ChapterhTwohTesthBank
Chapter Two h
Valuation, Risk, Return, and Uncertainty h h h h
A 1. An ordinary annuity is a
h h h h h h series of h h cash.
a. finite, constant h
b. finite, growing h
c. infinite, constant h
d. infinite, growing h
B 2. The winner of a state lottery usually receives a(n)
h h h h h h h h h
a. ordinary annuity h
b. annuity due h
c. growing annuity h
d. perpetuity
B 3. Using a discount rate of 8% per year, what is the present value of an ordinary ann
h h h h h h h h h h h h h h h h h
uity of $100 per year for 10 years?
h h h h h h h
a. $1,000
b. $671
c. $887
d. $557
A 4. Using a discount rate of 8% per year, what is the present value of an annuity due
h h h h h h h h h h h h h h h h h
of $100 per year with 10 payments?
h h h h h h h
a. $725
b. $559
c. $793
d. $772
D 5.
Using a discount rate of 8% per year (compounded quarterly), what is the p
h h h h h h h h h h h h h
resent value of an ordinary annuity of $100 per year for 10 years?
h h h h h h h h h h h h
a. $726
b. $662
c. $811
d. $684
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C 6. A perpetual cash flow stream makes its first payment of $500 in one year. Using
h h h h h h h h h h h h h h h h
a 7% annual discount rate and a 3% growth rate in the value of subsequent payments
h h h h h h h h h h h h h h h
, what is the present value of this growing perpetuity?
h h h h h h h h h
a. $2,000
b. $20,000
c. $12,500
d. $125,000
B 7. A perpetuity makes annual payments of $250. The perpetuity is valued using a 10
h h h h h h h h h h h h h h
% discount rate. What is the value of the perpetuity if the first payment is made imm
h h h h h h h h h h h h h h h h
ediately?
a. $2,500
b. $2,750
c. $25,000
d. $2,525
A 8. The fact that most investors are risk averse means they will
h h h h h h h h h h h
a. only take risks for which they are properly rewarded h h h h h h h h
b. not take a risk h h h
c. not voluntarily take a risk h h h h
d. not take a risk unless they know the outcome in advance
h h h h h h h h h h
B 9. Which of the following statements is true?
h h h h h h h
a. Some people are risk averse and others are not h h h h h h h h
b. Some people are more risk averse than others h h h h h h h
c. Risk averse people will not take a risk h h h h h h h
d. Risk averse people are willing to settle for less return than risk neutral pe
h h h h h h h h h h h h h
ople
A 10. Risk must involve
h h h
a. a chance of loss h h h
b. an unknown probability distribution h h h
c. actual dollars h
d. negative expected returns h h
C 11. Overall variability of returns is called
h h h h h h
a. systematic risk h
b. unsystematic risk h
c. total risk h
d. undiversifiable risk h
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B 12. Risk is often measured as
h h h h h
a. central tendency of returns h h h
b. dispersion of returns h h
c. expected value of returns h h h
d. possibility of negative returns h h h
A 13. Riskier securities have
h h h h returns.
a. higher expected h
b. lower realized h
c. higher instantaneous h
d. lower long-term h
B 14. The market rewards investors for bearing
h h h h h h h risk.
a. diversifiable
b. undiversifiable
c. unsystematic
d. total
B 15. The diminishing marginal utility of money explains why
h h h h h h h h
a. some stocks sell for more than others
h h h h h h
b. most people will not take a fair bet
h h h h h h h
c. people view the stock market as risky
h h h h h h
d. people tend to pay too much h h h h h
C 16. The text described an example of the diminishing marginal utility of money wit
h h h h h h h h h h h h h
h a statement made by a
h h h player. h h h
a. hockey
b. football
c. tennis
d. basketball
C 17. Individual investment behavior is more a function of
h h h h h h h h h than h .
a. risk, expected return
h h
b. expected return, utility h h
c. utility, expected return h h
d. expected return, risk h h
B 18. The St. Petersburg paradox explains why
h h h h h h
a. some stocks sell for more than others
h h h h h h
b. most people will not take a fair bet
h h h h h h h
c. people view the stock market as risky
h h h h h h
d. people tend to pay too much h h h h h
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A 19. In economic theory, if money is not saved, it is
h h h h h h h h h h
a. consumed
b. invested
c. unrealized
d. deferred
D 20. Wearing a Rolex watch is an example of someone getting
h h h h h h h h h h
a. psychic return h
b. utility
c. satisfaction
d. all of the above h h h
B 21. Two large classes of risk are
h h h h h h
a. systematic and undiversifiable h h
b. price and convenience h h
c. realized and psychic h h
d. market and intermarket h h
C 22. Individual consumption decisions are a major factor in determining
h h h h h h h h h
a. credit ratings of corporations h h h
b. dividend rates h
c. market interest rates h h
d. levels of perceived risk h h h
B
23. If a stock has a higher than average expected return, you would logicall
h h h h h h h h h h h h h
y expect it is
h h h
a. widely held by investors h h h
b. riskier than average h h
c. in an industry with good prospects
h h h h h
d. a well-managed companyh h
D 24. What is the present value of a growing perpetuity with an initial cash flow of 1
h h h h h h h h h h h h h h h h
000 (C0), a growth rate of 3% per year (g), and a required rate of return
h h h h h h h h h h h h h h h
of 8% (R)?
