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Figure 27-2. The figure shows a utility function for Britney. Figure 27-2. The figure shows a utility function for Britney. -Refer to Figure 27-2. From the appearance of the utility function, we know that A) Britney is risk averse. B) Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars. C) the property of diminishing marginal utility applies to Britney. D) All of the above are correct. -Refer to Figure 27-2. From the appearance of the utility function, we know that


A) Britney is risk averse.
B) Britney gains less satisfaction when her wealth increases by X dollars than she loses in satisfaction when her wealth decreases by X dollars.
C) the property of diminishing marginal utility applies to Britney.
D) All of the above are correct.

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

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Figure 27-6. On the graph, x represents risk and y represents return. Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Point A represents a situation in which A) all of a person's savings are allocated to a class of safe assets. B) the person knows with certainty that his or her return will be 3 percent. C) the standard deviation of the person's portfolio is zero. D) All of the above are correct. -Refer to Figure 27-6. Point A represents a situation in which


A) all of a person's savings are allocated to a class of safe assets.
B) the person knows with certainty that his or her return will be 3 percent.
C) the standard deviation of the person's portfolio is zero.
D) All of the above are correct.

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

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An index fund


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.

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

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Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a


A) conjectural mistake.
B) fundamental mishap.
C) speculative bubble.
D) temporary inefficiency.

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

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In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

A) True
B) False

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In answering which of the following questions would you find it necessary to calculate a present value?


A) Should Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent annual interest?
B) Should ABC Corporation buy a factory today for $2 million, knowing that the factory will yield the corporation $3 million after 5 years?
C) If Jill puts $5,000 today into a bank account that pays 3 percent interest, then how much will she have in the account after 2 years?
D) You would find it necessary to calculate a present value in order to answer all of these questions.

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

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Risk-averse individuals like good things more than they dislike comparable bad things.

A) True
B) False

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Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect that


A) every risk-averse person will earn a higher rate of return than every non-risk-averse person.
B) every risk-averse person will earn a lower rate of return than every non-risk-averse person.
C) the average risk-averse person will earn a higher rate of return than the average non-risk-averse person.
D) the average risk-averse person will earn a lower rate of return than the average non-risk-averse person.

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

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What is the future value of $375 at an interest rate of 3 percent one year from today?


A) $371.75
B) $386.25
C) $393.33
D) None of the above are correct to the nearest cent.

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

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Suppose the interest rate is 8 percent. Consider three payment options: 1) $200 today. 2) $220 one year from today. 3) $240 two years from today. Which of the following is correct?


A) Option 1 has the highest present value and Option 2 has the lowest.
B) Option 2 has the highest present value and Option 3 has the lowest.
C) Option 3 has the highest present value and Option 1 has the lowest.
D) None of the above is correct.

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

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Draw graphs showing the following three relationships.

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1. The relation between utilit...

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Figure 27-4. The figure shows a utility function for Alex. Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable. B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk. C) Alex is risk averse. D) Alex is not risk averse. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that


A) if Alex owns a house, then he definitely would buy fire insurance provided the cost of the insurance was reasonable.
B) Alex would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk.
C) Alex is risk averse.
D) Alex is not risk averse.

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

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Abby buys health insurance because she knows that she has health risks that wouldn't be obvious to an insurance company. Brad buys home owners insurance and then is less careful to make sure he's put out his cigarettes. The example with Abby


A) and the example with Brad illustrate adverse selection.
B) and the example with Brad illustrate moral hazard.
C) illustrates adverse selection; the example with Brad illustrates moral hazard.
D) illustrates moral hazard; the example with Brad illustrates adverse selection.

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

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A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?


A) Option A
B) Option B
C) Option C
D) The answer depends on the rate of interest, which is not specified here.

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

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Which of the following is correct if the interest rate is 6 percent?


A) $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400.
B) $215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400.
C) $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400.
D) $215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.

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

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The concept of present value helps explain why


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.

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

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Figure 27-5. The figure shows a utility function for Dexter. Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there, A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth. B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth. C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth. D) This cannot be determined from the graph. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,


A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D) This cannot be determined from the graph.

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

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Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the second year she earned 5 percent. How much money does Veronica have in her account today?


A) $1,133.31
B) $1,120.00
C) $1,123.50
D) None of the above are correct to the nearest cent.

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

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Cleo promises to pay Jacques $1,000 two years from today. If the interest rate is 4 percent, then how much is this future payment worth today?


A) $924.56
B) $931.44
C) $937.87
D) None of the above are correct to the nearest cent.

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

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If a person is risk averse, then she has


A) diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
B) diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.
C) increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
D) increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

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

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