25. According to the efficient markets hypothesis, stocks follow a random walk s

Question

25. According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

a. true b. false

26. Which of the following statements is correct?

a. A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection. b. Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection. c. A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection. d. Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard.

27. In which of the following instances is the present value of the future payment the largest?

a. You will receive $2,400 in 15 years and the annual interest rate is 8 percent. b. You will receive $2,000 in 10 years and the annual interest rate is 10 percent. c. You will receive $1,000 in 5 years and the annual interest rate is 5 percent. d. You will receive $1,000 in 10 years and the annual interest rate is 3 percent.

28. Suppose the interest rate is 8 percent. Consider three payment options: 1. $200 today. 2. $220 one year from today. 3. $240 two years from today. Which of the following is correct?

a. Option 2 has the highest present value and Option 3 has the lowest. b. Option 1 has the highest present value and Option 2 has the lowest. c. Option 3 has the highest present value and Option 1 has the lowest. d. None of the above is correct.

29. Which of the following actions best illustrates adverse selection?

a. A person purchases homeowners insurance and then checks his smoke detector batteries less frequently. b. A person adds risky stock to his portfolio. c. A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10. d. A person who has narrowly avoided many accidents applies for automobile insurance.

Explanation / Answer

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

b. false

26. Which of the following statements is correct?

a. A high-risk person is more likely to apply for insurance than a low-risk person because a high-risk person would benefit more from insurance protection.

b. Insurance companies can fully guard against the problem of moral hazard, but they cannot fully guard against the problem of adverse selection.

c. A low-risk person is more likely to apply for insurance than a high-risk person because a low-risk person would benefit more from insurance protection.

d. Insurance companies can fully guard against the problem of adverse selection, but they cannot fully guard against the problem of moral hazard.

. In which of the following instances is the present value of the future payment the largest?

a. You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

b. You will receive $2,000 in 10 years and the annual interest rate is 10 percent.

c. You will receive $1,000 in 5 years and the annual interest rate is 5 percent.

d. You will receive $1,000 in 10 years and the annual interest rate is 3 percent.

29. Which of the following actions best illustrates adverse selection?

a. A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

b. A person adds risky stock to his portfolio.

c. A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.

d. A person who has narrowly avoided many accidents applies for automobile insurance

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