quizlet overall part 2 8-11

Which of the following securities are the most interest rate sensitive? Utility stocks Growth stocks Preferred stocks Common stocks A) I and III B) II and IV C) III and IV D) I and II

A

A stock that has no ready market is said to have a high degree of A) business risk B) liquidity risk C) market risk D) investment risk

B

One way in which internal rate of return (IRR) differs from most return computations is that A) its application to debt securities is limited B) it takes into consideration the time value of money C) it takes into consideration the rate of inflation D) it is always an annualized rate of return

B

While listening to a commentator on cable TV, you hear the statement "the flight to quality has ended." What would you expect the effect of this to be? A) Airline stocks are in for a beating. B) Yield spreads are narrowing. C) Pessimism is spreading. D) Yield spreads are widening.

B The term yield spread refers to the difference in yield between very-high-quality debt instruments, such as U.S. government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won't demand as much in return from the lower-rated instruments.

he Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a coincident economic indicator? A) Agricultural employment B) Machine tool orders C) Industrial production D) Stock market prices as measured by the S&P 500

C Industrial production is a coincident indicator. The stock indices and manufacturing orders are leading indicators; economists do not use agricultural employment as an indicator.

Core inflation is best described as an inflation rate A) for producers' raw materials. B) that includes food and energy prices. C) the central bank views as acceptable. D) that excludes certain volatile goods prices.

D

If an investor wished to compute the mean return of her portfolio, she is going to A) compute the standard deviation B) compute using straight-line averaging C) find the median D) find the arithmetic mean

D Unless something else is specified, whenever the mean return is referenced, it is always the arithmetic mean (the simple average).

When it comes to computing market returns, it is TRUE to state that A) the median is always lower than the average B) the median is always higher than the geometric mean C) the geometric mean could never be greater than the arithmetic mean D) the mode is always higher than the mean

C

If a security has an anticipated return of 8.7% and a standard deviation of 14.6%, you would expect the returns to have a 95% probability (assuming a normal distribution) of falling between A) −20.5 and +37.9% B) −5.9 and +23.3% C) 8.7 and 23.3% D) 0 and 37.9%

A A security with a normal distribution has a 95% probability of falling within 2 standard deviations of its anticipated return. In this case, that would be −20.5% and +37.9%, which is computed by calculating return movements of 29.2% (14.6 × 2) in either direction.

During the past 2 quarters, the GDP declined by 3%, unemployment rose by 0.7%, and the Consumer Price Index fell off by 1.3%; this economic condition is called A) stagflation B) recession C) depression D) inflation

B Two consecutive quarters of economic decline is termed a recession.

You have determined that the net present value (NPV) of your client's investment is positive. If your client's required rate of return is 8%, which of the following is most likely the investment's internal rate of return (IRR)? A) 4% B) 8% C) 9% D) 0%

C If the NPV is a positive number, the investment's IRR must be greater than the investor's required rate of return. In this question, the required rate of return is 8% so the IRR (actual return) must be higher than that. There is only one choice higher than 8%. Remember, when the NPV is positive, it is a good investment.