Question 1

Calculate the future value of R800 one year from today if the interest rate is 
a) 3% 
b) 5% 
c) 7%.

Accepted Answer

a) R824
b...

Question 2

Draw graphs showing the following three relationships.
a.The relation between utility and wealth for a risk averse consumer.
b.The relation between standard deviation and the number of stocks in a portfolio.
c.The relation between return and risk.

Accepted Answer

The answer of Draw graphs showing the following three relationships.
a.The...

Question 3

You have a choice among three options.Option 1: receive R900 immediately.Option 2: receive R1 200 one year from now.Option 3: receive R2 000 five years from now.The interest rate is 15% per year.Rank these three options from highest present value to lowest present value.

Accepted Answer

A)  Option 1; Option 2; Option 3
B)  Option 3; Option 2; Option 1
C)  Option 2; Option 3; Option 1
D)  Option 3; Option 1; Option 2E) B) and D)
F) A) and B)

Question 4

An increase in the prevailing interest rate

Accepted Answer

A)  increases the present value of future returns from investment, and increases investment.
B)  decreases the present value of future returns from investment, and decreases investment.
C)  decreases the present value of future returns from investment, and increases investment.
D)  increases the present value of future returns from investment, and decreases investment.E) None of the above
F) A) and B)

Question 5

You have three ways to use fundamental analysis in pick a stock portfolio: 1)  do all the necessary research yourself, 2)  seek out the advice of a financial analysts, or

Accepted Answer

A)  put your money into a savings account.
B)  buy into index funds.
C)  buy stocks that you like.
D)  buy into an investment fund that conducts fundamental analysis.E) All of the above
F) A) and B)

Question 6

Compared to a portfolio composed entirely of shares, a portfolio that is 50 per cent government bonds and 50 per cent shares will have a

Accepted Answer

A)  lower return and a lower level of risk.
B)  lower return and a higher level of risk.
C)  higher return and a lower level of risk.
D)  higher return and a higher level of risk.E) B) and C)
F) A) and D)

Question 7

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that ...

Question 8

Which of the following reduces risk in a portfolio the greatest?

Accepted Answer

A)  Increasing the number of shares from 10 to 20
B)  All of these answers provide the same amount of risk reduction.
C)  Increasing the number of shares in the portfolio from 1 to 10
D)  Increasing the number of shares from 20 to 30E) C) and D)
F) B) and C)

Question 9

The insurance market demonstrates the problem of adverse selection when those that are sicker than average seek health insurance.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is true?

Accepted Answer

A)  Diversification reduces idiosyncratic risk but not aggregate risk.
B)  Diversification reduces aggregate risk but not idiosyncratic risk.
C)  Diversification reduces both idiosyncratic risk and aggregate risk but it reduces idiosyncratic risk by more.
D)  Diversification requires an investor to hold at least 100 shares in her portfolio to begin to reduce risk significantly.E) A) and B)
F) None of the above

Question 11

An investor who buys stock in a company is placing a bet on the ___________of that company.

Accepted Answer

A)  future profitability
B)  longevity of the CEO
C)  stakeholders
D)  All of the above are correct.E) C) and D)
F) A) and B)

Question 12

Someone who is risk averse

Accepted Answer

A)  suffers a reduction in utility if their wealth declines by R100 that is smaller than the gain in utility they would obtain if their wealth increased by R100.
B)  suffers a reduction in utility if their wealth declines by R100 that is larger than the gain in utility they would obtain if their wealth increased by R100.
C)  will always buy insurance against all risks they face, regardless of the price of insurance.
D)  is irrational.E) B) and D)
F) C) and D)

Question 13

You have a bond that you can redeem for r₁0 000 one year from now.The interest rate is 10 per cent per year.How much is the bond worth today?

Accepted Answer

A)  R9 090.91
B)  R11 000.00
C)  R9 000.00
D)  R523.81E) All of the above
F) None of the above

Question 14

What factors does a company's profitability depend on and whose job is it to take these factors into account?

Accepted Answer

A company's profitability depends on a l...

Question 15

Idiosyncratic risk is the

Accepted Answer

A)  uncertainty associated with the entire economy.
B)  uncertainty associated with specific companies.
C)  risk associated with adverse selection.
D)  risk associated with moral hazard.E) None of the above
F) A) and D)

Question 16

You are going to receive a R100 000 inheritance in ten years.If the prevailing interest rate is 6 percent, the present value of your inheritance is R55 839.48.

Accepted Answer

A) True 
 B)False

Question 17

The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return

Accepted Answer

A)  agrees to accept all or part of the risk.
B)  agrees to accept none of the risk.
C)  does not agrees to accept any risk.
D)  pays out premiums.E) A) and D)
F) A) and C)

Question 18

What's the difference between idiosyncratic risk and aggregate risk? Will diversification eliminate one or both? Explain.

Accepted Answer

Aggregate risk refers to economy-wide ri...

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)  overvalued, so its price would rise.
B)  overvalued, so its price would fall.
C)  undervalued, so its price would rise.
D)  undervalued, so its price would fall.E) A) and B)
F) A) and C)

Exam 8: The Basic Tools of Finance

The insurance market demonstrates the problem of adverse selection when those that are sicker than average seek health insurance.

Correct AnswerverifiedShow Answer

You are going to receive a R100 000 inheritance in ten years.If the prevailing interest rate is 6 percent, the present value of your inheritance is R55 839.48.

Correct AnswerverifiedShow Answer

What factors does a company's profitability depend on and whose job is it to take these factors into account?

Correct AnswerverifiedA company's profitability depends on a l...View AnswerShow Answer

Idiosyncratic risk is the

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Calculate the future value of R800 one year from today if the interest rate is a) 3% b) 5% c) 7%.

Correct Answerverifieda) R824 b...View AnswerShow Answer

What's the difference between idiosyncratic risk and aggregate risk? Will diversification eliminate one or both? Explain.

Correct AnswerverifiedAggregate risk refers to economy-wide ri...View AnswerShow Answer

Which of the following statements is true?

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Compared to a portfolio composed entirely of shares, a portfolio that is 50 per cent government bonds and 50 per cent shares will have a

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

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You have three ways to use fundamental analysis in pick a stock portfolio: 1) do all the necessary research yourself, 2) seek out the advice of a financial analysts, or

Correct AnswerverifiedShow Answer

You have a choice among three options.Option 1: receive R900 immediately.Option 2: receive R1 200 one year from now.Option 3: receive R2 000 five years from now.The interest rate is 15% per year.Rank these three options from highest present value to lowest present value.

Correct AnswerverifiedShow Answer

You have a bond that you can redeem for r₁0 000 one year from now.The interest rate is 10 per cent per year.How much is the bond worth today?

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Someone who is risk averse

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An investor who buys stock in a company is placing a bet on the ___________of that company.

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Which of the following reduces risk in a portfolio the greatest?

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An increase in the prevailing interest rate

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Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct AnswerverifiedAn example of adverse selection is that ...View AnswerShow Answer

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Correct AnswerverifiedShow Answer

The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return

Correct AnswerverifiedShow Answer

Draw graphs showing the following three relationships. a.The relation between utility and wealth for a risk averse consumer. b.The relation between standard deviation and the number of stocks in a portfolio. c.The relation between return and risk.

Correct AnswerverifiedShow Answer

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A company's profitability depends on a l...
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a) R824
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Aggregate risk refers to economy-wide ri...
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An example of adverse selection is that ...
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