h h h
a. $7777.64
b. $12,500
c. $20,000
d. $20,600
145
Chapter Two h
Valuation, Risk, Return, and Uncertainty h h h h
A 1. An ordinary annuity is a
h h h h h h series of h h cash.
a. finite, constant h
b. finite, growing h
c. infinite, constant h
d. infinite, growing h
B 2. The winner of a state lottery usually receives a(n)
h h h h h h h h h
a. ordinary annuity h
b. annuity due h
c. growing annuity h
d. perpetuity
B 3. Using a discount rate of 8% per year, what is the present value of an ordinary ann
h h h h h h h h h h h h h h h h h
uity of $100 per year for 10 years?
h h h h h h h
a. $1,000
b. $671
c. $887
d. $557
A 4. Using a discount rate of 8% per year, what is the present value of an annuity due
h h h h h h h h h h h h h h h h h
of $100 per year with 10 payments?
h h h h h h h
a. $725
b. $559
c. $793
d. $772
D 5.
Using a discount rate of 8% per year (compounded quarterly), what is the p
h h h h h h h h h h h h h
resent value of an ordinary annuity of $100 per year for 10 years?
h h h h h h h h h h h h
a. $726
b. $662
c. $811
d. $684
142
, ChapterhTwohTesthBank
C 6. A perpetual cash flow stream makes its first payment of $500 in one year. Using
h h h h h h h h h h h h h h h h
a 7% annual discount rate and a 3% growth rate in the value of subsequent payments
h h h h h h h h h h h h h h h
, what is the present value of this growing perpetuity?
h h h h h h h h h
a. $2,000
b. $20,000
c. $12,500
d. $125,000
B 7. A perpetuity makes annual payments of $250. The perpetuity is valued using a 10
h h h h h h h h h h h h h h
% discount rate. What is the value of the perpetuity if the first payment is made imm
h h h h h h h h h h h h h h h h
ediately?
a. $2,500
b. $2,750
c. $25,000
d. $2,525
A 8. The fact that most investors are risk averse means they will
h h h h h h h h h h h
a. only take risks for which they are properly rewarded h h h h h h h h
b. not take a risk h h h
c. not voluntarily take a risk h h h h
d. not take a risk unless they know the outcome in advance
h h h h h h h h h h
B 9. Which of the following statements is true?
h h h h h h h
a. Some people are risk averse and others are not h h h h h h h h
b. Some people are more risk averse than others h h h h h h h
c. Risk averse people will not take a risk h h h h h h h
d. Risk averse people are willing to settle for less return than risk neutral pe
h h h h h h h h h h h h h
ople
A 10. Risk must involve
h h h
a. a chance of loss h h h
b. an unknown probability distribution h h h
c. actual dollars h
d. negative expected returns h h
C 11. Overall variability of returns is called
h h h h h h
a. systematic risk h
b. unsystematic risk h
c. total risk h
d. undiversifiable risk h
143
, ChapterhTwohTesthBank
B 12. Risk is often measured as
h h h h h
a. central tendency of returns h h h
b. dispersion of returns h h
c. expected value of returns h h h
d. possibility of negative returns h h h
A 13. Riskier securities have
h h h h returns.
a. higher expected h
b. lower realized h
c. higher instantaneous h
d. lower long-term h
B 14. The market rewards investors for bearing
h h h h h h h risk.
a. diversifiable
b. undiversifiable
c. unsystematic
d. total
B 15. The diminishing marginal utility of money explains why
h h h h h h h h
a. some stocks sell for more than others
h h h h h h
b. most people will not take a fair bet
h h h h h h h
c. people view the stock market as risky
h h h h h h
d. people tend to pay too much h h h h h
C 16. The text described an example of the diminishing marginal utility of money wit
h h h h h h h h h h h h h
h a statement made by a
h h h player. h h h
a. hockey
b. football
c. tennis
d. basketball
C 17. Individual investment behavior is more a function of
h h h h h h h h h than h .
a. risk, expected return
h h
b. expected return, utility h h
c. utility, expected return h h
d. expected return, risk h h
B 18. The St. Petersburg paradox explains why
h h h h h h
a. some stocks sell for more than others
h h h h h h
b. most people will not take a fair bet
h h h h h h h
c. people view the stock market as risky
h h h h h h
d. people tend to pay too much h h h h h
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A 19. In economic theory, if money is not saved, it is
h h h h h h h h h h
a. consumed
b. invested
c. unrealized
d. deferred
D 20. Wearing a Rolex watch is an example of someone getting
h h h h h h h h h h
a. psychic return h
b. utility
c. satisfaction
d. all of the above h h h
B 21. Two large classes of risk are
h h h h h h
a. systematic and undiversifiable h h
b. price and convenience h h
c. realized and psychic h h
d. market and intermarket h h
C 22. Individual consumption decisions are a major factor in determining
h h h h h h h h h
a. credit ratings of corporations h h h
b. dividend rates h
c. market interest rates h h
d. levels of perceived risk h h h
B
23. If a stock has a higher than average expected return, you would logicall
h h h h h h h h h h h h h
y expect it is
h h h
a. widely held by investors h h h
b. riskier than average h h
c. in an industry with good prospects
h h h h h
d. a well-managed companyh h
D 24. What is the present value of a growing perpetuity with an initial cash flow of 1
h h h h h h h h h h h h h h h h
000 (C0), a growth rate of 3% per year (g), and a required rate of return
h h h h h h h h h h h h h h h
of 8% (R)?
h h h
a. $7777.64
b. $12,500
c. $20,000
d. $20,600
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