Ch.

27 - Sample Questions
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. The field of finance primarily studies

a. how society manages its scarce resources.
b. the implications of time and risk for allocating resources over time.
c. firms’ decisions concerning how much to produce and what price to charge.
d. how society can reduce market risk.
____ 2. Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6
percent. The future value of the $350 after 4 years is
a. $414.09.
b. $434.00.
c. $441.87.
d. $481.24.
____ 3. Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if
the interest rate is
a. 4 percent.
b. 6 percent.
c. 8 percent.
d. All of the above are correct.
____ 4. Compounding refers directly to
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.
____ 5. Which of the following is the correct way to compute the future value of $100 put into an account that earns 4
percent interest for 10 years?
a. $100(1 + .0410)
b. $100(1 + .04 10)
c. $100 x 10 x (1 + .04)
d. $100(1 + .04)10

Figure 27-1. The figure shows a utility function.

C
B

0 $400 $600 $800 Wealth

____ 6. Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the
distance between point A and point B; etc. Which of the following ratios best represents the marginal utility
per dollar when wealth increases from $400 to $600?
a.

b.

c.

d.

____ 7. The problem of moral hazard arises because

a. life is full of all sorts of risks.
b. after people buy insurance, they have less incentive to be careful about their risky
behavior.
c. a high-risk person is more likely to apply for insurance than is a low-risk person.
d. insurance companies go to great effort to avoid paying claims to their policy holders.
____ 8. 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.
____ 9. In general, as a person includes fewer stocks and more bonds in his portfolio,
a. both risk and expected return rise.
b. risk rises but expected return falls.
c. risk falls, but expected return rises.
d. both risk and expected return fall.
____ 10. If you believe that stock prices follow a random walk, then probably you
a. do not believe that there is positive relationship between risk and return.
b. do not believe that stock prices reflect all available information.
c. believe in the validity of the efficient markets hypothesis.
d. believe that it is a good idea to engage in fundamental analysis.
Ch.27 - Sample Questions
Answer Section

MULTIPLE CHOICE

1. ANS: B PTS: 1 DIF: 1 REF: 27-0

NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Risk | Time horizon MSC: Definitional
2. ANS: C PTS: 1 DIF: 2 REF: 27-1
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Future value MSC: Applicative
3. ANS: C PTS: 1 DIF: 2 REF: 27-1
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Present value MSC: Applicative
4. ANS: D PTS: 1 DIF: 1 REF: 27-1
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Compounding MSC: Definitional
5. ANS: D PTS: 1 DIF: 1 REF: 27-1
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Future value MSC: Applicative
6. ANS: D PTS: 1 DIF: 3 REF: 27-2
NAT: Analytic LOC: Utility and consumer choice TOP: Marginal utility
MSC: Analytical
7. ANS: B PTS: 1 DIF: 2 REF: 27-2
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Moral hazard MSC: Interpretive
8. ANS: A PTS: 1 DIF: 1 REF: 27-2
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Risk | Utility MSC: Interpretive
9. ANS: D PTS: 1 DIF: 2 REF: 27-2
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Risk | Returns MSC: Interpretive
10. ANS: C PTS: 1 DIF: 2 REF: 27-3
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Random walk | Efficient markets hypothesis MSC: Interpretive