Macro Quiz Chapter 27

According to fundamental analysis, a saver should prefer to buy stocks that are Select one: 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

undervalued. This means the price of the stock is low given the value of the corporation.

The risk of a portfolio Select one: 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.

c. is positively related to the average return of the portfolio.

Anna deposited $10,000 into an account three years ago. The first year she earned 12 percent interest, the second year she earned 8 percent interest, and the third year she earned 4 percent interest. How much money does she have in her account today? Select one: a. $12,579.84 b. $12,596.80 c. $12,597.12 d. None of the above are correct to the nearest cent.

a. $12,579.84

If the interest rate is 2.49 percent, then what is the present value of $5,000 to be received in 4 years? Select one: a. $4,531.52 b. $4,878.52 c. $5,124.50 d. $5,516.91

a. $4,531.52

Braden says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest. Lefty says that the present value of $400 to be received one year from today if the interest rate is 4 percent exceeds the present value of $400 to be received two years from today if the interest rate is 2 percent. Select one: a. Braden and Lefty are both correct. b. Braden and Lefty are both incorrect. c. Only Braden is correct. d. Only Lefty is correct.

a. Braden and Lefty are both correct.

Which of the following make(s) insurance premiums higher than otherwise? Select one: 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

a. adverse selection and moral hazard

Discounting refers directly to Select one: a. finding the present value of a future sum of money. b. finding the future value of a present sum of money. c. calculations that ignore the phenomenon of compounding for the sake of ease and simplicity. d. decreases in interest rates over time, while compounding refers to increases in interest rates over time.

a. finding the present value of a future sum of money.

The concept of present value helps explain why Select one: a. investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases. b. investment decreases when the interest rate increases, but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases. c. the quantity of loanable funds demanded decreases when the interest rate increases, but it is of no help in explaining why investment decreases when the interest rate increases. d. None of the above are correct; the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

a. investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments? Select one: a. $2,000/(1 + r)2. b. $1,000 + $1,000/(1 + r) c. $1,000/(1 + r) + $1,000/(1 + r)2 d. $1,000(1 + r) + $1,000(1 + r)2

b. $1,000 + $1,000/(1 + r)

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? Select one: a. $500(1 + r) + $10,500/(1 + r)2 b. $500/(1 + r) + $10,500/(1 + r)2 c. $11,000/(1 + r)2 d. $500(1 + r) + $10,500(1 + r)2

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

By purchasing shares in a mutual fund that holds a portfolio of stocks, a person can Select one: 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.

b. benefit from fundamental analysis, since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.

As the number of stocks in a portfolio rises, Select one: a. both firm-specific risks and market risk fall. b. firm-specific risks fall; market risk does not. c. market risk falls; firm-specific risks do not. d. neither firm-specific risks nor market risk falls.

b. firm-specific risks fall; market risk does not.

An index fund Select one: a. holds only stocks and bonds that are indexed to inflation. b. holds all the stocks in a given stock index. c. guarantees a return that follows the index of leading economic indicators. d. typically has a lower return than a managed fund.

b. holds all the stocks in a given stock index.

If a person is risk averse, then as wealth increases, total utility of wealth Select one: a. increases at an increasing rate. b. increases at a decreasing rate. c. decreases at an increasing rate. d. decreases at a decreasing rate.

b. increases at a decreasing rate.

The value of a stock is based on the Select one: a. present values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rise. b. present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise. c. future values of the dividend stream and final price. As a result, the value of a stock rises when interest rates rises. d. future values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.

b. present values of the dividend stream and final price. As a result, the value of a stock falls when interest rates rise.

If more people think a corporation's stock is overvalued than think it is undervalued then there is a Select one: a. surplus, so its price will rise. b. surplus, so its price will fall. c. shortage, so its price will rise. d. shortage, so its price will fall.

b. surplus, so its price will fall.

If asset markets are driven by the "animal spirits" of investors, then Select one: 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.

b. those markets reflect irrational behavior.

Which of the following is the correct expression for finding the present value of a $1,000 payment one year from today if the interest rate is 6 percent? Select one: a. $1,000 x (1.06) b. $1,000^(1.06) c. $1,000/(1.06) d. None of the above is correct.

c. $1,000/(1.06)

Which of the following games might a risk-averse person play? Select one: a. a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 b. a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 c. a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 d. a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1

c. a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1

If a stock or bond is risky Select one: 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.

c. both A and B are correct.

By diversifying, the risk of holding stock Select one: 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.

c. can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.

A risk-averse person Select one: 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.

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.

Diminishing marginal utility of wealth implies that the utility function Select one: a. has increasing slope and a person is risk averse. b. has increasing slope and a person is not risk averse. c. has decreasing slope and a person is risk averse d. has decreasing slope and a person is not risk averse.

c. has decreasing slope and a person is risk averse

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that Select one: a. fundamental analysis is an efficient way to go about choosing which stocks to buy or sell. b. stock prices move upward and downward "efficiently," rather than following a "random walk." c. the stock market is "informationally efficient." d. companies employ officers and managers who are well-qualified to perform their jobs.

c. the stock market is "informationally efficient."

Which of the following actions best illustrates adverse selection? Select one: a. A person purposely chooses bonds of corporations with high default risk because of the high returns. b. A person dislikes losing $400 more than he likes winning $400. c. After obtaining automobile insurance a person drives less carefully than before. d. A person intending to take up dangerous hobbies applies for life insurance.

d. A person intending to take up dangerous hobbies applies for life insurance.

Which of the following actions best illustrates moral hazard? Select one: a. A person adds risky stock to his portfolio. b. A person who has narrowly avoided many accidents applies for automobile insurance. c. A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. d. A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

d. A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

Which of the following pairs of portfolios exemplifies the risk-return tradeoff? Select one: 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.

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.

According to the efficient market hypothesis Select one: a. changes in the prices of stocks are predictable. Evidence shows that managed funds typically do better than indexed funds. b. changes in the prices of stocks are predictable. Evidence shows that indexed funds typically do better than managed funds. c. changes in the prices of stocks are not predictable. Evidence shows that managed funds typically do better than indexed funds. d. changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.

d. changes in the prices of stocks are not predictable. Evidence shows that indexed funds typically do better than managed funds.

Compounding refers directly to Select one: a. finding the present value of a future sum of money. b. finding the future value of a present sum of money. c. changes in the interest rate over time on a bank account or a similar savings vehicle. d. interest being earned on previously-earned interest.

d. interest being earned on previously-earned interest.

If stock prices follow a random walk, it means Select one: 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.

d. stock prices are just as likely to rise as to fall at any given time.