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Tami knows that people in her family die young, and so she buys life insurance. Preston 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.

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

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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?


A) $98.18
B) $100.96
C) $102.04
D) $103.24

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

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Diversification of a portfolio


A) can eliminate market risk, but it cannot eliminate firm-specific risk.
B) can eliminate firm-specific risk, but it cannot eliminate market risk.
C) increases the portfolio's standard deviation.
D) is not necessary for a person who is risk averse.

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

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If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?


A) $2,420.68
B) $2,591.85
C) $2,996.33
D) $3,040.63

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

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If a stock or bond is risky


A) risk averse people may be willing to hold it as part of a diversified portfolio.
B) risk averse people may be willing to hold it if the expected return is high enough.
C) both A and B are correct.
D) risk averse people will not hold it.

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

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Suppose the interest rate is 7 percent. Consider four payment options: Option

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A: $500 today.
Option B: $550 one year f...

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Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is


A) a mutual fund.
B) an insurance company.
C) a diversified company.
D) an equity-financed company.

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

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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. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800? A) the distance between the origin and point B B) the distance between the origin and point C C) the distance between point A and point C D) the distance between point B and point C -Refer to Figure 27-1. Which distance along the vertical axis represents the marginal utility of an increase in wealth from $600 to $800?


A) the distance between the origin and point B
B) the distance between the origin and point C
C) the distance between point A and point C
D) the distance between point B and point C

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

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Suppose your uncle offers you $100 today or $150 in 10 years. You would prefer to take the $100 today if the interest rate is


A) 3 percent.
B) 4 percent.
C) 5 percent.
D) None of the above is correct.

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

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In which of the following instances is the present value of the future payment the largest?


A) You will receive $1,000 in 5 years and the annual interest rate is 5 percent.
B) You will receive $1,000 in 10 years and the annual interest rate is 3 percent.
C) You will receive $2,000 in 10 years and the annual interest rate is 10 percent.
D) You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

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

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Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today?


A) $12,579.84
B) $12,596.80
C) $12,597.12
D) None of the above are correct to the nearest cent.

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

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Kyle puts a greater proportion of his portfolio into government bonds. Kyle's action


A) increases both risk and the average rate of return.
B) decreases both risk and the average rate of return.
C) increases risk, but decreases the average rate of return.
D) decreases risk, but increases the average rate of return.

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

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At which interest rate is the present value of $168.54 two years from today equal to $150 today?


A) 4 percent
B) 5 percent
C) 6 percent
D) None of the above would give a present value within a cent of $162.24.

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

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Which, if any, of the present values below are correctly computed?


A) A payment of $1,000 to be received one year from today, with a 8 percent interest rate, has a present value of $945.45.
B) A payment of $1,000 to be received one year from today, with a 9 percent interest rate, has a present value of $911.11.
C) A payment of $1,000 to be received one year from today, with a 10 percent interest rate, has a present value of $905.06.
D) None of the above are correct to the nearest cent.

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

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


A) risk increases and the standard deviation of the return rises.
B) risk increases and the standard deviation of the return falls.
C) risk decreases and the standard deviation of the return rises.
D) risk decreases and the standard deviation of the return falls.

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

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According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

A) True
B) False

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You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?


A) $4
B) $8
C) $16
D) $32

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

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Marcia has four savings accounts. Which account has the largest balance?


A) $100 deposited 1 year ago at an 8 percent interest rate
B) $100 deposited 2 years ago at a 4 percent interest rate
C) $100 deposited 4 years ago at a 2 percent interest rate
D) $100 deposited 8 years ago at a 1 percent interest rate

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

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Which of the following methods of picking stocks is not consistent with fundamental analysis?


A) doing research such as thoroughly reading and analyzing companies' annual reports
B) choosing mutual funds that are managed by individuals with good reputations
C) viewing individual stock prices as unpredictable
D) relying upon the advice of Wall Street analysts

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

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A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?


A) $2,000/1 + r) 2.
B) $1,000 + $1,000/1 + r)
C) $1,000/1 + r) + $1,000/1 + r) 2
D) $1,0001 + r) + $1,0001 + r) 2

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

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