102.
Suppose interest of 5% for two years can be earned on $1,000 saved today with no risk. What is
the least amount
a person would need to have a 50% chance of winning to be willing to face a
50% chance of losing $1,000 today
and be considered risk averse?
a.
$907.03 to be paid in two years
b.
$1,000.01 to be paid in two years
c.
$1,100.01 to be paid in two years
d.
$1,102.51 to be paid in two years
103.
By holding insurance a person
a.
reduces the risk of a bad outcome, such as their house burning down.
b.
shares risk and so reduces the burden of risk.
c.
Both A and B are correct.
d.
Neither A nor B are correct.
104.
Consider the following two situations. Irene accepts a job where she will be driving in dangerous
traffic, so she
seeks auto insurance. After Victor buys health insurance, he visits the gym less
frequently. Which of these
person’s actions illustrates moral hazard?
a.
both Irene’s and Victor’s
b.
Irene’s but not Victor’s
c.
Victor’s but not Irene’s
d.
neither Victor’s nor Irene’s
105.
Which of the following make(s) insurance premiums higher than otherwise?
a.
adverse selection and moral hazard
b.
adverse selection, but not moral hazard
c.
moral hazard, but not adverse selection
d.
neither adverse selection nor moral hazard
106.
A bank might make mortgages to people in different regions of the country. By doing so
a.
the bank reduces the risk it faces from falling house prices in its region and falling prices in all
regions.
b.
the bank reduces the risk it faces of falling house prices in its region but not from falling prices
in all regions.
c.
the bank reduces the risk it faces of falling house prices in all regions, but not the risk it faces
from falling
house prices in its regions.
d.
the bank reduces neither the risk it faces from falling house prices in its region nor falling prices
in all
regions.
107.
Samantha holds stocks in four companies. If she adds stocks of several more companies she will
decrease
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.
108.
Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert
$1,102.5 with certainty.
He is indifferent between this bond and one that has some risk but on
which the interest rate is 3% higher. How
much, to the nearest penny, does the riskier bond pay
in two years?
a. $1,160.00
b. $1,166.40
c. $1,168.65
d. $1,169.64
109.
By diversifying, the risk of holding stock
a.
can be eliminated. On average over the past two centuries stocks paid a higher average real
return than
bonds.
b.
can be eliminated. On average over the past two centuries stocks paid a lower average real
return than
bonds.
c.
can be reduced but not eliminated. On average over the past two centuries stocks paid a
higher average real
return than bonds.
d.
can be reduced but not eliminated. On average over the past two centuries stocks paid a
lower average real
return than bonds.
110.
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.
111.
From the standpoint of the economy as a whole, the role of
a.
the interest rate is to make sure that the price of bonds increases over time.
b.
diversification is to eliminate market risk.
c.
insurance is to reduce the risks inherent in life.
d.
insurance is to spread risks around more efficiently.
112.
Which of the following statements is correct?
a.
A high-risk person is more likely to apply for insurance than a low-risk person because a high-
risk person
would benefit more from insurance protection.
b.
A low-risk person is more likely to apply for insurance than a high-risk person because a low-
risk person
would benefit more from insurance protection.
c.
Insurance companies can fully guard against the problem of adverse selection, but they cannot
fully guard
against the problem of moral hazard.
d.
Insurance companies can fully guard against the problem of moral hazard, but they cannot
fully guard against
the problem of adverse selection.
113.
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.
114.
Lori, who currently owns stock in four companies, has decided to expand her portfolio by
purchasing stock in
virtually every company that sells stock. In doing so, Lori will
a.
increase the risk of her portfolio.
b.
decrease some, but not all, of the risk of her portfolio.
c.
decrease all of the risk of her portfolio.
d.
leave the risk of her portfolio unchanged from its present level.
115.
Which of the following pairs of portfolios exemplifies the risk-return tradeoff?
a.
For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for
Portfolio B, the
average return is 6 percent and the standard deviation is 25 percent.
b.
For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for
Portfolio B, the
average return is 8 percent and the standard deviation is 15 percent.
c.
For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for
Portfolio B, the
average return is 8 percent and the standard deviation is 15 percent.
d.
For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for
Portfolio B, the
average return is 8 percent and the standard deviation is 25 percent.
116.
The risk of a portfolio
a.
increases as the number of stocks in the portfolio increases.
b.
is usually measured using a statistic called the standard diversification.
c.
is positively related to the average return of the portfolio.
d.
bears no relationship to the average return of the portfolio.
117.
Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are
concerned that the
companies executives may take on greater risks than stockholders desire.
This example illustrates
a.
moral hazard and market risk.
b.
moral hazard and firm specific risk.
c.
adverse selection and market risk.
d.
adverse selection and firm specific risk.
118.
John has been a sky diver for many years. When the company John works for offers its
employees the option to
purchase a life insurance policy, John purchases a policy. This
illustrates the problem of
a.
moral hazard.
b.
adverse selection.
c.
risk-return tradeoff.
d.
diversification.
119.
Suppose that John can buy a savings bond for $500 that matures in ten years and pays John
$1,000 with certainty.
He is indifferent between this bond and another $500 bond that has some
risk but on which the interest rate is 5%
higher. How much, to the nearest penny, does the
riskier bond pay in ten years?
a. $1,275.91
b. $1,422.63
c. $1,577.69
d. $1,631.17
1.
