1. If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.
a.
True
b.
False
2. If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in
approximately 14 years.
a.
True
b.
False
3. 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.
a.
True
b.
False
4. The future value of $1 saved today is $1/(1 + r).
a.
True
b.
False
5. The present value of any future sum of money is the amount that would be needed today, at current interest rates, to
produce that future sum.
a.
True
b.
False
6. The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.
a.
True
b.
False
7. A company that can build a project that will cost $50,000, but returns $52,000 in one year would make a good decision
by turning this project down if the interest rate were 3 percent.
a.
True
b.
False
8. As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects
profitable.
a.
True
b.
False
9. According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.
a.
True
b.
False
10. The rule of 70 applies to a growing savings account but not to a growing economy.
a.
True
b.
False
11. If you are faced with the choice of receiving $500 today or $800 6 years from today, you will be indifferent between
the two possibilities if the interest rate is 8.148 percent.
a.
True
b.
False
12. The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest
rate increases.
a.
True
b.
False
13. An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.
a.
True
b.
False
14. The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it
is 6%.
a.
True
b.
False
15. 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.
a.
True
b.
False
16. ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today. If the interest
rate is 20 percent and if the project will yield the company $30,000 in 3 years, then ZZL will undertake the project.
a.
True
b.
False
17. Risk aversion simply means that people dislike bad things to happen.
a.
True
b.
False
18. Risk-averse individuals like good things more than they dislike comparable bad things.
a.
True
b.
False
19. People who are risk averse dislike bad outcomes more than they like comparable good outcomes.
a.
True
b.
False
20. The market for insurance is an example of diversification.
a.
True
b.
False
21. A person’s subjective measure of well-being or satisfaction is called aversion.
a.
True
b.
False
22. Historically, stocks have offered higher rates of return than bonds.
a.
True
b.
False
23. Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from
holding stock.
a.
True
b.
False
24. Risk-averse persons will take no risks.
a.
True
b.
False
25. The market for insurance is one example of reducing risk by using diversification.
a.
True
b.
False
26. A person with diminishing marginal utility of wealth is risk averse.
a.
True
b.
False
27. Adverse selection is illustrated by people who take greater risks after they purchase insurance.
a.
True
b.
False
28. Increasing the number of corporations whose stocks are in your portfolio reduces market risk.
a.
True
b.
False
29. Diversification can reduce firm-specific risk.
a.
True
b.
False
30. The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation
conflicts with the notion that most people are risk averse.
a.
True
b.
False
31. From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks
inherent in life.
a.
True
b.
False
32. If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the
increase in utility from gaining $1,000.
a.
True
b.
False
33. Moral hazard is illustrated by people who take greater risks after they purchase insurance.
a.
True
b.
False
34. Diversification cannot reduce market risk.
a.
True
b.
False
35. When the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing
a speculative bubble.
a.
True
b.
False
36. 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
37. The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock
when the stockholder sells her shares.
a.
True
b.
False
38. According to fundamental analysis, when choosing stocks for your portfolio, you should prefer undervalued stocks.
a.
True
b.
False
39. According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the
company’s value based on publicly available information.
a.
True
b.
False
40. According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one
year are more likely to increase than decrease in the next year.
a.
True
b.
False
41. 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
42. Studies find that mutual fund managers who do well in one year are likely to do well the next year.
a.
True
b.
False
43. Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.
a.
True
b.
False
44. Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.
a.
True
b.
False
45. Available evidence indicates that stock prices, even if not exactly a random walk, are very close to a random walk.
a.
True
b.
False
46. If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the
necessary research yourself.
a.
True
b.
False
47. If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental
analysis.
a.
True
b.
False
48. Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the
efficient markets hypothesis.
a.
True
b.
False
49. In the 15 years ending February 2016, most active portfolio managers failed to beat the market.
a.
True
b.
False
50. If the interest rate is 5 percent, then receiving $1,000 eight years from now is worth more than receiving $700 today.
a.
True
b.
False
51. If the interest rate is 6 percent, then the present value of $5,000 received ten years from today is $2,583.34.
a.
True
b.
False
52. According to the Rule of 70, it takes 70 years for a sum of money to double in value when the interest rate is 5
percent.
a.
True
b.
False
53. A person who is risk averse will like gaining $1,000 more than they will dislike losing $1,000.
a.
True
b.
False
54. Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance. This is an
example of the moral hazard problem associated with insurance.
a.
True
b.
False