Question 1

An ordinary annuity is a _____ series of _____ cash.

Accepted Answer

An ordinary annuity is a finite series of constant cash flows, typically occurring at the end of each period.

Question 2

The winner of a state lottery usually receives a(n)

Accepted Answer

B

Question 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?

Accepted Answer

The present value of an ordinary annuity is calculated as follows:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present valuePMT is the annual paymentr is the discount raten is the number of yearsIn this case, PMT = $100, r = 8%, and n = 10. Plugging these values into the formula, we get:PV = $100 * [1 - (1 + 0.08)^-10] / 0.08PV = $100 * [1 - 0.4632] / 0.08PV = $100 * 0.5368 / 0.08PV = $671.00Therefore, the present value of the ordinary annuity is $671.

Question 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?

Accepted Answer

The present value of an annuity due is calculated as the sum of the present values of each individual payment. Using a discount rate of 8% per year, the present value of each payment is $100 / (1 + 0.08)^n, where n is the number of years from the payment to the present. For the first payment, n = 1, so the present value is $100 / (1 + 0.08)^1 = $92.59. For the second payment, n = 2, so the present value is $100 / (1 + 0.08)^2 = $85.73. Continuing in this way, we can calculate the present value of each payment and then sum them to get the present value of the annuity due. The present value of the annuity due is $725.

Question 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?

Accepted Answer

The answer of Using a discount rate of 8% per...

Question 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?

Accepted Answer

The present value of a growing perpetuity is calculated using the formula PV = C / (r - g), where C is the first payment, r is the discount rate, and g is the growth rate. Substituting the given values: PV = $500 / (0.07 - 0.03) = $500 / 0.04 = $12,500.

Question 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?

Accepted Answer

The value of a perpetuity with immediate payments is calculated as the payment divided by the discount rate, then adjusted for the immediate payment. The formula is: Value = Payment + (Payment / Discount Rate). Here, Value = $250 + ($250 / 0.10) = $2,750.

Question 8

The fact that most investors are risk averse means they will

Accepted Answer

Risk-averse investors are willing to take risks, but only if they expect to be compensated with adequate returns for the risks they are taking.

Question 9

Which of the following statements is true?

Accepted Answer

Risk aversion varies among individuals, meaning some people are more risk averse than others.

Question 10

Risk must involve

Accepted Answer

Risk involves the possibility of a loss, which is the fundamental aspect of risk.

Question 11

Overall variability of returns is called

Accepted Answer

Total risk refers to the overall variability of returns, encompassing both systematic and unsystematic risk.

Question 12

Risk is often measured as

Accepted Answer

Risk is typically measured by the dispersion of returns, which indicates the variability or volatility of returns around the expected value.

Question 13

Riskier securities have _____ returns.

Accepted Answer

Riskier securities are generally expected to offer higher returns to compensate investors for taking on additional risk.

Question 14

The market rewards investors for bearing _____risk.

Accepted Answer

Undiversifiable risk is the risk that cannot be eliminated through diversification. It is the risk that affects the entire market and cannot be avoided by investing in different assets.

Question 15

The diminishing marginal utility of money explains why

Accepted Answer

The diminishing marginal utility of money suggests that as people accumulate more wealth, the additional satisfaction gained from each additional unit of money decreases. This makes people risk-averse, leading them to avoid fair bets where the potential loss is as significant as the potential gain.

Question 16

The text described an example of the diminishing marginal utility of money with a statement made by a _____ player.

Accepted Answer

The text describes an example of the diminishing marginal utility of money with a statement made by a tennis player.

Question 17

Individual investment behavior is more a function of _____ than _____.

Accepted Answer

Individual investment behavior is more a function of utility, which reflects personal preferences and satisfaction, than expected return, which is just one factor in decision-making.

Question 18

The St. Petersburg paradox explains why

Accepted Answer

The St. Petersburg paradox illustrates why most people will not take a fair bet due to the diminishing marginal utility of wealth, which makes them risk-averse.

Question 19

In economic theory, if money is not saved, it is

Accepted Answer

If money is not saved, it is typically consumed, meaning it is spent on goods and services.

Question 20

Wearing a Rolex watch is an example of someone getting

Accepted Answer

Wearing a Rolex watch can provide psychic return (emotional or psychological satisfaction), utility (functional use of a watch), and satisfaction (pleasure or contentment from owning a luxury item).

Quiz 2: Valuation, Risk, Return, and Uncertainty

An ordinary annuity is a _ series of _ cash.