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The idea of insurance


A) would not appeal to a risk-averse person.
B) is, other things the same, to reduce the probability of a fire, accident, or death.
C) is to share risk.
D) is to provide a sure thing, not a gamble.

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

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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?


A) $4
B) $8
C) $16
D) $32

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

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If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?


A) 6
B) 8
C) 10
D) 12

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

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Fundamental analysis is


A) the study of the relation between risk and return of stock portfolios.
B) the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion.
C) the study of a company's accounting statements and future prospects to determine its value.
D) a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.

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

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Writing in the Wall Street Journal in 2009, economist Jeremy Siegel pointed out that the efficient markets hypothesis


A) was responsible for the financial crisis of 2008-2009.
B) was responsible for the Great Depression of the 1930s.
C) claims that prices observed in financial markets are always "right."
D) claims that prices observed in financial markets are mostly "wrong."

E) A) and B)
F) A) 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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If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is


A) overvalued so you should consider buying it.
B) overvalued so you should not consider buying it.
C) undervalued so you should consider buying it.
D) undervalued so you should not consider buying it.

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

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You have been promised a payment of $250,000 in the future. In which case is the present value of this payment highest?


A) You receive the payment 3 years from now and the interest rate is 8 percent.
B) You receive the payment 3 years from now and the interest rate is 6 percent.
C) You receive the payment 2 years from now and the interest rate is 8 percent.
D) You receive the payment 2 years from now and the interest rate is 6 percent.

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

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The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

A) True
B) False

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Diversification can reduce firm-specific risk.

A) True
B) False

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Diversification of a portfolio


A) can eliminate market risk, but it cannot eliminate firm-specific risk.
B) can eliminate firm-specific risk, but it cannot eliminate market risk.
C) increases the portfolio's standard deviation.
D) is not necessary for a person who is risk averse.

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

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In the 1990s, Fed Chair Alan Greenspan believed that the market was


A) undervalued, and evidence later showed that this was clearly correct.
B) undervalued, but whether it was remains debatable.
C) overvalued, and evidence later showed that this was clearly correct.
D) overvalued, but whether it was remains debatable.

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

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Sometimes On Time (SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either


A) a decrease in the price of a new jet or a decrease in the interest rate.
B) a decrease in the price of a new jet or an increase in the interest rate.
C) an increase in the price of a new jet or a decrease in the interest rate.
D) an increase in the price of a new jet or an increase in the interest rate.

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

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You receive $500 today which you plan to save for two years. Also, in two years you will be given another $500. If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?


A) $500(1.05) 2 + $500/(1.05) 2
B) $500(1.05) 2 + $500
C) $500 + $500/(1.05) 2
D) $500 + $500

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

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The relation between return and risk.

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Manufacturers of Weightbegone are concerned that genetic advances in weight control might reduce the demand for their diet snacks. This is an example of


A) firm-specific risk, which will likely raise shareholders' demand for higher return.
B) firm-specific risk, which will likely not likely raise shareholders' demand for higher return.
C) market risk, which will likely raise shareholders' demand for higher return.
D) market risk, which will likely not raise shareholders' demand for higher return.

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

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

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David increases the number of companies in which he holds stocks.


A) This reduces risk's standard deviation and firm-specific risk.
B) This reduces risk's standard deviation and market risk.
C) This raises market risk, but lowers firm-specific risk. What happens to overall risk is unclear.
D) This raises firm-specific risk, but lowers market risk. What happens to overall risk is unclear.

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

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If Robert is risk-averse, then he will always


A) choose not to play a game where he has a 50 percent chance of winning $1 and a 50 percent chance of losing $1.
B) choose not to play a game where he has a 75 percent chance of winning $1 and a 25 percent chance of losing $1.
C) choose to play a game where he has a 52 percent chance of winning $1 and a 48 percent chance of losing $1.
D) All of the above are correct.

E) None of the above
F) All of the above

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The future value of $1 saved today is $1/(1 + r).

A) True
B) False

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