Investments 11th Edition By Zvi Bodie -Test Bank

Investments 11th Edition By Zvi Bodie -Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 05 Test Bank

1. Over the past year you earned a nominal rate of interest of 10% on your money. The inflation rate was 5% over the same period. The exact actual growth rate of your purchasing power was
   A.15.5%.
   B. 10.0%.
   C. 5.0%.
   D. 4.8%.
   E. 15.0%.

r = (1 + R)/(1 + I) -1; 1.10%/1.05% – 1 = 4.8%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

2. Over the past year you earned a nominal rate of interest of 8% on your money. The inflation rate was 4% over the same period. The exact actual growth rate of your purchasing power was
   A.15.5%.
   B. 10.0%.
   C. 3.8%.
   D. 4.8%.
   E. 15.0%.

r = (1 + R)/(1 + I) – 1; 1.08%/1.04% – 1 = 3.8%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

3. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?
   A.5%
   B. 10%
   C. 7%
   D. 3%

9% – 4% = 5%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

4. A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year?
   A.1.5%
   B. 10%
   C. 7%
   D. 3%
   E. None of the options

5% – 3.5% = 1.5%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

5. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately
   A.1%.
   B. 9%.
   C. 20%.
   D. 15%.

5% + 4% = 9%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

6. If the annual real rate of interest is 2.5% and the expected inflation rate is 3.7%, the nominal rate of interest would be approximately
   A.3.7%.
   B. 6.2%.
   C. 2.5%.
   D. -1.2%.

2.5% + 3.7% = 6.2%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

7. You purchased a share of stock for $20. One year later you received $1 as a dividend and sold the share for $29. What was your holding-period return?
   A.45%
   B. 50%
   C. 5%
   D. 40%
   E. None of the options

($1 + $29 – $20)/$20 = 0.5000, or 50%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

8. You purchased a share of stock for $68. One year later you received $3.00 as a dividend and sold the share for $74.50. What was your holding-period return?
   A.12.5%
   B. 14.0%
   C. 13.6%
   D. 11.8%

($3.00 + $74.50 – $68.00)/$68.00 = 0.1397, or 14.0%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

9. Which of the following determine(s) the level of real interest rates?

   I) The supply of savings by households and business firms
   II) The demand for investment funds
   III) The government’s net supply and/or demand for funds
   A.I only
   B. II only
   C. I and II only
   D. I, II, and III

The value of savings by households is the major supply of funds; the demand for investment funds is a portion of the total demand for funds; the government’s position can be one of either net supplier or net demander of funds. The above factors constitute the total supply and demand for funds, which determine real interest rates.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

10. Which of the following statement(s) is(are) true?

    I) The real rate of interest is determined by the supply and demand for funds.
    II) The real rate of interest is determined by the expected rate of inflation.
    III) The real rate of interest can be affected by actions of the Fed.
    IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.
    A.I and II only.
    B. I and III only.
    C. III and IV only.
    D. II and III only.
    E. I, II, III, and IV only.

The expected rate of inflation is a determinant of nominal, not real, interest rates. Real rates are determined by the supply and demand for funds, which can be affected by the Fed.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

11. Which of the following statement(s) is(are) true?
    A. Inflation has no effect on the nominal rate of interest.
    B. The realized nominal rate of interest is always greater than the real rate of interest.
    C. Certificates of deposit offer a guaranteed real rate of interest.
    D. None of the options is true.

Expected inflation rates are a determinant of nominal interest rates. The realized nominal rate of interest would be negative if the difference between actual and anticipated inflation rates exceeded the real rate. The realized nominal rate of interest would be less than the real rate if the unexpected inflation were greater than the real rate of interest. Certificates of deposit contain a real rate based on an estimate of inflation that is not guaranteed.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

12. Other things equal, an increase in the government budget deficit
    A.drives the interest rate down.
    B. drives the interest rate up.
    C. might not have any effect on interest rates.
    D. increases business prospects.

