C708 - Principles of Finance - Unit 4 Quiz

What type of risk can an investor reduce through the process of diversification? Uncertainty All risk can be reduced Systematic risk only Unsystematic risk

Unsystematic risk

You own a perpetuity that pays $1000 in the first year. It has a 5% annual interest rate and a 2% annual growth rate. What is the present value of the perpetuity? $50,000 $33,333 $14,286 $20,000

$33,333

What is the present value of $100,000 that will be received 5 years from today if you face a 10% compound interest rate every year (rounded up to the nearest dollar)? $72,092 $62,092 $52,092 $82,092

$62,092

You expect to receive a payment of $1 million in a year. The annual interest rate is 5%. What is the present value of the future payment? $666,667 $995,025 $105,000 $952,381

$952,381

Of the following car financing options, which one would you prefer while assuming that you prefer paying the least amount of dollars and that you face a 10% annual compound interest rate on all your financial decisions? A lump-sum payment of $20,000 today only. A payment $10,000 today and another of $10,000 in one year from today. A lump-sum payment of $19,000 today only. A lump-sum payment of $20,000 in two years from today.

A lump-sum payment of $20,000 in two years from today.

Which prediction based on a description of the yield curve is not correct? A flat yield curve suggest that interest rates will be cut. A normal yield curve suggests that interest rates will remain the same in the future. A normal yield curve suggests that interest rates will be raised in the future. An inverted yield curve suggests that interest rates will be dramatically cut.

A normal yield curve suggests that interest rates will remain the same in the future.

Which answer is not a cost to the investor that is included in the calculation of an investment's interest rate? Inflation Brokerage commissions and fees Opportunity Cost Risk of a bad investment

Brokerage commissions and fees

Which option is an adequate method to reduce an investor's risk through diversification? Invest in a broad pool of US and international stocks and bonds. Invest in a small pool of stocks from companies in the same industry. Invest in a start-up business that has a broad ownership among a large number of investors. Invest in the common stocks of the two companies that have performed the best in the last 5 years.

Invest in a broad pool of US and international stocks and bonds.

You are considering investing in the common stock of a major US Corporation. Which answer is an example of systematic risk? Risk related to an impending lawsuit against the company Risk related to the possibility of foreign expropriation of the company's property Risk resulting from a general decline in the US stock markets Risk resulting from general unrest in the company's labor force

Risk resulting from a general decline in the US stock markets

Which answer is not a factor that influences market interest rates? Deferred consumption Alternative investments Inflationary expectations Stock market activity

Stock market activity

The risk that remains after an investor has extensively diversified his portfolio is primarily ________ Standard Deviation Risk Unsystematic Risk Systematic Risk Variance Risk

Systematic Risk

Which statement accurately describes systematic risk? Systematic risk is what provides a stock's "risk premium." An example of a systematic risk is if you own stock in a company that has liquidity problems. Systematic risk is uncertainty associated with a company or industry in which you invest. By diversifying your stock portfolio, you can minimize systematic risk.

Systematic risk is what provides a stock's "risk premium."

Which of the following describes the relationship between present value and future value? When one increases, the other increases, assuming all variables are constant. The more time that passes, the higher the present value and the lower the future value. The higher the interest rate, the higher the present value and the lower the future value. When present value increases, the future value decreases, assuming all variables are constant.

When one increases, the other increases, assuming all variables are constant.