When a person engages in detailed analysis of a company to determine its value, he or she
is engaging in
a.
standard deviation analysis.
b.
informational analysis.
c.
fundamental analysis.
d.
efficiency analysis.
2.
By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can
a.
benefit from fundamental analysis, since the mutual fund requires its shareholders to
perform fundamental
analysis on their own.
b.
benefit from fundamental analysis, since the mutual fund hires one or more individuals to
perform fundamental
analysis for the fund.
c.
eliminate market risk.
d.
reduce the standard deviation of his or her portfolio to zero.
3.
If the efficient markets hypothesis is correct, then
a.
the number of shares of stock offered for sale exceeds the number of shares of stock
that people want to
buy.
b.
the stock market is informationally efficient.
c.
stock prices never follow a random walk.
d.
All of the above are correct.
4.
If you believe that stock prices follow a random walk, then probably you
a.
do not believe that there is positive relationship between risk and return.
b.
do not believe that stock prices reflect all available information.
c.
believe in the validity of the efficient markets hypothesis.
d.
believe that it is a good idea to engage in fundamental analysis.
5.
The performance of index funds
a.
usually falls short of the performance of actively-managed funds.
b.
provides evidence in support of the notion that stock prices do not depend upon supply
and demand.
c.
provides evidence in support of the efficient markets hypothesis.
d.
provides evidence in support of the notion that stock-market participants are irrational.
6.
Which of the following is correct concerning diversification?
a.
It only reduces firm-specific risk, but most of the reduction comes from increasing the
number of stocks in a
portfolio to well above 30.
b.
It only reduces firm-specific risk; much of the reduction comes from increasing the
number of stocks in a
portfolio from 1 to 30.
c.
It only reduces market risk, but most of the reduction comes from increasing the number
of stocks in a
portfolio to well above 30.
d.
None of the above is correct.
7.
8.
Which of the following is correct?
a.
Risk-averse people will not hold stock.
b.
Diversification cannot reduce firm-specific risk.
c.
The larger the percentage of stock in a portfolio, the greater the risk, but the greater the
average return.
d.
Stock prices are determined by fundamental analysis rather than by supply and demand.
9.
Dividends
a.
are the rates of return on mutual funds.
b.
are cash payments that companies make to shareholders.
c.
are the difference between the price and present value per share of a stock.
d.
are the rates of return on a company’s capital stock.
10.
Cash payments that companies make to shareholders are called
a.
annuities.
b.
dividends.
c.
premiums.
d.
favorables.
11.
A high-ranking corporate official of a well-known company is unexpectedly sentenced to
prison for criminal activity
in trading stocks. This should
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.
12.
Fundamental analysis is
a.
the study of the relation between risk and return of stock portfolios.
b.
the determination of the allocation of savings between stocks and bonds based on a
person’s degree of risk aversion.
c.
the study of a company’s accounting statements and future prospects to determine its
value.
d.
a method used to determine how adding stocks to a portfolio will change the risk of the
portfolio.
13.
According to fundamental analysis, a saver should prefer to buy stocks that are
a.
undervalued. This means the price of the stock is low given the value of the
corporation.
b.
undervalued. This means the value of the corporation is low given the price of stock.
c.
overvalued. This means the price of the stock is high given the value of the corporation.
d.
overvalued. This means the value of the corporation is high given the price of stock.
14.
15.
Suppose that fundamental analysis indicates a particular company’s stock is overvalued.
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.
16.
Suppose fundamental analysis indicates that XYZ Corporation’s stock is undervalued.
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.
17.
Fundamental analysis shows that stock in Garske Software Corporation has a present
value that is higher than its
price.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn’t consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn‘t consider adding it to your portfolio.
18.
Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price
that exceeds its present
value.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn’t consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn‘t consider adding it to your portfolio.
19.
Fundamental analysis shows that stock in Stainless Appliance Company has a present
value below its price.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn’t consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn’t consider adding it to your portfolio.
20.
Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower
than its price.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn’t consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn’t consider adding it to your portfolio.
21.
Fundamental analysis shows that stock in Johnson’s Lumber Company has a price that is
less than its present value.
a.
This stock is overvalued; you should consider adding it to your portfolio.
b.
This stock is overvalued; you shouldn’t consider adding it to your portfolio.
c.
This stock is undervalued; you should consider adding it to your portfolio.
d.
This stock is undervalued; you shouldn‘t consider adding it to your portfolio.
22.
Fundamental analysis determines the value of a stock based on
a.
dividends.
b.
the expected final sale price.
c.
the ability of the corporation to earn profits.
d.
All of the above are correct.
23.
If stock prices follow a random walk, it means
a.
long periods of declining prices are followed by long periods of rising prices.
b.
the greater the number of consecutive days of price declines, the greater the probability
prices will increase
the following day.
c.
stock prices are unrelated to random events that shock the economy.
d.
stock prices are just as likely to rise as to fall at any given time.
24.
Some people claim that stocks follow a random walk. What does this mean?
a.
The price of stock one day is about what it was on the previous day.
b.
Changes in stock prices cannot be predicted from available information.
c.
Stock prices are not determined by market fundamentals such as supply and demand.
d.
Prices of stocks of different firms in the same industry show no or little tendency to
move together.