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What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?


A) $105.26
B) $105.00
C) $97.24
D) $94.34

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

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According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

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Only news that changes the pub...

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The utility function of a risk-averse person has a


A) positive slope and gets steeper as wealth increases.
B) positive slope but gets flatter as wealth increases.
C) negative slope but gets steeper as wealth increases.
D) negative slope and gets flatter as wealth increases.

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

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At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?


A) 3
B) 4
C) 5
D) 7

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

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A risk-averse person


A) has a utility curve where the slope increases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300.
B) has a utility curve where the slope increases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.
C) has a utility curve where the slope decreases with wealth, and might take a bet with a 80 percent chance of winning $300 and a 20 per chance of losing $300.
D) has a utility curve where the slope decreases with wealth, and would never take a bet with a 80 percent chance of winning $300 and a 20 per cent chance of losing $300.

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

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Suppose the interest rate is 7 percent. Consider four payment options: Option A: $500 today. Option B: $550 one year from today. Option C: $575 two years from today. Option D: $600 three years from today. Which of the payments has the lowest present value today?


A) Option A
B) Option B
C) Option C
D) Option D

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

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Which of the following is correct concerning a risk-averse person?


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.
D) All of the above are correct.

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

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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

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Over the past two centuries, the average annual rates of return were about


A) 5 percent for stocks and about 1.5 percent for short-term government bonds.
B) 6 percent for stocks and about 2.5 percent for short-term government bonds.
C) 8 percent for stocks and about 3 percent for short-term government bonds.
D) None of the above is correct.

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

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Given that Tamar is a risk-averse person, she might accept a bet with a 50 percent chance of losing $100 today if she had a 50 percent


A) chance of winning $120 in two years and the interest rate was 11%.
B) chance of winning $114 in two years and the interest rate was 7%.
C) chance of winning $110 in two years and the interest rate was 3%.
D) None of the above are correct; a risk averse person would not accept any of the above bets.

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

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The available evidence indicates that


A) about one-half of all managers of active mutual funds consistently outperform index funds.
B) outperforming the market on a consistent basis is extremely difficult to do.
C) there is little truth to the notion that there is a trade-off between risk and return.
D) there is little truth to the efficient markets hypothesis.

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

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The market for insurance is one example of reducing risk by using diversification.

A) True
B) False

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Which of the following is not correct?


A) There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks.
B) The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds.
C) Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions.
D) If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis.

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

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A person with diminishing marginal utility of wealth is risk averse.

A) True
B) False

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Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.


A) Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis.
B) Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.
C) Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis.
D) Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

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

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The nation of Zambonia experiences the same rate of population growth every year. If the population of Zambonia doubles every 35 years, then what is the approximate annual rate of population growth?

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Using the Rule of 70...

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Suppose you win a small lottery and you are given the following choice: You can 1) receive an immediate payment of $10,000 or 2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is


A) 2 percent, but not if the interest rate is 3 percent.
B) 3 percent, but not if the interest rate is 4 percent.
C) 4 percent, but not if the interest rate is 5 percent.
D) 5 percent, but not if the interest rate is 6 percent.

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

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The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

A) True
B) False

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If the interest rate is r percent, then the rule of 70 says that your savings will double about every


A) 70/1 - r) years.
B) 70/1 + r) years.
C) 70/r years.
D) 701 + r) /r years.

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

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If asset markets are driven by the "animal spirits" of investors, then


A) those markets reflect rational behavior.
B) those markets reflect irrational behavior.
C) the efficient markets hypothesis is correct.
D) the stock market exhibits informational efficiency.

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

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