Fina 363 Exam 2
Which of the following statement(s) is(are) true?
I) The real rate of interest is determined by the supply and demand for funds. III) The real rate of interest can be affected by actions of the Fed.
The holding-period return (HPR) on a share of stock is equal to
the capital gain yield during the period, plus the dividend yield.
The holding-period return (HPR) for a stock is equal to
the dividend yield plus the capital gains yield.
In words, the real rate of interest is approximately equal to
the nominal rate minus the inflation rate.
Skewness is a measure of
the normality of a distribution.
Which of the following determine(s) the level of real interest rates?
) 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 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?
-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?
-1% 3% - 4% = -1%.
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
0.25. (8 - 3)/20 = 0.25.
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
0.32. (12 - 4)/25 = 0.32.
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
0.33. (15 - 5)/30 = 0.33.
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
0.48%. r = (1 + R)/(1 + I) - 1; 1.036/1.031% - 1 = 0.484%.
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?
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?
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?
1.5% 5% - 3.5% = 1.5%.
You have been given this probability distribution for the holding-period return for KMP stock:
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
11.76%. r = (1 + R)/(1 + I) - 1; 1.14/1.02 - 1 = 11.76%.
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?
12.22% HPR = ([97 - 90] + 4)/90 = 12.22%.
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
13%. 18 - 5 = 13%.
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?
14.0% $3.00 + $74.50 - $68.00)/$68.00 = 0.1397, or 14.0%.
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?
14.4% HPR = .40 (30%) + .40 (11%) + .20 (-10%) = 14.4%.
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?
16% 18% - 2% = 16%.
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?
18.18% E(P1) = .25 (54/55 - 1) + .40 (64/55 - 1) + .35 (74/55 - 1) = 18.18%.
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?
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?
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 4% over the same period. The exact actual growth rate of your purchasing power was
3.8%. r = (1 + R)/(1 + I) - 1; 1.08%/1.04% - 1 = 3.8%.
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?
4% 6% - 2% = 4%.
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%.
An investment provides a 2% return semi-annually, its effective annual rate
4.04%. 1.02)2 - 1 = 4.04%.
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?
4.1% 5.7% - 1.6% = 4.1%.
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
4.35%. r = (1 + R)/(1 + I) - 1; 1.08/1.035 - 1 = 4.35%.
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
4.8%. r = (1 + R)/(1 + I) -1; 1.10%/1.05% - 1 = 4.8%.
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?
5% 9% - 4% = 5%.
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
5%. 11 - 6 = 5%.
Practitioners often use a ________% VaR, meaning that ________% of returns will exceed the VaR, and ________% will be worse
5, 95, 5
If an investment provides a 1.25% return quarterly, its effective annual rate is
5.09%. (1.0125)4 - 1 = 5.09%.
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?
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?
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
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?
50% ($1 + $29 - $20)/$20 = 0.5000, or 50%.
If an investment provides a 3% return semi-annually, its effective annual rate is
6.09%. (1.03)2 - 1 = 6.09%.
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
6.2%. 2.5% + 3.7% = 6.2%.
You have been given this probability distribution for the holding-period return for KMP stock:
66.04% Variance = [.30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2] = 66.04%.
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
7%. 3.5% + 3.5% = 7%.
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
8%. 12 - 4 = 8%.
You have been given this probability distribution for the holding-period return for KMP stock:
8.13% s = [.30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2]1/2 = 8.13%.
If an investment provides a 2.1% return quarterly, its effective annual rate is
8.67%. (1.021)4 - 1 = 8.67%.
If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately
9%. 5% + 4% = 9%.
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
9.65%. r = (1 + R)/(1 + I) - 1; 1.125/1.026 - 1 = 9.65%.
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?
9.75% ($0.25 + $12.92 - $12)/$12 = 0.0975, or 9.75%.
If an investment provides a 0.78% return monthly, its effective annual rate is
9.77%. (1.0078)12 - 1 = 9.77%.
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%.
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%.
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%.
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%.
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%.
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%.
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%.
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%.
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%.
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%.
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.
________ 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
The most common measure of loss associated with extremely negative returns is
B. value at risk.
You have been given this probability distribution for the holding-period return for GM stock: What is the expected standard deviation for GM stock?
E. 14.87% s = [.40 (30 - 14.4)2 + .40 (11 - 14.4)2 + .20 (-10 - 14.4)2]1/2 = 14.87%.
What has been the relationship between T-Bill rates and inflation rates since the 1980s?
The T-Bill rate has been higher than the inflation rate almost the entire period.
Which of the following factors would not be expected to affect the nominal interest rate?
The coupon rate on previously issued government bonds
Bracket Creep" happens when
tax liabilities are based on nominal income and there is a positive inflation rate.
Which of the following measures of risk best highlights the potential loss from extreme negative returns?
Value at risk (VaR)
________ is a risk measure that indicates vulnerability to extreme negative returns.
Value at risk and lower partial standard deviation
Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2012 show that
stocks offered investors greater rates of return than bonds and bills.
The risk premium for common stocks
cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.
When a distribution is negatively skewed,
standard deviation underestimates risk.
If the nominal return is constant, the after-tax real rate of return
declines as the inflation rate increases and increases as the inflation rate decreases.
Ceteris paribus, a decrease in the demand for loanable funds
drives the interest rate down.
Other things equal, an increase in the government budget deficit
drives the interest rate up.
When comparing investments with different horizons, the ____________ provides the more accurate comparison.
effective annual rate
When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be
expected shortfall and conditional tail expectation.
Kurtosis is a measure of
how fat the tails of a distribution are and the normality of a distribution.
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 ___________.
increase; decrease
If a distribution has "fat tails," it exhibits
kurtosis.
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.
If the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation,
neither borrowers nor savers gain nor lose.
Annual percentage rates (APRs) are computed using
simple interest.
When a distribution is positively skewed,
standard deviation overestimates risk.
