Econ ch.9

Laila recently received an inheritance, and she is planning to invest the inheritance in one of four stock portfolios. Which of these portfolios would you expect to have the highest risk?

A portfolio with an average annual rate of return of 11%.

Refer to Figure 27-1. From the appearance of the utility function, we know that

Jasmine would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

$500/(1 + r) + $10,500/(1 + r)2

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

$800

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

$859.09

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

1 to 10

Tyler puts $450 into an account when the interest rate is 8 percent. Later he checks his balance and finds he has about $612.22. How long did Tyler wait to check his balance?

4 years

Sanjay would like to double the money in his retirement account in ten years. According to the rule of 70, what rate of interest would he need to earn to attain his objective?

7 percent

Parker says that the present value of $350 to be received one year from today if the interest rate is 6 percent is less than the present value of $350 to be received two years from today if the interest rate is 3 percent. Ryan says that $350 saved for one year at 6 percent interest has a smaller future value than $350 saved for two years at 3 percent interest.

Only Ryan is correct

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the following makes the price of FineLine Corporation Stock fall?

Only the interest rate rising

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?

$16

Amari deposited $2,000 into an account two years ago. The first year he earned 8 percent interest; the second year he earned 4 percent. How much money does Amari have in his account today?

$2,246.40

Which of the following actions best illustrates moral hazard?

Roberto buys home owners insurance and then is less careful to make sure he's put out his cigarettes

According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?

about 7 years

Refer to Table 27-1. If Jin's current wealth is $61,000, then

his gain in utility from gaining $1,000 is less than his loss in utility from losing $1,000. Jin is risk averse.

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

lower the price of the stock

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

marginal utility diminishes as wealth rises, so he must be risk averse.

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is

no greater than 10.83 percent.

Ahmet decided to increase the number of stocks in his portfolio. In doing so, Ahmet reduced

the firm-specific risk, but not the market risk of his portfolio.

For a risk averse person,

the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.

Refer to Figure 27-1. Suppose Jasmine begins with $420 in wealth. Starting from there,

the pain of losing $120 of her wealth would exceed the pleasure of adding $120 to her wealth.

On a graph with utility on the vertical axis and wealth on the horizontal axis, diminishing marginal utility of wealth implies that the utility function is

upward-sloping and has decreasing slope.

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

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.

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?

Interest rates rise and truck prices rise.

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?

Victor's but not Irene's