1- When an externality exists,

a- some of the benefits or costs of an action are enjoyed or suffered by people who did not

consent to that action.

b- all of the benefits or costs of an action are enjoyed or suffered by people who agreed to

that action.

c- the market for the good generating the externality will be less competitive.

d- a good is joint in consumption, and nonexcludable.

2- Unlike a debit card, a credit card permits you to

a

. earn interest on your outstanding balance.

b

. spend and pay now.

c

. spend now and pay later.

d

. pay now and spend later.

3- The volatility of investing in the stock market can be reduced by

a

. buying and selling stocks frequently.

b

. investing in the stocks of a few companies.

c

. investing in a diverse portfolio of stocks.

d

. investing in high-risk stocks in hopes of large profits.

4- Which strategy is most likely to reduce the volatility of returns from stock ownership?

a

. investing in a few companies that have performed well historically

b

.

buying more shares of your stocks that have risen in price during the last 12

months, while selling those that have fallen

c

.

selling more shares of your stocks that have risen in price during the last 12

months, while buying those that have fallen

d

. regular investing into a diverse portfolio of stocks over a lengthy period of time

5- What are the odds that a person can select a managed fund that will do better than the market

average over the long run (e.g. a 20-year time period)?

a

. The odds are very low, about one in fifty.

b

.

There is about a fifty-fifty chance of selecting a managed fund that will outperform the

market average.

c

.

With enough research, the odds are high, about 85 percent of selecting a managed fund

that will outperform the market average.

d

. Managed funds will almost always do better than the market average over the long run.

6- What is the lesson to be learned from comparing the performance of managed funds

with indexed equity funds?

a

. Only experts can hope to be highly successful investors in the stock market.

b

.

An ordinary investor is unlikely to earn an attractive rate of return in the stock

market.

c

.

An ordinary investor can earn an attractive rate of return in the stock market, but

only if they are willing to put substantial time and effort into research.

d

.

Indexed equity funds make it possible for the ordinary investor to earn an

attractive rate of return in the stock market.

7- If it is widely recognized that a company is on the verge of a technological breakthrough that

will increase future profits, the random walk theory indicates that

a

.

an investor will gain if they purchase the stock before the higher future profits are actually

realized.

b

. the likelihood that the new technology is actually profitable is random.

c

. the current price of the stock will already reflect the higher expected future profits.

d

the future price of the stock will be unaffected by the company's profitability.