Chapter Two Test Bank
Chapter Two
Valuation, Risk, Return, and Uncertainty
A 1. An ordinary annuity is a _____ series of _____ cash.
a. finite, constant
b. finite, growing
c. infinite, constant
d. infinite, growing
B 2. The winner of a state lottery usually receives a(n)
a. ordinary annuity
b. annuity due
c. growing annuity
d. perpetuity
B 3. Using a discount rate of 8% per year, what is the present value of an ordinary
annuity of $100 per year for 10 years?
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 of $100 per year with 10 payments?
a. $725
b. $559
c. $793
d. $772
D 5. Using a discount rate of 8% per year (compounded quarterly), what is the
present value of an ordinary annuity of $100 per year for 10 years?
a. $726
b. $662
c. $811
d. $684
142
, Chapter Two Test Bank
C 6. A perpetual cash flow stream makes its first payment of $500 in one year.
Using a 7% annual discount rate and a 3% growth rate in the value of subsequent
payments, what is the present value of this growing perpetuity?
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% discount rate. What is the value of the perpetuity if the first payment is made
immediately?
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
a. only take risks for which they are properly rewarded
b. not take a risk
c. not voluntarily take a risk
d. not take a risk unless they know the outcome in advance
B 9. Which of the following statements is true?
a. Some people are risk averse and others are not
b. Some people are more risk averse than others
c. Risk averse people will not take a risk
d. Risk averse people are willing to settle for less return than risk neutral
people
A 10. Risk must involve
a. a chance of loss
b. an unknown probability distribution
c. actual dollars
d. negative expected returns
C 11. Overall variability of returns is called
a. systematic risk
b. unsystematic risk
c. total risk
d. undiversifiable risk
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, Chapter Two Test Bank
B 12. Risk is often measured as
a. central tendency of returns
b. dispersion of returns
c. expected value of returns
d. possibility of negative returns
A 13. Riskier securities have _____ returns.
a. higher expected
b. lower realized
c. higher instantaneous
d. lower long-term
B 14. The market rewards investors for bearing _____risk.
a. diversifiable
b. undiversifiable
c. unsystematic
d. total
B 15. The diminishing marginal utility of money explains why
a. some stocks sell for more than others
b. most people will not take a fair bet
c. people view the stock market as risky
d. people tend to pay too much
C 16. The text described an example of the diminishing marginal utility of money
with a statement made by a _____ player.
a. hockey
b. football
c. tennis
d. basketball
C 17. Individual investment behavior is more a function of _____ than _____.
a. risk, expected return
b. expected return, utility
c. utility, expected return
d. expected return, risk
B 18. The St. Petersburg paradox explains why
a. some stocks sell for more than others
b. most people will not take a fair bet
c. people view the stock market as risky
d. people tend to pay too much
144
, Chapter Two Test Bank
A 19. In economic theory, if money is not saved, it is
a. consumed
b. invested
c. unrealized
d. deferred
D 20. Wearing a Rolex watch is an example of someone getting
a. psychic return
b. utility
c. satisfaction
d. all of the above
B 21. Two large classes of risk are
a. systematic and undiversifiable
b. price and convenience
c. realized and psychic
d. market and intermarket
C 22. Individual consumption decisions are a major factor in determining
a. credit ratings of corporations
b. dividend rates
c. market interest rates
d. levels of perceived risk
B 23. If a stock has a higher than average expected return, you would logically
expect it is
a. widely held by investors
b. riskier than average
c. in an industry with good prospects
d. a well-managed company
D 24. What is the present value of a growing perpetuity with an initial cash flow of
1000 (C0), a growth rate of 3% per year (g), and a required rate of return of 8%
(R)?
a. $7777.64
b. $12,500
c. $20,000
d. $20,600
145
Chapter Two
Valuation, Risk, Return, and Uncertainty
A 1. An ordinary annuity is a _____ series of _____ cash.
a. finite, constant
b. finite, growing
c. infinite, constant
d. infinite, growing
B 2. The winner of a state lottery usually receives a(n)
a. ordinary annuity
b. annuity due
c. growing annuity
d. perpetuity
B 3. Using a discount rate of 8% per year, what is the present value of an ordinary
annuity of $100 per year for 10 years?
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 of $100 per year with 10 payments?
a. $725
b. $559
c. $793
d. $772
D 5. Using a discount rate of 8% per year (compounded quarterly), what is the
present value of an ordinary annuity of $100 per year for 10 years?
a. $726
b. $662
c. $811
d. $684
142
, Chapter Two Test Bank
C 6. A perpetual cash flow stream makes its first payment of $500 in one year.
Using a 7% annual discount rate and a 3% growth rate in the value of subsequent
payments, what is the present value of this growing perpetuity?
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% discount rate. What is the value of the perpetuity if the first payment is made
immediately?
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
a. only take risks for which they are properly rewarded
b. not take a risk
c. not voluntarily take a risk
d. not take a risk unless they know the outcome in advance
B 9. Which of the following statements is true?
a. Some people are risk averse and others are not
b. Some people are more risk averse than others
c. Risk averse people will not take a risk
d. Risk averse people are willing to settle for less return than risk neutral
people
A 10. Risk must involve
a. a chance of loss
b. an unknown probability distribution
c. actual dollars
d. negative expected returns
C 11. Overall variability of returns is called
a. systematic risk
b. unsystematic risk
c. total risk
d. undiversifiable risk
143
, Chapter Two Test Bank
B 12. Risk is often measured as
a. central tendency of returns
b. dispersion of returns
c. expected value of returns
d. possibility of negative returns
A 13. Riskier securities have _____ returns.
a. higher expected
b. lower realized
c. higher instantaneous
d. lower long-term
B 14. The market rewards investors for bearing _____risk.
a. diversifiable
b. undiversifiable
c. unsystematic
d. total
B 15. The diminishing marginal utility of money explains why
a. some stocks sell for more than others
b. most people will not take a fair bet
c. people view the stock market as risky
d. people tend to pay too much
C 16. The text described an example of the diminishing marginal utility of money
with a statement made by a _____ player.
a. hockey
b. football
c. tennis
d. basketball
C 17. Individual investment behavior is more a function of _____ than _____.
a. risk, expected return
b. expected return, utility
c. utility, expected return
d. expected return, risk
B 18. The St. Petersburg paradox explains why
a. some stocks sell for more than others
b. most people will not take a fair bet
c. people view the stock market as risky
d. people tend to pay too much
144
, Chapter Two Test Bank
A 19. In economic theory, if money is not saved, it is
a. consumed
b. invested
c. unrealized
d. deferred
D 20. Wearing a Rolex watch is an example of someone getting
a. psychic return
b. utility
c. satisfaction
d. all of the above
B 21. Two large classes of risk are
a. systematic and undiversifiable
b. price and convenience
c. realized and psychic
d. market and intermarket
C 22. Individual consumption decisions are a major factor in determining
a. credit ratings of corporations
b. dividend rates
c. market interest rates
d. levels of perceived risk
B 23. If a stock has a higher than average expected return, you would logically
expect it is
a. widely held by investors
b. riskier than average
c. in an industry with good prospects
d. a well-managed company
D 24. What is the present value of a growing perpetuity with an initial cash flow of
1000 (C0), a growth rate of 3% per year (g), and a required rate of return of 8%
(R)?
a. $7777.64
b. $12,500
c. $20,000
d. $20,600
145
