86. Art was given two choices when the interest rate was 3 percent. In each case he was supposed to choose the option with the highest present value. In option 1 Art chose $50 today over $51 a year from today. In option 2 Art chose $250 today over $260 a year from today. Which of the following is correct?

B.Art made the right choice only in the first case.

A.Art made the right choice in both cases.

C. Art made the right choice only in the second case.

D.Art made the wrong choice in both cases.

87. HydroGrow is considering building a new building 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

A.falls, and so Hydro Grow is less likely to build the building.

B.falls, and so HydroGrow is more likely to build the building.

C. rise, and so HydroGrow is less likely to build the building.

D.rise, and so HydroGrow is more likely to build the building.

89. A fall in the rate of interest will

C. increase investment primarily because it will increase the present value of future revenues expected from investment projects.

A.reduce investment primarily because it will reduce the present value of future revenues expected from investment projects.

B.reduce investment primarily because it will increase the present value of current construction costs.

D.increase investment primarily because it will reduce the present value of current construction costs.

90. 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?

D.The answer depends on the rate of interest.

91. A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?

D.The answer depends on the rate of interest.

93. As the interest rate rises, the present value of future revenues from investment projects

D.fall, so investment spending falls.

A.rise, so investment spending rises.

B.fall, so investment spending rises.

C. rise, so investment spending falls.

95. A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?

B.The second is lowest; the third is highest.

A.The first is lowest; the second is highest.

C. The third is lowest; the fourth is highest.

D.The fourth is lowest; the first is highest.

98. When the interest rate rises, the quantity of loanable funds demanded

D.falls, and investment spending falls.

A.rises, and investment spending rises.

B.rises, and investment spending falls.

C. falls, and investment spending rises.

99. When the interest rate falls, the quantity of loanable funds demanded

A.rises, and investment spending rises.

B.rises, and investment spending falls.

C. falls, and investment spending rises.

D.falls, and investment spending falls.

100. Which of the following is the correct way to state the rule of 70? A variable with a growth rate of X percent

B.doubles every 70(1 – 1/x) years.

C. doubles every 70/x mũ 2 years.

D.doubles every 70/(1 – x) years.

108. Robert is risk averse and has $1,000 with which to make a financial investment. He has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Robert should choose

D.either A or B because they are the same to him.

109. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that

D.the average risk-averse person will earn a lower rate of return than the average non-risk averse person.

A.every risk-averse person will earn a higher rate of return than every non-risk averse person.

B.every risk-averse person will earn a lower rate of return than every non-risk averse person.

C. the average risk-averse person will earn a higher rate of return than the average non-risk averse person.

111. A risk-averse person

A.would necessarily not play a game where she had a 50 percent chance of winning $1 and a 50 percent chance of losing $1.

B.would necessarily not play a game where she had a 75 percent chance of winning $1 and a 25 percent chance of losing $1.

C. both of the above are correct.

D.Neither of the above are correct.

112. Which of the following games might a risk-averse person be willing to play?

B.A game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1.

A.A game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1.

113. Which of the following games might a risk-averse person be willing to play?

A.A game where she has a 60 percent chance of winning $1 and a 40 percent chance of getting nothing.

B.A game where she has a 70 percent chance of winning $1 and a 30 percent chance of losing a $1.

114. Which of the following is true concerning a risk-averse person?

D.All of the above are correct.

A.She would not play games where the probability of winning and losing a dollar are the same.

B.She might not buy health insurance if she thinks her risks are low.

C. Her marginal utility of wealth decreases as her income increases.

115. Eddie is risk averse. Which of the following is true about Eddie?

B.He will not accept bets where his probability of winning and losing a dollar are the same.

A.His marginal utility of wealth increases as his income increases.

116. If a person is risk averse, then he has

A.diminishing marginal utility of wealth, implying that his utility function gets flatter as wealth increases.

B.diminishing marginal utility of wealth, implying that his utility function gets steeper as wealth increases.

C. increasing marginal utility of wealth, implying that his utility function gets flatter as wealth increases.

D.increasing marginal utility of wealth, implying that his utility function gets steeper as wealth increases.

117. The utility function of a risk-averse person has a

B.positive slope but gets flatter as wealth increases.

