Managerial Finance

You have been given this probability distribution for the holding-period return for a stock:State of the Economy probability HPRBoom 0.40 (aka 40%) +22%Normal growth 0.35 (aka 35%) +11%Recession 0.25 (aka 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.

s = [0.40 * (22 - 10.4)^2 + 0.35 * (11 - 10.4)^2 + 0.25 * (-9 - 10.4)^2]^(1/2) = 12.167%

You have been given this probability distribution for the holding-period return for GM stock:State of the Economy probability HPRBoom 0.40 (aka 40%) +30%Normal growth 0.40 (aka 40%) +11%Recession 0.20 (aka 20%) -10%What is the expected standard deviation for the stock? A) 16.91% B) 16.13% C) 13.79% D) 15.25% E) 14.87%

s = [0.40 * (30 - 14.4)^2 + 0.40 * (11 - 14.4)^2 + 0.20 * (-10 - 14.4)2]^(1/2) = 14.87%

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) -0.26% C) -0.89% D) 1.63% E) None of the options

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

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 + return per quarter)^(# quarters per year) - 1 =(1.0125)^4 - 1 = 5.09%.

If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio'sexcess 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.

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%.

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%.

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) 1.50% B) 10.00% C) 7.00% D) 3.00% E) None of the options

A) 1.50%

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.

When comparing investments with different horizons, the ________provides the more accuratecomparison. A) arithmetic average B) effective annual rate C) average annual return D) historical annual average

B) effective annual rate

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.

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%.

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.

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

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%.

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%.

________ is/are (a) risk measure(s) 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.

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 commonstocks are risky.

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

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. 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.

________ 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 (three) options E) All of the (three) options

E) All of the (three) options

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

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) both declines as the inflation rate increases and increases as the inflation rate decreases.

E) both 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. (50 %) C) the normality of a distribution. D) the dividend yield of the distribution. E) both how fat the tails of a distribution are and the normality of a distribution.

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

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.

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. 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).

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%.

The formula is (one plus quarterly return) raised to the fourth power less one,(1+quarterly return)^4 - 1 =(1.021)^4 - 1 = 8.67%.

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.

The formula is (return less risk-free return) divided by the standard deviation of returns;(15 - 5)/30 = 0.33.

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%.

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

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

The formula is:(1 + semiannual return)^(#periods per year) - 1,(1.03)^2 - 1 = 6.09%.

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.