Deck 6: The Risks and Returns From Investing

Question 1

The housing bubble and resulting credit crisis of 2008 is an example of:

A)nonsystematic risk.
B)systematic risk.
C)inflation risk.
D)political risk

Answer 1

B

Question 2

Political stability is the major factor concerning:

A)exchange-rate risk.
B)systematic risk.
C)nonsystematic risk.
D)country risk.

Answer 2

D

Question 3

Which of the following is true regarding the cumulative wealth index?It:

A)is measured by adding up the total returns over the holding period and dividing by the investment.
B)uses a beginning index value (often set to $1,but it can be set to any amount).
C)is the present value of the future cash flows expected from the investment.
D)uses the arithmetic mean as the rate of growth of one's wealth.

Answer 3

B

Question 4

To calculate the return on a stock that pays a year-end dividend,an investor should:

A)divide the stock's sale price by its purchase price and subtract 1.
B)add the dividend and sale price,divide by the purchase price and subtract 1.
C)divide the sale price by the purchase price and add the dividend yield.
D)divide all cash flows received by the selling price and subtract 1.

Question 5

Adding 1 to return produces the:

A)arithmetic mean.
B)return relative.
C)cumulative wealth index.
D)geometric mean.

Question 6

In deriving changes in wealth over time,the return relative solves the problem of:

A)inflation.
B negative returns.
C)interest rates.
D)tax differences.

Question 7

Total return is equal to:

A)capital gain + price change.
B)yield + income.
C)capital gain - loss.
D)yield + price change.

Question 8

In order to determine the compound growth rate of an investment over some period,an investor would calculate the:

A)arithmetic mean.
B)geometric mean.
C)calculus mean.
D)arithmetic median.

Question 9

Which of the following is not part of the yield component of total return?

A)Dividend payment on common stock
B)Coupon interest payment on bonds
C)Capital gain upon sale of stock
D)Dividend payment on preferred stock

Question 10

Assume an investor purchases a bond when the Euro is quoted at $0.96 per Euro and sells the bond when the Euro is quoted at $1.12 per Euro.Relative to the dollar,the Euro has:

A)appreciated,and the investor has gained from the currency move.
B)appreciated,and the investor has lost from the currency move.
C)depreciated,and the investor has gained from the currency move.
D)depreciated,and the investor has lost from the currency move.

Question 11

Liquidity risk:

A)is the risk that investment bankers normally face.
B)is lower for small OTC stocks than for large NYSE stocks.
C)is a risk associated with secondary market transactions.
D)increases whenever interest rates increase.

Question 12

If the Dow Jones Industrials had a price appreciation of 6 percent one year and yet total return for the year was 9 percent,the difference would be due to:

A)the tax treatment of capital gains.
B)the cumulative wealth effect.
C)dividends.
D)inflation.

Question 13

Financial risk is most closely associated with:

A)the use of equity financing by corporations.
B)the use of debt financing by corporations.
C)equity investments held by corporations.
D)debt investments held by corporations.

Question 14

A major difference between real and nominal returns is that:

A)real returns adjust for inflation,and nominal returns do not.
B)real returns use actual cash flows,and nominal returns use expected cash flows.
C)real returns adjust for commissions,and nominal returns do not.
D)real returns show after-tax returns,and nominal returns show before-tax returns.

Question 15

Investors should be willing to invest in riskier investments only:

A)if the expected holding period is short term.
B)if there are no safe alternatives except for holding cash.
C)if the expected return is adequate for the risk level.
D)if they are speculators.

Question 16

If a U.S.investor buys foreign stock,his dollar-denominated return will increase if the dollar:

A)appreciates relative to the foreign currency.
B)depreciates relative to the foreign currency.
C)remains unchanged relative to the foreign currency.
D)moves to a net gain position relative to all foreign currencies.

Question 17

If interest rates are expected to rise,you would expect:

A)bond prices to fall more than stock prices.
B)bond prices to rise more than stock prices.
C)stock prices to fall more than bond prices.
D)stock prices to rise and bond prices to fall.

Question 18

An impending recession is an example of:

A)interest rate risk.
B)inflation risk.
C)market risk.
D)financial risk.

Question 19

New financial disclosure regulations affecting the brokerage industry are a type of:

A)market risk.
B)financial risk.
C)business risk.
D)liquidity risk.

