Chapter 5 mc

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

A. simple interest.

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.

A. standard deviation overestimates risk.

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

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

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%

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

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

A. 1.5% 5% - 3.5% = 1.5%.

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? State of economy--Prob--HPR Boom. .30. 18% Normal Growth. .50. 12% Recession. .20. -5% A. 10.40% B. 9.32% C. 11.63% D. 11.54% E. 10.88%

A. 10.40% HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%.

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%.

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

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%.

A. 13%. 18 - 5 = 13%.

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%

A. 4% 6% - 2% = 4%.

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%

A. 4.1% 5.7% - 1.6% = 4.1%.

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%

A. 5% 9% - 4% = 5%.

You have been given this probability distribution for the holding-period return for KMP stock: What is the expected variance for KMP stock? State of economy--Prob--HPR Boom. .30. 18% Normal Growth. .50. 12% Recession. .20. -5% A. 66.04% B. 69.96% C. 77.04% D. 63.72% E. 78.45%

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

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%.

A. 8%. 12 - 4 = 8%.

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

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

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. drives the interest rate down.

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.

A. stocks offered investors greater rates of return than bonds and bills.

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.

A. the nominal rate minus the inflation rate.

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%

B. -0.9% 2.5% - 3.4% = -0.9%.

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%

B. -1% 3% - 4% = -1%.

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%

B. 12.22% HPR = ([97 - 90] + 4)/90 = 12.22%.

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%

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

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%

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

You have been given this probability distribution for the holding-period return for GM stock: What is the expected variance for GM stock? State of economy--Prob--HPR Boom. .40. 30% Normal Growth. .40. 11% Recession. .20. -10% A. 200.00% B. 221.04% C. 246.37% D. 14.87% E. 16.13%

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

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%.

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

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%.

B. 5.09%. (1.0125)^4 - 1 = 5.09%.

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

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

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%.

B. 6.2%. 2.5% + 3.7% = 6.2%.

You have been given this probability distribution for the holding-period return for KMP stock: What is the expected standard deviation for KMP stock? State of economy--Prob--HPR Boom. .30. 18% Normal Growth. .50. 12% Recession. .20. -5% A. 6.91% B. 8.13% C. 7.79% D. 7.25% E. 8.85%

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

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%.

B. 9%. 5% + 4% = 9%.

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.

B. I and III only.

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.

B. drives the interest rate up.

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

B. effective annual rate

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

B. increase; decrease

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.

B. the capital gain yield during the period, plus the dividend yield.

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.

B. value at risk.

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.

C. 0.32. (12 - 4)/25 = 0.32.

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%.

C. 0.48%. r = (1 + R)/(1 + I) - 1; 1.036/1.031% - 1 = 0.484%.

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%

C. 16% 18% - 2% = 16%.

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%.

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

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

C. 5, 95, 5

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%.

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

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

C. The coupon rate on previously issued government bonds

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.

C. standard deviation underestimates risk.

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

C. the normality of a distribution.

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.

D. 0.33. (15 - 5)/30 = 0.33.

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? State---Prob---Price 1. 25%. $50 2. 40%. $60 3. 35%. $70 A. 17.72% B. 18.89% C. 17.91% D. 18.18%

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

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

D. 4.04%. (1.02)^2 - 1 = 4.04%.

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%.

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

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

D. 5.56% HPR = (92 - 90 + 3)/90 = 5.56%.

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? State of economy--Prob--HPR Boom. .20. 24% Normal Growth. .45. 15% Recession. .35. 8% A. 4.72% B. 6.30% C. 4.38% D. 5.74% E. None of the options

D. 5.74% Variance = .20 × (24 - 14.35)2 + .45 × (15 - 14.35)2 + .35 × (8 - 14.35)2 = 32.9275. Standard deviation = 32.92751/2 = 5.74.

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

D. 6.09%. (1.03)2 - 1 = 6.09%.

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%.

D. 7%. 3.5% + 3.5% = 7%.

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%.

D. 8.67%. (1.021)^4 - 1 = 8.67%.

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%.

D. 9.77%. (1.0078)^12 - 1 = 9.77%.

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

D. I, II, and III

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.

D. None of the options is true.

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.

D. The T-Bill rate has been higher than the inflation rate almost the entire period.

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

D. Value at risk (VaR)

________ 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

D. Value at risk and lower partial standard deviation

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.

D. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.

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.

D. kurtosis.

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.

D. most optimistic as it takes the highest return (smallest loss) of all the cases.

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.

D. neither borrowers nor savers gain nor lose.

"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.

D. tax liabilities are based on nominal income and there is a positive inflation rate.

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.

E. expected shortfall and conditional tail expectation.

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.

E. 0.25. (8 - 3)/20 = 0.25.

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? State of economy--Prob--HPR Boom. .40. 30% Normal Growth. .40. 11% Recession. .20. -10% A. 10.4% B. 11.4% C. 12.4% D. 13.4% E. 14.4%

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

You have been given this probability distribution for the holding-period return for GM stock: What is the expected standard deviation for GM stock? State of economy--Prob--HPR Boom. .40. 30% Normal Growth. .40. 11% Recession. .20. -10% A. 16.91% B. 16.13% C. 13.79% D. 15.25% E. 14.87%

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

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%.

E. 5%. 11 - 6 = 5%.

________ 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

E. All of the options

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

E. None of the options ($1.82 + $136 - $120)/$120 = 0.1485, or 14.85%.

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

E. None of the options ($2 + $31 - $20)/$20 = 0.65, or 65%.

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

E. None of the options 2.5% + 3.4% = 5.9%.

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

E. None of the options 3.5% + 2.5% = 6%.

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

E. None of the options 4% + 3% = 7%.

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

E. None of the options 4.3% - 3% = 1.3%.

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? State of economy--Prob--HPR Boom. .40. 22% Normal Growth. .35. 11% Recession. .25. -9% A. 11.67% B. 8.33% C. 9.56% D. 12.4% E. None of the options

E. None of the options HPR = .40 (22%) + .35 (11%) + .25 (-9%) = 10.4%.

You have been given this probability distribution for the holding-period return for a stock: What is the expected variance for the stock? State of economy--Prob--HPR Boom. .40. 22% Normal Growth. .35. 11% Recession. .25. -9% A. 142.07% B. 189.96% C. 177.04% D. 128.17% E. None of the options

E. None of the options Variance = [.40 (22 - 10.4)2 + .35 (11 - 10.4)2 + .25 (-9 - 10.4)2] = 148.04%.

You have been given this probability distribution for the holding-period return for a stock: What is the expected standard deviation for the stock? State of economy--Prob--HPR Boom. .40. 22% Normal Growth. .35. 11% Recession. .25. -9% A. 2.07% B. 9.96% C. 7.04% D. 1.44% E. None of the options

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%.

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.

E. declines as the inflation rate increases and increases as the inflation rate decreases.

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. E. how fat the tails of a distribution are and the normality of a distribution.

E. how fat the tails of a distribution are and the normality of a distribution.

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.

E. the dividend yield plus the capital gains yield.