A.positive slope and gets steeper as wealth increases.

C. negative slope but gets steeper as wealth increases.

D.negative slope and gets flatter as wealth increases.

118. A risk averse person has

D.a utility curve that slopes upward and a marginal utility curve that slopes downward.

A.utility and marginal utility curves that slope upward.

B.utility and marginal utility curves that slope downward.

C. a utility curve that slopes down and a marginal utility curve that slopes upward.

119. Diminishing marginal utility of wealth implies that the utility function is

A.upward sloping and has decreasing slope.

B.upward sloping and has increasing slope.

C. downward sloping and has decreasing slope.

D.downward sloping and has increasing slope.

120. If a person is risk averse, then as wealth increases, total utility of wealth

B.increases at a decreasing rate

A.increases at an increasing rate

C. decreases at an increasing rate

D.decreases at a decreasing rate

A.can be reduced by placing a large number of small bets rather than a small number of large bets.

B.can be reduced by increasing the number of stocks in a portfolio.

122. The last $1,000 of Arnold’s wealth adds more to his utility than the previous $1,000. Based on this information, Arnold has

C. decreasing marginal utility of wealth and is risk averse

A.increasing marginal utility of wealth and is risk averse

B.increasing marginal utility of wealth and is not risk averse

D.decreasing marginal utility of wealth and is not risk averse

123. The last $500 of Mary’s wealth adds more to her utility than another $500 would. Based on this information, Mary’s utility function

C. is upward sloping and her marginal utility function is downward sloping.

A.and marginal utility function are both upward sloping.

B.and marginal utility function are both downward sloping.

D.is downward sloping and her marginal utility function is upward sloping.

124. Tiffany knows that people in her family die young, and so she buys life insurance. Mark knows he is a reckless driver and so he applies for automobile insurance.

A.These are both examples of adverse selection.

B.These are both examples of moral hazard.

C. The first example illustrates adverse selection, and the second illustrates moral hazard.

D.The first example illustrates moral hazard, and the second illustrates adverse selection.

125. Which of the following is adverse selection?

C. a high-risk person being more likely to apply for insurance

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

D.after obtaining insurance a person having less incentive to be careful

126. Which of the following best illustrates moral hazard?

A.After a person obtains auto insurance, she drives less carefully.

B.A person obtains insurance knowing he is in poor health.

C. A person holds stock only in very risky corporations.

D.A person holds stocks from only a few corporations.

127. When you rent a video, you might treat it with less care than you would if it were your own. This is an example of

D.self-serving attribution bias.

128. Which of the following defines an annuity?

A.For a fee, an insurance company provides you with regular income until you die.

B.An extra fee charged to persons in dangerous occupations by life insurance companies.

C. It’s another name for stock funds managed by mutual fund managers.

D.It’s another name for any diversified portfolio.

130. Financial intermediaries typically require mortgage borrowers to have homeowner’s insurance and do credit checks before making the loan.

D.The insurance requirement is designed primarily to reduce the risk of moral hazard; the credit check is designed primarily to reduce adverse selection.

A.The insurance requirement and the credit check are both designed primarily to reduce adverse selection.

B.The insurance requirement and the credit check are both designed primarily to reduce the risk of moral hazard.

C. The insurance requirement is designed primarily to reduce adverse selection; the credit check is designed primarily to reduce the risk of moral hazard.

131. You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you’d use on your own car.

C. The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard.

A.Both examples primarily illustrate adverse selection.

B.Both examples primarily illustrate moral hazard.

D.The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.

133. Which of the following is not correct?

C. Insurance markets reduce risk, but not by Diversification.

A.The higher average return on stocks than on bonds comes at the price of higher risk.

B.Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk.

D.Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.

134. Ross thinks that if Acme Corporation has high revenues, then Zenith Corporation will have low revenues, and that if Acme Corporation has low revenues, Zenith Corporation will have high revenues. He buys stock in both corporations.

A.He has reduced idiosyncratic risk but not aggregate risk.

B.He has reduced aggregate risk, but not idiosyncratic risk.

C. He had reduce both idiosyncratic risk and aggregate risk.

D.He has reduced neither idiosyncratic risk nor aggregate risk.

135. Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?

B.Portfolios with smaller standard deviations have greater risk

A.There are risks in holding stocks, even in a highly diversified portfolio.

C. Stocks with greater risks offer greater average returns.

D.They all gave her correct advice.

136. Peter talked to several stockbrokers and made the following conclusions. Which, if any, of his conclusions are incorrect?

D.None of Peter’s conclusions are incorrect.

A.It is relatively easy to reduce idiosyncratic risk by increasing the number of companies one holds stock in.

B.Stock prices, even if not exactly a random walk, are very close to it.

C. Some people have made a lot of money in the stock market by using insider information, but these cases are not contrary to the efficient markets hypothesis.

137. Other things the same, as the number of stocks in a portfolio rises,

D.risk decreases and so the standard deviation of the return falls.

A.risk increases and so the standard deviation of the return rises.

B.risk increases and so the standard deviation of the return falls.

C. risk decreases and so the standard deviation of the return rises.

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

D.risk decreases at a decreasing rate.

A.risk increases at an increasing rate.

B.risk increases at a decreasing rate.

C. risk decreases at an increasing rate.

140. An increase in the number of corporations in a portfolio from 1 to 10 reduces

C. idiosyncratic risk by more than an increase from 110 to 120.

A.aggregate risk by more than an increase from 110 to 120.

B.aggregate risk by less than an increase from 110 to 120.

D.idiosyncratic risk by less than an increase from 110 to 120.

141. Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?

B.People who are risk averse should never hold stock.

A.Higher average returns come at the price of higher risk.

C. Diversification cannot eliminate all of the risk in stock portfolio.

D.None of her conclusions are incorrect.

142. After the Enron debacle, Dewey Rockmuch decided to increase the number of stocks in his portfolio. His actions reduced

B.the idiosyncratic risk, but not the aggregate risk of his portfolio.

A.both the idiosyncratic risk and the aggregate risk of his portfolio.

C. the aggregate risk, but not the idiosyncratic risk of his portfolio.

D.neither the aggregate nor the idiosyncratic risk of his portfolio.

Chapter 27 (A)

Authored by Hằng Nguyễn

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MULTIPLE CHOICE QUESTION

2 mins • 1 pt

1. The field of finance studies how

A.society manages its scarce resources.

B.people make decisions regarding resource allocation over time and how to handle risk

C. people decide whether or not to become risk averse.

D.society can reduce aggregate risk.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

31. Which of the following is the correct way to figure the future value of $X that earns r percent for N years?

A.$X(1 + rN) mũ N

B.$X(1 + r) mũ N

C. $X(1 + rN)

D.$X(1 + r/N) mũ N

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

63. What is the present value of a payment of $100 to be made one year from today?

A.$100*(1 + r)

B.$100/(1 + r)

C. $100 – $100 x r

D.$100 – (1 + r)/$100

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

69. The present value of a payment to be made in the future is lower at

A.higher interest rates and as the time until the payment is made increases.

B.higher interest rates and as the time until the payment is made decreases.

C. lower interest rates and as the time until the payment is made increases.

D.lower interest rates and as the time until the payment is made decreases.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

70. You are expecting to receive $650 at some time in the future. Which of the following would decrease the present value of this future payment?

A.Interest rates rise and you get the payment sooner.

B.Interest rates rise and you have to wait longer for the payment.

C. Interest rates fall and you get the payment sooner.

D.Interest rates fall and you have to wait longer to get the payment.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

71. You are expecting to receive $750 at some time in the future. Which of the following would increase the present value of this future payment?

A.Interest rates rise and you get the payment sooner.

B.Interest rates rise and you have to wait longer for the payment.

C. Interest rates fall and you get the payment sooner.

D.Interest rates fall and you have to wait longer to get the payment.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

85. Pat was given two choices when the interest rate was 6 percent. In each case she was supposed to choose the option with the highest present value. In option 1 Pat chose $200 today over $215 a year from today. In option 2 Pat chose $400 today over $420 a year from today. Which of the following is correct?

A.Pat made the right choice in both cases.

B.Pat made the right choice in the first case only.

C. Pat made the right choice in the second case only.

D.Pat made the wrong choice in both cases.

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