An increase in the government budget deficit, other things equal, causes the government to increase its borrowing, which increases the demand for funds and drives interest rates up.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Nominal interest rate factors
 

13. Ceteris paribus, a decrease in the demand for loanable funds
    A.drives the interest rate down.
    B. drives the interest rate up.
    C. might not have any effect on interest rates.
    D. results from an increase in business prospects and a decrease in the level of savings.

A decrease in demand, ceteris paribus, always drives interest rates down. An increase in business prospects would increase the demand for funds. The savings level affects the supply of, not the demand for, funds.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Nominal interest rate factors
 

14. The holding-period return (HPR) on a share of stock is equal to
    A.the capital gain yield during the period, plus the inflation rate.
    B. the capital gain yield during the period, plus the dividend yield.
    C. the current yield, plus the dividend yield.
    D. the dividend yield, plus the risk premium.
    E. the change in stock price.

The HPR of any investment is the sum of the capital gain and the cash flow over the period, which for common stock is B.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Rate of return
 

15. Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2012 show that
    A.stocks offered investors greater rates of return than bonds and bills.
    B. stock returns were less volatile than those of bonds and bills.
    C. bonds offered investors greater rates of return than stocks and bills.
    D. bills outperformed stocks and bonds.
    E. Treasury bills always offered a rate of return greater than inflation.

The historical data show that, as expected, stocks offer a greater return and greater volatility than the other investment alternatives. Inflation sometimes exceeded the T-bill return.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Historical market performance
 

16. If the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation,
    A.borrowers gain and savers lose.
    B. savers gain and borrowers lose.
    C. both borrowers and savers lose.
    D. neither borrowers nor savers gain nor lose.
    E. both borrowers and savers gain.

If the described interest rate accurately reflects the rate of inflation, both borrowers and lenders are paying and receiving, respectively, the real rate of interest; thus, neither group gains.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

17. You have been given this probability distribution for the holding-period return for KMP stock:

    What is the expected holding-period return for KMP stock?
    A. 10.40%
    B. 9.32%
    C. 11.63%
    D. 11.54%
    E. 10.88%

HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

18. You have been given this probability distribution for the holding-period return for KMP stock:

    What is the expected standard deviation for KMP stock?
    A. 6.91%
    B. 8.13%
    C. 7.79%
    D. 7.25%
    E. 8.85%

s = [.30 (18 – 10.4)² + .50 (12 – 10.4)² + .20 (-5 – 10.4)²]^1/2 = 8.13%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 3 Challenge
Topic: Standard deviation and variance
 

19. You have been given this probability distribution for the holding-period return for KMP stock:

    What is the expected variance for KMP stock?
    A. 66.04%
    B. 69.96%
    C. 77.04%
    D. 63.72%
    E. 78.45%

Variance = [.30 (18 – 10.4)² + .50 (12 – 10.4)² + .20 (-5 – 10.4)²] = 66.04%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 3 Challenge
Topic: Standard deviation and variance
 

20. If the nominal return is constant, the after-tax real rate of return
    A.declines as the inflation rate increases.
    B. increases as the inflation rate increases.
    C. declines as the inflation rate declines.
    D. increases as the inflation rate decreases.
    E. declines as the inflation rate increases and increases as the inflation rate decreases.

Inflation rates have an inverse effect on after-tax real rates of return.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

21. The risk premium for common stocks
    A.cannot be zero, for investors would be unwilling to invest in common stocks.
    B. must always be positive, in theory.
    C. is negative, as common stocks are risky.
    D. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.
    E. cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

If the risk premium for common stocks were zero or negative, investors would be unwilling to accept the lower returns for the increased risk.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Risk premiums
 

22. If a portfolio had a return of 18%, the risk-free asset return was 5%, and the standard deviation of the portfolio’s excess returns was 34%, the risk premium would be
    A.13%.
    B. 18%.
    C. 49%.
    D. 12%.
    E. 29%.

