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Multiple Choice
1. A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits
exceed the ____.
a. marginal returns
b. total costs
c. marginal costs
d. average costs
e. average benefits
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
Marginal Analysis
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
2. The level of an economic activity should be increased to the point where the ____ is zero.
a. marginal cost
b. average cost
c. net marginal cost
d. net marginal benefit
e. none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
Marginal Analysis
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 1
3. The net present value of an investment represents
a. an index of the desirability of the investment
b. the expected contribution of that investment to the goal of shareholder wealth maximization
c. the rate of return expected from the investment
d. a and b only
e. a and c only
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
The Net Present Value Concept
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 9:08 AM
4. Generally, investors expect that projects with high expected net present values also will be projects with
a. low risk
b. high risk
c. certain cash flows
d. short lives
e. none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
The Net Present Value Concept
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 2
5. An closest example of a risk-free security is
a. General Motors bonds
b. AT&T commercial paper
c. U.S. Government Treasury bills
d. San Francisco municipal bonds
e. an I.O.U. that your cousin promises to pay you $100 in 3 months
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
Meaning and Measurement of Risk
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
6. The standard deviation is appropriate to compare the risk between two investments only if
a. the expected returns from the investments are approximately equal
b. the investments have similar life spans
c. objective estimates of each possible outcome is available
d. the coefficient of variation is equal to 1.0
e. none of the above
ANSWER:
a
POINTS:
1
DIFFICULTY:
Mdoerate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Meaning and Measurement of Risk
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 3
7. The approximate probability of a value occurring that is greater than one standard deviation from the mean is
approximately (assuming a normal distribution)
a. 68.26%
b. 2.28%
c. 34%
d. 15.87%
e. none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Challenging
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
Meaning and Measurement of Risk
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
8. Based on risk-return tradeoffs observable in the financial marketplace, which of the following securities would you
expect to offer higher expected returns than corporate bonds?
a. U.S. Government bonds
b. municipal bonds
c. common stock
d. commercial paper
e. none of the above
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
Risk and Required Return
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 4
9. The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
a. the coefficient of variation is easier to compute
b. the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute
risk
c. the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute
risk
d. the standard deviation is rarely used in practice whereas the coefficient of variation is widely used
e. c and d
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Meaning and Measurement of Risk
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
7/23/2016 3:00 PM
10. The ____ is the ratio of ____ to the ____.
a. standard deviation; covariance; expected value
b. coefficient of variation; expected value; standard deviation
c. correlation coefficient; standard deviation; expected value
d. coefficient of variation; standard deviation; expected value
e. none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Meaning and Measurement of Risk
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 5
11. Sources of positive net present value projects include
a. buyer preferences for established brand names
b. economies of large-scale production and distribution
c. patent control of superior product designs or production techniques
d. a and b only
e. a, b, and c
ANSWER:
e
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
The Net Present Value Concept
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
7/23/2016 3:01 PM
12. Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my
required interest rate is 10%.
a. True
b. False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
Risk and Required Return
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
7/23/2016 3:39 PM
Copyright Cengage Learning. Powered by Cognero.
Page 6
13. The number of standard deviations z that a particular value of r is from the mean ? can be computed as z = (r – ?)/
ฯ. Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your
standard deviation of weekly earnings is $500. What is the probability that you earn zero in a week? Use the following
brief z-table to help with this problem.
Z value Probability
-3 .0013
-2 .0228
-1 .1587
0 .5000
a. 1.3% chance of earning nothing in a week
b. 2.28% chance of earning nothing in a week
c. 15.87% chance of earning nothing in a week
d. 50% chance of earning nothing in a week
e. none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Challenging
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Risk and Required Return
KEYWORDS:
BLOOMโS: Analysis
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
7/23/2016 1:31 PM
14. Consider an investment with the following payoffs and probabilities:
State of the Economy Probability Return
Stability .50 1,000
Good Growth .50 2,000
Determine the expected return for this investment.
a. 1,300
b. 1,500
c. 1,700
d. 2,000
e. 3,000
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Marginal Analysis
KEYWORDS:
BLOOMโS: Analysis
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
7/23/2016 3:04 PM
Copyright Cengage Learning. Powered by Cognero.
Page 7
15. Consider an investment with the following payoffs and probabilities:
State of the Economy Probability Return
GDP grows slowly .70 1,000
GDP grow fast .30 2,000
Let the expected value in this example be 1,300. How do we find the standard deviation of the investment?
a. ฯ = โ { (1000-1300)2 + (2000-1300)2 }
b. ฯ = โ { (1000-1300) + (2000-1300) }
c. ฯ = โ { (.5)(1000-1300)2 + (.5)(2000-1300)2 }
d. ฯ = โ { (.7)(1000-1300) + (.3)(2000-1300) }
e. ฯ = โ { (.7)(1000-1300)2 + (.3)(2000-1300)2 }
ANSWER:
e
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Risk and Required Return
KEYWORDS:
BLOOMโS: Analysis
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 8
16. An investment advisor plans a portfolio your 85 year old risk-averse grandmother. Her portfolio currently consists of
60% bonds and 40% blue chip stocks. This portfolio is estimated to have an expected return of 6% and with a standard
deviation 12%. What is the probability that she makes less than 0% in a year? [A portion of Appendix B1 is given below,
where z = (x – ฮผ)/ฯ , with ฮผ as the mean and ฯ as the standard deviation.]
a. 2.28%
b. 6.68%
c. 15.87%
d. 30.85%
e. 50%
Table B1 for Z
Z
Prob.
