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Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.

A) True
B) False

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A firm has three different investment options, each costing $10 million. Option A will generate $12 million in revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option C will generate $18 million in revenue at the end of three years. Which option should the firm choose?


A) Option A
B) Option B
C) Option C
D) The answer depends on the rate of interest, which is not specified here.

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

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Three people go to the bank to cash in their accounts. Amy had her money in an account for 25 years at 4 percent interest. Bill had his money in an account for 20 years at 5 percent interest. Celia had her money in an account for 5 years at 20 percent interest. If each of them originally deposited $500 in their accounts, which of them gets the most money when they cash in their accounts?


A) Amy
B) Bill
C) Celia
D) They each get the same amount.

E) None of the above
F) B) and D)

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Suppose you invest $10,000 at 7% interest to be withdrawn by your heirs in 100 years. According to the rule of 70, approximately how much will your heirs be able to withdraw?

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With a 7% interest rate the rule of 70 i...

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Suppose that fundamental analysis indicates a particular company's stock is overvalued.


A) This means its present value is less than its price. You should consider adding the stock to your portfolio.
B) This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio.
C) This means its present value is more than its price. You should consider adding the stock to your portfolio.
D) This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.

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

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Figure 27-5. The figure shows a utility function for Dexter. Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the graph, we know that A) Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. B) Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001. C) Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001. D) None of the above answers can be inferred from the appearance of the utility function. -Refer to Figure 27-5. From the appearance of the graph, we know that


A) Dexter's level of satisfaction increases by more when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001.
B) Dexter's level of satisfaction increases by less when his wealth increases from $1,001 to $1,002 than it does when his wealth increases from $1,000 to $1,001.
C) Dexter's level of satisfaction increases by the same amount when his wealth increases from $1,001 to $1,002 as it does when his wealth increases from $1,000 to $1,001.
D) None of the above answers can be inferred from the appearance of the utility function.

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

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Which of the following makes) insurance premiums higher than otherwise?


A) adverse selection and moral hazard
B) adverse selection, but not moral hazard
C) moral hazard, but not adverse selection
D) neither adverse selection nor moral hazard

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

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Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate at which Markovich still would be willing to build the plant?


A) 3 percent
B) 3.5 percent
C) 4 percent
D) 4.5 percent

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

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James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if


A) X < 1,045.00.
B) X < 1,188.89.
C) X < 1,266.67.
D) X < 1,360.86.

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

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

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You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?


A) $5001.05) 2 + $500/1.05) 2
B) $5001.05) 2 + $500
C) $500 + $500/1.05) 2
D) $500 + $500

E) None of the above
F) All of the above

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At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?


A) 5
B) 7
C) 9
D) 11

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

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Figure 27-1. The figure shows a utility function. Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. For the person to whom this utility function applies, A) the more wealth she has, the less utility she gets from an additional dollar of wealth. B) the more wealth she has, the more utility she gets from an additional dollar of wealth. C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600. D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600. -Refer to Figure 27-1. For the person to whom this utility function applies,


A) the more wealth she has, the less utility she gets from an additional dollar of wealth.
B) the more wealth she has, the more utility she gets from an additional dollar of wealth.
C) her level of satisfaction will be enhanced more by an increase in wealth from $600 to $800 than it would be by an increase in wealth from $400 to $600.
D) her level of satisfaction will be enhanced equally by an increase in wealth from $600 to $800 or by an increase in wealth from $400 to $600.

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

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Other things the same, when the interest rate rises, the present value of future revenues from investment projects


A) rises, so investment spending rises.
B) falls, so investment spending rises.
C) rises, so investment spending falls.
D) falls, so investment spending falls.

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

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A pharmaceutical company unexpectedly announces that it just developed an important new drug. This news should


A) raise the price of the corporation's stock; if it does not the stock is overvalued.
B) raise the price of the corporation's stock; if it does not the stock is undervalued.
C) reduce the price of the corporation's stock; if it does not the stock is overvalued.
D) reduce the price of the corporation's stock; if it does not the stock is undervalued.

E) None of the above
F) All of the above

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If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

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Approximat...

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Which of the following is adverse selection?


A) the risk associated with selecting stocks in only a few specific companies
B) the risk that a person will become overconfident in his ability to select stocks
C) a high-risk person being more likely to apply for insurance
D) after obtaining insurance a person having less incentive to be careful

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

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Ronaldo's Foods considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?


A) Interest rates rise and the cost of building the store rises.
B) Interest rates rise and the cost of building the store falls.
C) Interest rates fall and the cost of building the store rises.
D) Interest rates fall and the cost of building the store falls.

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

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Scenario 27-2 Suppose Dave has a utility function 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. Use the following diagram to graph Dave's utility function for . where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Use the following diagram to graph Dave's utility function for 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. Use the following diagram to graph Dave's utility function for . . 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. Use the following diagram to graph Dave's utility function for .

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Here is th...

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If the efficient market hypothesis is correct, then


A) index funds should typically beat managed funds, and usually do.
B) index fund should typically beat managed funds, but usually do not.
C) mutual funds should typically beat index funds, and usually do.
D) mutual funds should typically beat index funds, but usually do not.

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

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