18 – 5 = 13%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Risk premiums
 

23. You purchase a share of Boeing stock for $90. One year later, after receiving a dividend of $3, you sell the stock for $92. What was your holding-period return?
    A.4.44%
    B. 2.22%
    C. 3.33%
    D. 5.56%
    E. None of the options

HPR = (92 – 90 + 3)/90 = 5.56%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

24. Toyota stock has the following probability distribution of expected prices one year from now:

    If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding-period return on Toyota?
    A. 17.72%
    B. 18.89%
    C. 17.91%
    D. 18.18%

E(P1) = .25 (54/55 – 1) + .40 (64/55 – 1) + .35 (74/55 – 1) = 18.18%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 3 Challenge
Topic: Rate of return
 

25. Which of the following factors would not be expected to affect the nominal interest rate?
    A.The supply of loanable funds
    B. The demand for loanable funds
    C. The coupon rate on previously issued government bonds
    D. The expected rate of inflation
    E. Government spending and borrowing

The nominal interest rate is affected by supply, demand, government actions, and inflation. Coupon rates on previously issued government bonds reflect historical interest rates but should not affect the current level of interest rates.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Topic: Nominal interest rate factors
 

26. If a portfolio had a return of 11%, the risk-free asset return was 6%, and the standard deviation of the portfolio’s excess returns was 25%, the risk premium would be
    A.14%.
    B. 6%.
    C. 35%.
    D. 21%.
    E. 5%.

11 – 6 = 5%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Risk premiums
 

27. In words, the real rate of interest is approximately equal to
    A.the nominal rate minus the inflation rate.
    B. the inflation rate minus the nominal rate.
    C. the nominal rate times the inflation rate.
    D. the inflation rate divided by the nominal rate.
    E. the nominal rate plus the inflation rate.

The actual relationship is (1 + real rate) = (1 + nominal rate)/(1 + inflation rate). This can be approximated by the equation: Real rate = nominal rate – inflation rate.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Topic: Nominal and real rates
 

28. If the Federal Reserve lowers the discount rate, ceteris paribus, the equilibrium levels of funds lent will __________ and the equilibrium level of real interest rates will ___________.
    A.increase; increase
    B. increase; decrease
    C. decrease; increase
    D. decrease; decrease
    E. reverse direction from their previous trends; reverse direction from their previous trends

A lower discount rate would encourage banks to make more loans, which would increase the money supply. The supply curve would shift to the right and the equilibrium level of funds would increase while the equilibrium interest rate would fall.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Nominal interest rate factors
 

29. What has been the relationship between T-Bill rates and inflation rates since the 1980s?
    A.The T-Bill rate was sometimes higher than and sometimes lower than the inflation rate.
    B. The T-Bill rate has equaled the inflation rate plus a constant percentage.
    C. The inflation rate has equaled the T-Bill rate plus a constant percentage.
    D. The T-Bill rate has been higher than the inflation rate almost the entire period.
    E. The T-Bill rate has been lower than the inflation rate almost the entire period.

The T-Bill rate was higher than the inflation rate for over two decades.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

30. “Bracket Creep” happens when
    A.tax liabilities are based on real income and there is a negative inflation rate.
    B. tax liabilities are based on real income and there is a positive inflation rate.
    C. tax liabilities are based on nominal income and there is a negative inflation rate.
    D. tax liabilities are based on nominal income and there is a positive inflation rate.
    E. too many peculiar people make their way into the highest tax bracket.

A positive inflation rate typically leads to higher nominal income. Higher nominal income means people will have higher tax liabilities and in some cases will put them in higher tax brackets. This can happen even when real income has declined.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Taxes and related issues
 

31. The holding-period return (HPR) for a stock is equal to
    A.the real yield minus the inflation rate.
    B. the nominal yield minus the real yield.
    C. the capital gains yield minus the tax rate.
    D. the capital gains yield minus the dividend yield.
    E. the dividend yield plus the capital gains yield.