-3 .0013
-2.5 .0062
-2. .0228
-1.5 .0668
-1 .1587
-.5 ..3085
0 .5000
ANSWER:
d
POINTS:
1
DIFFICULTY:
Challenging
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPRPOG: Analysis
TOPICS:
Risk and Required Return
KEYWORDS:
BLOOMโS: Analysis
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
7/23/2016 3:05 PM
Copyright Cengage Learning. Powered by Cognero.
Page 9
17. Two investments have the following expected returns (net present values) and standard deviations:
PROJECT Expected Value Standard Deviation
Q $100,000 $20,000
X $50,000 $16,000
Based on the Coefficient of Variation, where the C.V. is the standard deviation dividend by the expected value.
a. All coefficients of variation are always the same.
b. Project Q is riskier than Project X
c. Project X is riskier than Project Q
d. Both projects have the same relative risk profile
e. There is not enough information to find the coefficient of variation.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Challenging
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Marginal Analysis
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
18. Regarding demand and supply, which of the following statements is NOT correct?
a. Demand and supply simultaneously determine equilibrium market price
b. Demand expresses intentions, but supply does not
c. Demand is a potential concept distinguished from the transactional even of “units sold”
d. Supply is more like scenario planning for operations than for actual production
e. all of the above statements are correct
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Reflective Thinking – BPROG: Analysis
TOPICS:
Demand and Supply: A Review
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
7/22/2016 1:35 PM
DATE MODIFIED:
7/23/2016 1:49 PM
Copyright Cengage Learning. Powered by Cognero.
Page 10
19. The marginal decision rule will be replaced with the net present value rule when:
a. costs and benefits occur at approximately the same time
b. costs are incurred immediately
c. benefits are incurred immediately
d. the marginal decision rule is never replaced
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPROG: Analytic
TOPICS:
The Net Present Value Concept
KEYWORDS:
BLOOMโS: Comprehension
DATE CREATED:
7/22/2016 1:35 PM
DATE MODIFIED:
7/23/2016 2:12 PM
Essay
Copyright Cengage Learning. Powered by Cognero.
Page 11
20. Suppose that the firm’s cost function is given in the following schedule (where Q is the level of output):
Output
Q (units)
0
1
2
3
4
5
6
7
8
9
10
Total
Cost
7
25
37
45
50
53
58
66
78
96
124
Determine the (a) marginal cost and (b) average total cost schedules
ANSWER:
Output
Total
Cost
Q
0
1
2
3
4
5
6
7
8
9
10
7
25
37
45
50
53
58
66
78
96
124
(a)
Marginal
Cost
ฮ(TC)
ฮQ
(b)
Average Total
Cost
TC
Q
-18
12
8
5
3
5
8
12
18
28
-25.00
18.50
15.00
12.50
10.60
9.67
9.43
9.75
10.67
12.40
POINTS:
1
DIFFICULTY:
Challenging
QUESTION TYPE:
Essay
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPRPOG: Analysis
TOPICS:
Marginal Analysis
KEYWORDS:
BLOOMโS: Analysis
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 12
21. Complete the following table.
Output
0
1
2
3
4
5
6
7
8
9
10
ANSWER:
Total
Profit
Marginal
Profit
Average
Profit
โ48
โ26
โ8
6
16
22
24
22
16
6
โ8
0
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Output
Total
Profit
Marginal
Profit
Average
Profit
0
1
2
3
4
5
6
7
8
9
10
โ48
โ26
โ8
6
16
22
24
22
16
6
โ8
0
22
18
14
10
6
2
โ2
โ6
โ10
โ14
–โ26.
โ4.
2.
4.
4.40
4.
3.14
2.
0.67
โ0.80
POINTS:
1
DIFFICULTY:
Challenging
QUESTION TYPE:
Essay
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPRPOG: Analysis
TOPICS:
Marginal Analysis
KEYWORDS:
BLOOMโS: Analysis
DATE CREATED:
6/21/2016 8:42 AM
DATE MODIFIED:
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 13
22. A firm has decided to invest in a piece of land. Management has estimated that the land can be sold in 5 years for the
following possible prices:
Price
Probability
10,000
15,000
20,000
25,000
.20
.30
.40
.10
(a)
Determine the expected selling price for the land.
(b) Determine the standard deviation of the possible sales prices.
(c)
Determine the coefficient of variation.
ANSWER:
(a)
(b)
(c)
POINTS:
1
DIFFICULTY:
Challenging
QUESTION TYPE:
Essay
HAS VARIABLES:
False
NATIONAL STANDARDS: United States – BPRPOG: Analysis
TOPICS:
KEYWORDS:
DATE CREATED:
DATE MODIFIED:
Risk and Required Return
BLOOMโS: Analysis
6/21/2016 8:42 AM
6/21/2016 8:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 14

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