Question 1

The available evidence indicates that

Accepted Answer

A)   about one-half of all managers of active mutual funds consistently outperform index funds.
B)   outperforming the market on a consistent basis is extremely difficult to do.
C)   there is little truth to the notion that there is a trade-off between risk and return.
D)   there is little truth to the efficient markets hypothesis.E) A) and D)
F) B) and D)

Question 2

Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease

Accepted Answer

A)   firm specific risk and market risk.
B)   firm specific risk but not market risk.
C)   market risk but not firm specific risk.
D)   neither firm specific nor market risk.E) B) and D)
F) None of the above

Question 3

To diversify, a homeowner with a variable-rate mortgage should choose investments that

Accepted Answer

A)   pay higher returns when interest rates rise and lower returns when interest rates fall.
B)   pay lower returns when interest rates rise and higher returns when interest rates fall.
C)   provide a higher return than the market average.
D)   provide a lower return than the market average.E) None of the above
F) A) and B)

Question 4

When a person engages in detailed analysis of a company to determine its value, he or she is engaging in

Accepted Answer

A)   standard deviation analysis.
B)   informational analysis.
C)   fundamental analysis.
D)   efficiency analysis.E) A) and C)
F) B) and C)

Question 5

What is the future value of $450 at an interest rate of 9 percent two years from today?

Accepted Answer

A)   $534.65
B)   $546.35
C)   $565.18
D)   $574.13E) B) and C)
F) A) and D)

Question 6

After the 1982 recession, the U.S. and world economies entered into a long period

Accepted Answer

A)   of high unemployment rates.
B)   high inflation rates.
C)   that has become known as the "Great Moderation."
D)   that has become known as the "Great Recession."E) None of the above
F) A) and D)

Question 7

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. In what way(s)  does the graph differ from the usual case?

Accepted Answer

A)   The utility function shown here is upward-sloping, whereas in the usual case the utility function is downward- sloping.
B)   The utility function shown here is bowed downward (convex) , whereas in the usual case the utility function is bowed upward (concave) .
C)   On the graph shown here, wealth is measured along the horizontal axis, whereas in the usual case saving is measured along the horizontal axis.
D)   On the graph shown here, utility is measured along the vertical axis, whereas in the usual case satisfaction is measured along the vertical axis.E) B) and C)
F) A) and D)

Question 8

The efficient markets hypothesis implies

Accepted Answer

A)   that all stocks are fairly valued all the time and that no stock is a better buy than any other.
B)   that all stocks are fairly valued all the time, but that some stocks may be better buys than other.
C)   that some stocks may be better buys than others and stock experts can determine which ones.
D)   that no stock is efficiently valued.E) A) and B)
F) A) and C)

Question 9

Most financial decisions involve two related elements:

Accepted Answer

A)   advice and consent.
B)   investment and taxes.
C)   time and risk.
D)   saving and consumption.E) A) and D)
F) B) and C)

Question 10

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?

Accepted Answer

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

Question 11

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Accepted Answer

A) True 
 B)False

Question 12

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

Accepted Answer

A)   $100 today plus $190 one year from today
B)   $150 today plus $140 one year from today
C)   $200 today plus $90 one year from today
D)   $250 today plus $40 one year from todayE) None of the above
F) A) and D)

Question 13

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Accepted Answer

A)   risk increases at an increasing rate.
B)   risk increases at a decreasing rate.
C)   risk decreases at an increasing rate.
D)   risk decreases at a decreasing rate.E) A) and C)
F) C) and D)

Question 14

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Accepted Answer

A)   is now lower than it was before, and so Hydro Grow is less likely to build the building.
B)   is now lower than it was before, and so HydroGrow is more likely to build the building.
C)   is now higher than it was before, and so HydroGrow is less likely to build the building.
D)   is now higher than it was before, and so HydroGrow is more likely to build the building.E) A) and D)
F) A) and C)

Question 15

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Accepted Answer

A)   $414.09.
B)   $434.00.
C)   $441.87.
D)   $481.24.E) B) and D)
F) C) and D)

Question 16

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Accepted Answer

A) True 
 B)False

Question 17

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Accepted Answer

A)   $411.26 if the $500 is to be received in 5 years and $338.95 if the $500 is to be received in 10 years.
B)   $348.28 if the $500 is to be received in 5 years and $242.60 if the $500 is to be received in 10 years.
C)   $291.11 if the $500 is to be received in 5 years and $272.89 if the $500 is to be received in 10 years.
D)   $291.11 if the $500 is to be received in 5 years and $236.49 if the $500 is to be received in 10 years.E) None of the above
F) A) and B)

Question 18

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Accepted Answer

A)   raise the price and raise the present value of the corporation's stock.
B)   raise the price and lower the present value of the corporation's stock.
C)   lower the price and raise the present value of the corporation's stock.
D)   lower the price and lower the present value of the corporation's stock.E) A) and B)
F) A) and C)

Question 19

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Accepted Answer

A)   the present value of the returns from the mill will fall, so Allen will be less likely to build the mill.
B)   the present value of the returns from the mill will fall, so Allen will be more likely to build the mill.
C)   the present value of the returns from the mill will rise, so Allen will be less likely to build the mill.
D)   the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.E) B) and D)
F) All of the above

Question 20

Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's account worth today?

Accepted Answer

A)   $1,225.38
B)   $1,248.48
C)   $1,264.72
D)   $1,273.45E) All of the above
F) A) and C)

Exam 27: The Basic Tools of Finance

Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. In what way(s) does the graph differ from the usual case?

Correct AnswerverifiedShow Answer

To diversify, a homeowner with a variable-rate mortgage should choose investments that

Correct AnswerverifiedShow Answer

Most financial decisions involve two related elements:

Correct AnswerverifiedShow Answer

After the 1982 recession, the U.S. and world economies entered into a long period

Correct AnswerverifiedShow Answer

Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease

Correct AnswerverifiedShow Answer

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Correct AnswerverifiedShow Answer

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Correct AnswerverifiedShow Answer

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Correct AnswerverifiedShow Answer

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Correct AnswerverifiedShow Answer

What is the future value of $450 at an interest rate of 9 percent two years from today?

Correct AnswerverifiedShow Answer

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks. This should

Correct AnswerverifiedShow Answer

When a person engages in detailed analysis of a company to determine its value, he or she is engaging in

Correct AnswerverifiedShow Answer

Suppose the interest rate is 4 percent. Which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

Three years ago Dawn put $1,200 into an account paying 2 percent interest. How much is Dawn's account worth today?

Correct AnswerverifiedShow Answer

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedWith a 7% interest rate the rule of 70 i...View AnswerShow Answer

Other things the same, as the stocks of a greater number of corporations are held in a portfolio,

Correct AnswerverifiedShow Answer

The available evidence indicates that

Correct AnswerverifiedShow Answer

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

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