Question 20

Which of the following corresponds most closely with an increase in interest rates?

A)Business risk
B)Financial risk
C)Liquidity risk
D)Inflation risk

Question 21

Holding interest rates constant,a narrowing of the equity risk premium implies a decline in the rate of return on stocks because the amount earned beyond the risk-free rate is reduced.

Question 22

Over the past 50 years,which of the following financial assets showed the greatest amount of price volatility,as measured by standard deviation?

A)Small-cap stocks
B)Large-cap stocks
C)Treasury bonds
D)Treasury bills

Question 23

The less the variability of return,the greater the risk.

Question 24

A Chinese stock denominated in Chinese yuan will have an increase in its dollar-denominated return if the Chinese yuan strengthens against the dollar.

Question 25

Another name for a capital gain is yield.

Question 26

Which of the following statements regarding the arithmetic mean and the geometric mean is true?

A)The arithmetic mean is always a better measure of average performance.
B)The geometric mean is always a better measure of average performance.
C)The arithmetic mean is a better measure of performance over single periods.
D)The geometric mean is the best estimate of the expected return for the next period.

Question 27

New regulations concerning auto emissions would be a type of market risk for the auto industry.

Question 28

Return and risk are inversely related.

Question 29

Bond prices and interest rates are inversely related.

Question 30

Present value is based on the concept of:

A)compounding.
B)systematic risk.
C)duration.
D)discounting.

Question 31

As the dollar falls,

A)foreign investors owning U.S.stocks suffer.
B)U.S.investors owning U.S.stocks suffer.
C)U.S.investors owning foreign stocks suffer.
D)foreign investors owning foreign stocks suffer.

Question 32

It is generally easier to predict interest rate risk than market risk.

Question 33

The standard deviation of a security measures the:

A)systematic risk of the security.
B)unsystematic risk of the security.
C)total risk of the security.
D)risk per unit of return for the security.

Question 34

International mutual funds offer investors global diversification without exchange rate risk.

Question 35

Which of the following statements about the expected equity risk premium is true?

A)It is occasionally negative.
B)There is no direct way to measure it.
C)It decreases as investor uncertainty increases.
D)It increases as the risk-free rate increases.

Question 36

The equity risk premium is the difference between the expected return:

A)on stocks and bonds.
B)on high-grade stocks and low-grade stocks.
C)on stocks and the risk-free rate.
D)on a stock market index and the inflation rate.

Question 37

A number of prominent observers expect the equity risk premium in the future to be:

A)considerably lower than that of the past.
B)considerably higher than that of the past.
C)very similar to the historical average.
D)very similar to the recent value.

Question 38

If you invest in German bonds and the Euro becomes stronger during your holding period,then:

A)you will be able to buy back fewer dollars when you redeem your bond.
B)your dollar-denominated return will increase.
C)your-dollar denominated return will decrease.
D)your return will be the interest you receive.

Question 39

The most common measure of inflation is the Producer Price Index.

Question 40

When most people refer to mean rate of return,they are referring to the:

A)holding period rate of return.
B)arithmetic average rate of return.
C)geometric average rate of return.
D)cumulative average rate of return.

Question 41

What is the major drawback of a return measure?Why is it the most common return calculation used by investors?

Question 42

What common variable is used in the calculation of both the cumulative wealth index and the geometric mean return?How is the common variable calculated?How is it used in each?

Question 43

Assume you are a U.S.citizen who purchases $20,000 worth of bonds of the Deep Shaft Mining Company in Kenya.What sources of risk can you identify with this investment?

Question 44

What was the effect on foreign investors owning U.S.stocks when the dollar fell in 2008?

Question 45

The standard deviation of returns,calculated as the square root of the variance of returns,is a measure of total risk of an asset or portfolio.

Question 46

The returns and risk measures in this chapter are calculated from historical data.Are such measures good predictors of the future?What are some circumstances that could change to impact future return and risk?How can an investor use these return and risk measures to help construct a portfolio?

Question 47

When should an investor use the arithmetic mean return?The geometric mean return?

Question 48

What is the best measure of risk for a sole proprietorship?

Question 49

Where
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PC=______________

Question 50

Both present value and future value are based upon the concept of the time value of money.