Question 1

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Accepted Answer

A random walk means the path of a variab...

Question 2

An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer. It is widely believed that the presence of this individual will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?

Accepted Answer

A)   the announcement and the rise in interest rates
B)   the announcement but not the rise in interest rates
C)   the rise in interest rates, but not the announcement
D)   neither the announcement nor the rise in interest ratesE) A) and B)
F) None of the above

Question 3

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Accepted Answer

A)   Al
B)   Ralph
C)   Stan
D)   They all retire with the same amount.E) B) and C)
F) A) and D)

Question 4

Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay

Accepted Answer

A)   $140,000, but not $150,000.
B)   $150,000, but not $160,000.
C)   $160,000, but not $170,000.
D)   $170,000, but not $180,000.E) C) and D)
F) B) and C)

Question 5

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Accepted Answer

A)   firm-specific risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
B)   market risk, and so they do not need to worry about their wealth decreasing as a result of recessions.
C)   firm-specific risk, but still they have reason to worry about their wealth decreasing as a result of recessions.
D)   market risk, but still they have reason to worry about their wealth decreasing as a result of recessions.E) A) and B)
F) None of the above

Question 6

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Accepted Answer

A)   undervalued, and evidence later showed that this was clearly correct.
B)   undervalued, but whether it was remains debatable.
C)   overvalued, and evidence later showed that this was clearly correct.
D)   overvalued, but whether it was remains debatable.E) B) and C)
F) None of the above

Question 7

A measure of the volatility of a variable is its

Accepted Answer

A)   present value.
B)   future value.
C)   return.
D)   standard deviation.E) A) and B)
F) All of the above

Question 8

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A)   Dexter is risk averse.
B)   Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)   the property of decreasing marginal utility applies to Dexter.
D)   All of the above are correct.E) A) and B)
F) C) and D)

Question 9

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Accepted Answer

A)   5 percent
B)   4 percent
C)   3 percent
D)   2 percentE) B) and D)
F) B) and C)

Question 10

The future value of $1 saved today is $1/(1 + r).

Accepted Answer

A) True 
 B)False

Question 11

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Accepted Answer

A)   $98.18
B)   $100.96
C)   $102.04
D)   $103.24E) A) and C)
F) A) and B)

Question 12

Write the formula to find the present value of $x to be paid in n years.

Accepted Answer

The answer of Write the formula to find the present...

Question 13

Which of the following is the largest?

Accepted Answer

A)   the future value of $250 with 3% interest for 2 years
B)   the future value of $250 at 2% interest for 3 years
C)   the present value of $250 to be paid in two years when the interest rate is 3%
D)   the present value of $250 to be paid in three years when the interest rate is 2%E) None of the above
F) B) and D)

Question 14

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Accepted Answer

A)   The interest rate on the loan from Bank A is higher than the interest rate on the loan from Bank B.
B)   The interest rate on the loan from Bank A is lower than the interest rate on the loan from Bank B.
C)   The interest rates on the two loans are the same.
D)   There is not enough information to determine which loan has the higher interest rate.E) B) and D)
F) A) and C)

Question 15

The future value of $500 saved for two years at an interest rate of 5% is

Accepted Answer

A)   $550.25.
B)   $550.00.
C)   $551.25.
D)   None of the above are correct.E) All of the above
F) A) and B)

Question 16

Which of the following is not consistent with the efficient market hypothesis?

Accepted Answer

A)   Stock prices should follow a random walk.
B)   Index funds should typically outperform highly managed funds.
C)   News has no effect on stock prices.
D)   There is little point in spending many hours studying the business pages looking for undervalued stocks.E) C) and D)
F) None of the above

Question 17

Risk aversion helps to explain various things we observe in the economy, including

Accepted Answer

A)   adherence to the old adage, "Don't put all your eggs in one basket."
B)   insurance.
C)   the risk-return trade-off.
D)   All of the above are correct.E) A) and D)
F) B) and C)

Question 18

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

Accepted Answer

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) A) and D)
F) None of the above

Question 19

Suppose your bank account pays a 5% interest rate. You are considering purchasing a share of stock in DH Corporation for $250. The stock will pay you a $10 dividend at the end of years 1, 2, 3, 4, and 5. You expect to be able to sell the stock at the end of year 5 for $300. Is DH a good investment? Provide evidence to support your answer.

Accepted Answer

The present value of...

Question 20

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

Accepted Answer

The efficient markets hypothes...

Exam 27: The Basic Tools of Finance

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

Which of the following is not consistent with the efficient market hypothesis?

Correct Answer
verified

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Correct Answer
verified

The future value of $500 saved for two years at an interest rate of 5% is

Correct Answer
verified

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Correct Answer
verified
A random walk means the path of a variab...
View Answer

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Correct Answer
verified

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Correct Answer
verified

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Correct Answer
verified

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

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

Correct Answer
verified

Risk aversion helps to explain various things we observe in the economy, including

Correct Answer
verified

Correct Answer
verified

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct Answer
verified

Which of the following is the largest?

Correct Answer
verified

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Correct Answer
verified

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

Correct Answer
verified

Write the formula to find the present value of $x to be paid in n years.

Correct Answer
verified

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

Correct Answer
verified

A measure of the volatility of a variable is its

Correct Answer
verified

The future value of $1 saved today is $1/(1 + r).

Correct Answer
verified

Exam 27: The Basic Tools of Finance

Correct AnswerverifiedThe present value of...View AnswerShow Answer

Which of the following is not consistent with the efficient market hypothesis?

Correct AnswerverifiedShow Answer

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Correct AnswerverifiedShow Answer

The future value of $500 saved for two years at an interest rate of 5% is

Correct AnswerverifiedShow Answer

What does "random walk" mean? According to the efficient markets hypothesis, should stock prices follow a random walk?

Correct AnswerverifiedA random walk means the path of a variab...View AnswerShow Answer

You could borrow $1,000 today from Bank A and repay the loan, with interest, by paying Bank A $1,060 one year from today. Or, you could borrow $1,500 today from Bank B and repay the loan, with interest, by paying Bank B $1,600 one year from today. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Correct AnswerverifiedShow Answer

In the 1990s, Fed Chair Alan Greenspan believed that the market was

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedThe efficient markets hypothes...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Risk aversion helps to explain various things we observe in the economy, including

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

People who hold well-diversified portfolios of stocks have greatly reduced or eliminated

Correct AnswerverifiedShow Answer

Which of the following is the largest?

Correct AnswerverifiedShow Answer

Amelia knows that she has about $105 in her bank account. She knows she earned an interest rate of 4 percent, but she doesn't remember how much she opened the account with a year ago. How much did she put in?

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

Write the formula to find the present value of $x to be paid in n years.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A measure of the volatility of a variable is its

Correct AnswerverifiedShow Answer

The future value of $1 saved today is $1/(1 + r).

Correct AnswerverifiedShow Answer

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A random walk means the path of a variab...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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