HPR consists of an income component and a price change component. The income component on a stock is the dividend yield. The price change component is the capital gains yield.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Topic: Rate of return
 

32. You have been given this probability distribution for the holding-period return for Cheese, Inc. stock:

    Assuming that the expected return on Cheese’s stock is 14.35%, what is the standard deviation of these returns?
    A. 4.72%
    B. 6.30%
    C. 4.38%
    D. 5.74%
    E. None of the options

Variance = .20 ´ (24 – 14.35)² + .45 ´ (15 – 14.35)² + .35 ´ (8 – 14.35)² = 32.9275. Standard deviation = 32.9275^1/2 = 5.74.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Standard deviation and variance
 

33. An investor purchased a bond 45 days ago for $985. He received $15 in interest and sold the bond for $980. What is the holding-period return on his investment?
    A.1.02%
    B. 0.50%
    C. 1.92%
    D. 0.01%

HPR = ($15 + 980 – 985)/$985 = .010152284 = approximately 1.02%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Rate of return
 

34. An investor purchased a bond 63 days ago for $980. He received $17 in interest and sold the bond for $987. What is the holding-period return on his investment?
    A.1.52%
    B. 2.45%
    C. 1.92%
    D. 2.68%

HPR = ($17 + 987 – 980)/$980 = .0244898 = approximately 2.45%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Rate of return
 

35. Over the past year you earned a nominal rate of interest of 8% on your money. The inflation rate was 3.5% over the same period. The exact actual growth rate of your purchasing power was
    A.15.55%.
    B. 4.35%.
    C. 5.02%.
    D. 4.81%.
    E. 15.04%.

r = (1 + R)/(1 + I) – 1; 1.08/1.035 – 1 = 4.35%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

36. Over the past year you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was
    A.11.76%.
    B. 16.00%.
    C. 15.02%.
    D. 14.32%.

r = (1 + R)/(1 + I) – 1; 1.14/1.02 – 1 = 11.76%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

37. Over the past year you earned a nominal rate of interest of 12.5% on your money. The inflation rate was 2.6% over the same period. The exact actual growth rate of your purchasing power was
    A.9.15%.
    B. 9.90%.
    C. 9.65%.
    D. 10.52%.

r = (1 + R)/(1 + I) – 1; 1.125/1.026 – 1 = 9.65%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

38. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 6%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year?
    A.4%
    B. 2%
    C. 6%
    D. 3%

6% – 2% = 4%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

39. A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 3%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?
    A.1%
    B. -1%
    C. 7%
    D. 3%

3% – 4% = -1%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

40. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%. What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year?
    A.4.1%
    B. 2.5%
    C. 2.9%
    D. 1.6%

5.7% – 1.6% = 4.1%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

41. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 2.5%. What is your approximate annual real rate of return if the rate of inflation was 3.4% over the year?
    A.0.9%
    B. -0.9%
    C. 5.9%
    D. 3.4%

2.5% – 3.4% = -0.9%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

42. A year ago, you invested $12,000 in an investment that produced a return of 18%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year?
    A.18%
    B. 2%
    C. 16%
    D. 15%

18% – 2% = 16%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

43. If the annual real rate of interest is 3.5% and the expected inflation rate is 2.5%, the nominal rate of interest would be approximately
    A.3.5%.
    B. 2.5%.
    C. 1%.
    D. 6.8%.
    E. None of the options

3.5% + 2.5% = 6%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

44. If the annual real rate of interest is 2.5% and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately
    A.4.9%.
    B. 0.9%.
    C. -0.9%.
    D. 7%.
    E. None of the options

2.5% + 3.4% = 5.9%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

45. If the annual real rate of interest is 4% and the expected inflation rate is 3%, the nominal rate of interest would be approximately
    A.4%.
    B. 3%.
    C. 1%.
    D. 5%.
    E. None of the options

