Multiple Choice Questions
1. If the interest rate is zero, then $100 to be paid in 10 years has a present value that is
a. Less than $100.
b. Exactly $100.
c. More than $100.
d. Indeterminate.
2. If the interest rate is 10 percent, then the future value in 2 years of $100 today is
a. $80.
b. $83.
c. $120.
d. $121.
3. If the interest rate is 10 percent, then the present value of $100 to be paid in 2 years is
a. $80.
b. $83.
c. $120.
d. $121.
4. The ability of insurance to spread risk is limited by
a. Risk aversion and moral hazard.
b. Risk aversion and adverse selection.
c. Moral hazard and adverse selection.
d. Risk aversion only.
5. The benefit of diversification when constructing a portfolio is that it can eliminate
a. Speculative bubbles.
b. Risk aversion.
c. Firm-specific risk.
d. Market risk.
6. According to the efficient markets hypothesis,
a. Changes in stock prices are impossible to predict from public information.
b. Excessive diversification can reduce an investor's expected portfolio returns.
c. The stock market moves based on the changing animal spirits of investors.
d. Actively managed mutual funds should give higher returns than index funds.