Investments 9Th Canadian Edition By Bodie - Test Bank

Investments 9Th Canadian Edition By Bodie – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 05

Risk, Return, and the Historical Record

 

 

Multiple Choice Questions

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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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 are true.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

13. Ceteris paribus, a decrease in the demand for loans
    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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

15. Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2015 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.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-03 Bills and Inflation, 1957-2017.
Topic: 05-03 The Equilibrium Real Rate of Interest

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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

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

Stock of the Economy	Probability	HPR
Boom	0.30	18%
Normal growth	0.50	12%
Recession	0.20	-5%

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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

Stock of the Economy	Probability	HPR
Boom	0.30	18%
Normal growth	0.50	12%
Recession	0.20	-5%

 

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

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

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

Stock of the Economy	Probability	HPR
Boom	0.30	18%
Normal growth	0.50	12%
Recession	0.20	-5%

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

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-04 Risk and Risk Premiums.
Topic: 05-04 The Equilibrium Nominal Rate of Interest

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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-04 Risk and Risk Premiums.
Topic: 05-10 Risk and 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

State	Probability			Price
1		25	%	$	50
2		40	%	$	60
3		35	%	$	70

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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-04 Risk and Risk Premiums.
Topic: 05-10 Risk and 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.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

28. If the Federal Reserve lowers the Fed Funds 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

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

29. “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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

30. 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.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

State	Probability			Price
1		25	%	$	50
2		40	%	$	60
3		35	%	$	70

 

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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

32. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

33. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

34. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

35. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

36. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

37. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

38. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

39. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

40. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

41. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

42. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

43. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

44. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

45. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

46. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

47. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

Stock of the Economy	Probability			HPR
Boom		0.40			22	%
Normal growth		0.35			11	%
Recession		0.25		–	9	%

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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

Stock of the Economy	Probability			HPR
Boom		0.40			22	%
Normal growth		0.35			11	%
Recession		0.25		–	9	%

 

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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

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

Stock of the Economy	Probability			HPR
Boom		0.40			22	%
Normal growth		0.35			11	%
Recession		0.25		–	9	%

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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

51. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

52. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

53. 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.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

54. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 05-01 Determinants of the Level of Interest Rates.
Topic: 05-01 Determinants of the Level of Interest Rates

55. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

Stock of the Economy	Probability			HPR
Boom		0.40			30	%
Normal growth		0.40			11	%
Recession		0.20		–	10	%

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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

Stock of the Economy	Probability			HPR
Boom		0.40			30	%
Normal growth		0.40			11	%
Recession		0.20		–	10	%

 

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

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

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

Stock of the Economy	Probability			HPR
Boom		0.40			30	%
Normal growth		0.40			11	%
Recession		0.20		–	10	%

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

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

59. 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%

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

60. 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

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

61. 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

62. If 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

63. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

64. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

66. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-02 Comparing Rates of Return for Different Holding Periods.
Topic: 05-02 Real and Nominal Rates of Interest

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

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

68. 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.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

69. 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

70. 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

71. 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

72. 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.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

73. 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.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

74. 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.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-05 Time Series Analysis of Past Rates of Return.
Topic: 05-05 Taxes and the Real Rate of Interest

75. 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%.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 05-04 Risk and Risk Premiums.
Topic: 05-10 Risk and Risk Premiums

76. ________ 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 are correct.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

77. ________ 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. None of the options are correct.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

78. 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

79. 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. 1; 99; 51
    D. 95; 5; 95
    E. 80; 80; 20

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

80. 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-07 Deviations from Normality and Risk Measures.
Topic: 05-07 Annual Percentage Rates

81. 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.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Hard
Learning Objective: 05-06 The Normal Distribution.
Topic: 05-06 Comparing Rates of Return for Different Holding Periods