4% + 3% = 7%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

46. You purchased a share of stock for $12. One year later you received $0.25 as a dividend and sold the share for $12.92. What was your holding-period return?
    A.9.75%
    B. 10.65%
    C. 11.75%
    D. 11.25%
    E. None of the options

($0.25 + $12.92 – $12)/$12 = 0.0975, or 9.75%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

47. You purchased a share of stock for $120. One year later you received $1.82 as a dividend and sold the share for $136. What was your holding-period return?
    A.15.67%
    B. 22.12%
    C. 18.85%
    D. 13.24%
    E. None of the options

($1.82 + $136 – $120)/$120 = 0.1485, or 14.85%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

48. You purchased a share of stock for $65. One year later you received $2.37 as a dividend and sold the share for $63. What was your holding-period return?
    A.0.57%
    B. -0.2550%
    C. -0.89%
    D. 1.63%
    E. None of the options

($2.37 + $63 – $65)/$65 = 0.00569, or 0.57%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

49. You have been given this probability distribution for the holding-period return for a stock:

    What is the expected holding-period return for the stock?
    A. 11.67%
    B. 8.33%
    C. 9.56%
    D. 12.4%
    E. None of the options

HPR = .40 (22%) + .35 (11%) + .25 (-9%) = 10.4%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

50. You have been given this probability distribution for the holding-period return for a stock:

    What is the expected standard deviation for the stock?
    A. 2.07%
    B. 9.96%
    C. 7.04%
    D. 1.44%
    E. None of the options

s = [.40 (22 – 10.4)² + .35 (11 – 10.4)² + .25 (-9 – 10.4)²]^1/2 = 12.167%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 3 Challenge
Topic: Standard deviation and variance
 

51. You have been given this probability distribution for the holding-period return for a stock:

    What is the expected variance for the stock?
    A. 142.07%
    B. 189.96%
    C. 177.04%
    D. 128.17%
    E. None of the options

Variance = [.40 (22 – 10.4)² + .35 (11 – 10.4)² + .25 (-9 – 10.4)²] = 148.04%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 3 Challenge
Topic: Standard deviation and variance
 

52. Which of the following measures of risk best highlights the potential loss from extreme negative returns?
    A.Standard deviation
    B. Variance
    C. Upper partial standard deviation
    D. Value at risk (VaR)
    E. None of the options

Only VaR measures potential loss from extreme negative returns.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Topic: Value-at-risk
 

53. Over the past year you earned a nominal rate of interest of 3.6% on your money. The inflation rate was 3.1% over the same period. The exact actual growth rate of your purchasing power was
    A.3.6%.
    B. 3.1%.
    C. 0.48%.
    D. 6.7%.

r = (1 + R)/(1 + I) – 1; 1.036/1.031% – 1 = 0.484%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Nominal and real rates
 

54. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 4.3%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?
    A.4.3%
    B. -1.3%
    C. 7.3%
    D. 3%
    E. None of the options

4.3% – 3% = 1.3%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

55. If the annual real rate of interest is 3.5% and the expected inflation rate is 3.5%, the nominal rate of interest would be approximately
    A.0%.
    B. 3.5%.
    C. 12.25%.
    D. 7%.

3.5% + 3.5% = 7%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Basic
Topic: Nominal and real rates
 

56. You purchased a share of CSCO stock for $20. One year later you received $2 as a dividend and sold the share for $31. What was your holding-period return?
    A.45%
    B. 50%
    C. 60%
    D. 40%
    E. None of the options

($2 + $31 – $20)/$20 = 0.65, or 65%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

57. You have been given this probability distribution for the holding-period return for GM stock:

    What is the expected holding-period return for GM stock?
    A. 10.4%
    B. 11.4%
    C. 12.4%
    D. 13.4%
    E. 14.4%

HPR = .40 (30%) + .40 (11%) + .20 (-10%) = 14.4%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

