Deck 27: True False

Question 1

As the interest rate increases,the present value of future sums decreases,so firms will find fewer investment projects profitable.

Answer 1

True

Question 2

If the interest rate is 8 percent,then the present value of $1,000 to be received in 4 years is $735.03.

Answer 2

True

Question 3

If you are faced with the choice of receiving $500 today or $800 6 years from today,you will be indifferent between the two possibilities if the interest rate is 8.148 percent.

Answer 3

True

Question 4

Risk aversion simply means that people dislike bad things to happen.

Question 5

The rule of 70 applies to a growing savings account but not to a growing economy.

Question 6

ZZL Corporation has the opportunity to undertake an investment project that will cost $20,000 today.If the interest rate is 20 percent and if the project will yield the company $30,000 in 3 years,then ZZL will undertake the project.

Question 7

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

Question 8

The market for insurance is an example of diversification.

Question 9

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

Question 10

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

Question 11

The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

Question 12

PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years.PZX will forgo the project if the interest rate is higher than 10 percent.

Question 13

The sooner a payment is received and the higher the interest rate,the greater the present value of a future payment.

Question 14

If a savings account pays 5 percent annual interest,then the rule of 70 tells us that the account value will double in approximately 14 years.

Question 15

According to the rule of 70,if you earn an interest rate of 3.5 percent,your savings will double about every 20 years.

Question 16

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Question 17

The present value of $100 to be paid in two years is less than the present value of $100 to be paid in three years.

Question 18

The present value of any future sum of money is the amount that would be needed today,at current interest rates,to produce that future sum.

Question 19

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

Question 20

A company that can build a project that will cost $50,000,but returns $52,000 in one year would make a good decision by turning this project down if the interest rate were 3 percent.

Question 21

From the standpoint of the economy as a whole,the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Question 22

The market for insurance is one example of reducing risk by using diversification.

Question 23

Risk-averse persons will take no risks.

Question 24

Historically the return on stocks has been higher than the return on bonds.In part this reflects the higher risk from holding stock.

Question 25

Diversification cannot reduce market risk.

Question 26

Adverse selection is illustrated by people who take greater risks after they purchase insurance.

Question 27

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

Question 28

A person's subjective measure of well-being or satisfaction is called aversion.

Question 29

According to the efficient markets hypothesis,at any moment in time,the market price is the best estimate of the company's value based on publicly available information.

Question 30

According to fundamental analysis,when choosing stocks for your portfolio,you should prefer undervalued stocks.

Question 31

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.

Question 32

Historically,stocks have offered higher rates of return than bonds.

Question 33

Diversification can reduce firm-specific risk.

Question 34

Increasing the number of corporations whose stocks are in your portfolio reduces market risk.

Question 35

Because the statistic called the standard deviation measures the volatility of a variable,it is used to measure the return of a portfolio.

Question 36

Moral hazard is illustrated by people who take greater risks after they purchase insurance.

Question 37

According to the efficient markets hypothesis,stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Question 38

If a person had increasing marginal utility,then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Question 39

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Question 40

A person with diminishing marginal utility of wealth is risk averse.

Question 41

Actively managed mutual funds usually fail to outperform index funds,and this fact provides evidence in favor of the efficient markets hypothesis.

Question 42

In the 15 years ending February 2016,most active portfolio managers failed to beat the market.

Question 43

If you believe the stock market is informationally efficient,then it is a waste of time to engage in fundamental analysis.

Question 44

If you wish to rely on fundamental analysis to choose a portfolio of stocks,then you have no choice but to do all the necessary research yourself.

Question 45

Managed mutual funds usually outperform mutual funds that are supposed to follow some stock index.

Question 46

A person who is risk averse will like gaining $1,000 more than they will dislike losing $1,000.

Question 47

Studies find that mutual fund managers who do well in one year are likely to do well the next year.

Question 48

If the interest rate is 6 percent,then the present value of $5,000 received ten years from today is $2,583.34.

Question 49

Available evidence indicates that stock prices,even if not exactly a random walk,are very close to a random walk.

Question 50

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Question 51

Suppose Dave drives more recklessly when he has car insurance than when he does not have car insurance.This is an example of the moral hazard problem associated with insurance.

Question 52

According to the efficient markets hypothesis,the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Question 53

According to the Rule of 70,it takes 70 years for a sum of money to double in value when the interest rate is 5 percent.

Question 54

If the interest rate is 5 percent,then receiving $1,000 eight years from now is worth more than receiving $700 today.