification is to reduce risk.How does a person diversify a stock portfolio? How is risk measured?

Correct AnswerverifiedBuying stocks in a n...View AnswerShow Answer

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations.What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Correct AnswerverifiedThe efficient markets hypothes...View AnswerShow Answer

Correct AnswerverifiedThe present value of the futur...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 work.

Correct AnswerverifiedFor example at 3 percent the p...View AnswerShow 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 interest rate is 5 percent,then what is the present value of $2,000 to be received in three years?

Correct AnswerverifiedThe presen...View AnswerShow Answer

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000,with the first payment one year from now,the second payment two years from now,and the third payment three years from now.What is the present value of this stream of payments?

Correct AnswerverifiedThe presen...View AnswerShow Answer

The nation of Zambonia experiences the same rate of population growth every year.If the population of Zambonia doubles every 35 years,then what is the approximate annual rate of population growth?

Correct AnswerverifiedUsing the Rule of 70...View AnswerShow Answer

Correct AnswerverifiedThe utility Dave receives from...View AnswerShow Answer

How does adverse selection affect the insurance market?

Correct AnswerverifiedHigh risk persons ar...View AnswerShow Answer

Correct AnswerverifiedThe present value of the inves...View AnswerShow Answer

Draw graphs showing the following three relationships. 1.The relation between utility and wealth for a risk averse consumer. 2.The relation between standard deviation and the number of stocks in a portfolio. 3.The relation between return and risk.

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.Then what is its purpose?

Correct AnswerverifiedTo spread these risk...View AnswerShow Answer

Correct Answer
verified
She may believe that...
View Answer

Correct Answer
verified
The increased percentage of st...
View Answer

Correct Answer
verified
The present value of the futur...
View Answer

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

Correct Answer
verified
Jack’s should remodel. The pre...
View Answer

Correct Answer
verified
The reduct...
View Answer

Correct Answer
verified
Buying stocks in a n...
View Answer

Correct Answer
verified
The efficient markets hypothes...
View Answer

Correct Answer
verified
The present value of the futur...
View Answer

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

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

Correct Answer
verified
The presen...
View Answer

Correct Answer
verified
The presen...
View Answer

Correct Answer
verified
Using the Rule of 70...
View Answer

Correct Answer
verified
The utility Dave receives from...
View Answer

Correct Answer
verified
High risk persons ar...
View Answer

Correct Answer
verified
The present value of the inves...
View Answer

Correct Answer
verified

Correct Answer
verified
To spread these risk...
View Answer