58. You have been given this probability distribution for the holding-period return for GM stock:

    What is the expected standard deviation for GM stock?
    A. 16.91%
    B. 16.13%
    C. 13.79%
    D. 15.25%
    E. 14.87%

s = [.40 (30 – 14.4)² + .40 (11 – 14.4)² + .20 (-10 – 14.4)²]^1/2 = 14.87%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 3 Challenge
Topic: Standard deviation and variance
 

59. You have been given this probability distribution for the holding-period return for GM stock:

    What is the expected variance for GM stock?
    A. 200.00%
    B. 221.04%
    C. 246.37%
    D. 14.87%
    E. 16.13%

Variance = [.40 (30 – 14.4)² + .40 (11 – 14.4)² + .20 (-10 – 14.4)²] = 221.04%.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 3 Challenge
Topic: Standard deviation and variance
 

60. You purchase a share of CAT stock for $90. One year later, after receiving a dividend of $4, you sell the stock for $97. What was your holding-period return?
    A.14.44%
    B. 12.22%
    C. 13.33%
    D. 5.56%

HPR = ([97 – 90] + 4)/90 = 12.22%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Rate of return
 

61. When comparing investments with different horizons, the ____________ provides the more accurate comparison.
    A.arithmetic average
    B. effective annual rate
    C. average annual return
    D. historical annual average

The effective annual rate provides the more accurate comparison of investments with different horizons because it expresses the returns in a common period.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Topic: Annual, holding period, and effective rates
 

62. Annual percentage rates (APRs) are computed using
    A.simple interest.
    B. compound interest.
    C. either simple interest or compound interest.
    D. best estimates of expected real costs.
    E. None of the options

APRs use simple interest.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Topic: Annual, holding period, and effective rates
 

63. An investment provides a 2% return semi-annually, its effective annual rate is
    A.2%.
    B. 4%.
    C. 4.02%.
    D. 4.04%.
    E. None of the options

(1.02)² – 1 = 4.04%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Annual, holding period, and effective rates
 

64. If an investment provides a 1.25% return quarterly, its effective annual rate is
    A.5.23%.
    B. 5.09%.
    C. 4.02%.
    D. 4.04%.

(1.0125)⁴ – 1 = 5.09%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Annual, holding period, and effective rates
 

65. If an investment provides a 0.78% return monthly, its effective annual rate is
    A.9.36%.
    B. 9.63%.
    C. 10.02%.
    D. 9.77%.

(1.0078)¹² – 1 = 9.77%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Annual, holding period, and effective rates
 

66. If an investment provides a 3% return semi-annually, its effective annual rate is
    A.3%.
    B. 6%.
    C. 6.06%.
    D. 6.09%.

(1.03)² – 1 = 6.09%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Annual, holding period, and effective rates
 

67. If an investment provides a 2.1% return quarterly, its effective annual rate is
    A.2.1%.
    B. 8.4%.
    C. 8.56%.
    D. 8.67%.

(1.021)⁴ – 1 = 8.67%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Annual, holding period, and effective rates
 

68. Skewness is a measure of
    A.how fat the tails of a distribution are.
    B. the downside risk of a distribution.
    C. the normality of a distribution.
    D. the dividend yield of the distribution.
    E. None of the options

Skewness is a measure of the normality of a distribution.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Deviations from normality
 

69. Kurtosis is a measure of
    A.how fat the tails of a distribution are.
    B. the downside risk of a distribution.
    C. the normality of a distribution.
    D. the dividend yield of the distribution.

Kurtosis is a measure of the normality of a distribution that specifically measures how fat the tails are.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Deviations from normality
 

70. When a distribution is positively skewed,
    A.standard deviation overestimates risk.
    B. standard deviation correctly estimates risk.
    C. standard deviation underestimates risk.
    D. the tails are fatter than in a normal distribution.

When a distribution is positively skewed, standard deviation overestimates risk.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Deviations from normality
 

71. When a distribution is negatively skewed,
    A.standard deviation overestimates risk.
    B. standard deviation correctly estimates risk.
    C. standard deviation underestimates risk.
    D. the tails are fatter than in a normal distribution.

When a distribution is negatively skewed, standard deviation underestimates risk.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Deviations from normality
 

72. If a distribution has “fat tails,” it exhibits
    A.positive skewness.
    B. negative skewness.
    C. a kurtosis of zero
    D. kurtosis.
    E. positive skewness and kurtosis.

Kurtosis is a measure of the tails of a distribution, or “fat tails.”

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Intermediate
Topic: Deviations from normality
 

73. If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio’s excess returns was 20%, the Sharpe measure would be
    A.0.08.
    B. 0.03.
    C. 0.20.
    D. 0.11.
    E. 0.25.

(8 – 3)/20 = 0.25.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Risk-adjusted performance measures (Sharpe, Treynor, Jensen, Information ratio, M2, etc.)
 

74. If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio’s excess returns was 25%, the Sharpe measure would be
    A.0.12.
    B. 0.04.
    C. 0.32.
    D. 0.16.
    E. 0.25.

(12 – 4)/25 = 0.32.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Risk-adjusted performance measures (Sharpe, Treynor, Jensen, Information ratio, M2, etc.)
 

75. If a portfolio had a return of 15%, the risk-free asset return was 5%, and the standard deviation of the portfolio’s excess returns was 30%, the Sharpe measure would be
    A.0.20.
    B. 0.35.
    C. 0.45.
    D. 0.33.
    E. 0.25.

(15 – 5)/30 = 0.33.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Risk-adjusted performance measures (Sharpe, Treynor, Jensen, Information ratio, M2, etc.)
 

76. If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio’s excess returns was 25%, the risk premium would be
    A.8%.
    B. 16%.
    C. 37%.
    D. 21%.
    E. 29%.

12 – 4 = 8%.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Intermediate
Topic: Risk premiums
 

77. ________ is a risk measure that indicates vulnerability to extreme negative returns.
    A.Value at risk
    B. Lower partial standard deviation
    C. Standard deviation
    D. Value at risk and lower partial standard deviation
    E. None of the options

Value at risk and lower partial standard deviation are risk measures that indicate vulnerability to extreme negative returns.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Challenge
Topic: Value-at-risk
 

78. ________ is a risk measure that indicates vulnerability to extreme negative returns.
    A.Value at risk
    B. Lower partial standard deviation
    C. Expected shortfall
    D. None of the options
    E. All of the options

All of the options are risk measures that indicate vulnerability to extreme negative returns.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Challenge
Topic: Value-at-risk
 

79. The most common measure of loss associated with extremely negative returns is
    A.lower partial standard deviation.
    B. value at risk.
    C. expected shortfall.
    D. standard deviation.

The most common measure of loss associated with extremely negative returns is value at risk.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Challenge
Topic: Value-at-risk
 

80. Practitioners often use a ________% VaR, meaning that ________% of returns will exceed the VaR, and ________% will be worse.
    A.25, 75, 25
    B. 75, 25, 75
    C. 5, 95, 5
    D. 95, 5, 95
    E. 80, 80, 20

Practitioners often use a 5% VaR, meaning that 95% of returns will exceed the VaR, and 5% will be worse.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Challenge
Topic: Value-at-risk
 

81. When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the
    A.most realistic as it is the most complete measure of risk.
    B. most pessimistic as it is the most complete measure of risk.
    C. most optimistic as it is the most complete measure of risk.
    D. most optimistic as it takes the highest return (smallest loss) of all the cases.

When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the most optimistic as it takes the highest return (smallest loss) of all the cases.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Challenge
Topic: Value-at-risk
 

82. When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be
    A.expected shortfall.
    B. value at risk.
    C. conditional tail expectation.
    D. expected shortfall and value at risk.
    E. expected shortfall and conditional tail expectation.

When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be expected shortfall (or conditional tail expectation).

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Challenge
Topic: Normal probability distribution