Deck 5: Introduction to Risk,return,and the Historical Record

Question 1

You have been given this probability distribution for the holding-period return for KMP stock: $\begin{array}{lll}\underline{\text { State of the Economy }} & \underline{\text { Probability }} &\underline{ \text { HPR } }\\\text { Boom } & .30 & 18\% \\\text { Normal growth } & .50 & 12\%\\\text { Recession } & .20 & -5\%\end{array}$



-What is the expected variance for KMP stock?

A)66.04%
B)69.96%
C)77.04%
D)63.72%
E)78.45%

Answer 1

66.04%

Question 2

Historical records regarding return on stocks,Treasury bonds,and Treasury bills between 1926 and 2009 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.

Answer 2

A

Question 3

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 or lose.
E)both borrowers and savers gain.

Answer 3

D

Question 4

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%.
E)none of the above.

Question 5

Which of the following statements is 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 above is true.
E)A,B and C

Question 6

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.
E)none of the above.

Question 7

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%.
E)none of the above.

Question 8

Over the past year you earned a nominal rate of interest of 8 percent on your money.The inflation rate was 4 percent 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%.

Question 9

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 above.

Question 10

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)A and D.

Question 11

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.
E)none of the above.

Question 12

You purchased a share of stock for $30.One year later you received $1.50 as a dividend and sold the share for $32.25.What was your holding-period return?

A)12.5%
B)12.0%
C)13.6%
D)11.8%
E)none of the above

Question 13

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
E)none of the above

Question 14

Over the past year you earned a nominal rate of interest of 10 percent on your money.The inflation rate was 5 percent 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%.

Question 15

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 above

Question 16

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 7%.What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

A)4%.
B)10%.
C)7%.
D)3%.
E)none of the above.

Question 17

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.

Question 18

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.

Question 19

You have been given this probability distribution for the holding-period return for KMP stock: $\begin{array}{lll}\underline{\text { State of the Economy }} & \underline{\text { Probability }} &\underline{ \text { HPR } }\\\text { Boom } & .30 & 18\% \\\text { Normal growth } & .50 & 12\%\\\text { Recession } & .20 & -5\%\end{array}$



-What is the expected standard deviation for KMP stock?

A)6.91%
B)8.13%
C)7.79%
D)7.25%
E)8.85%

Question 20

You have been given this probability distribution for the holding-period return for KMP stock: $\begin{array}{lll}\underline{\text { State of the Economy }} & \underline{\text { Probability }} &\underline{ \text { HPR } }\\\text { Boom } & .30 & 18\% \\\text { Normal growth } & .50 & 12\%\\\text { Recession } & .20 & -5\%\end{array}$



-What is the expected holding-period return for KMP stock?

A)10.40%
B)9.32%
C)11.63%
D)11.54%
E)10.88%

Question 21

Toyota stock has the following probability distribution of expected prices one year from now: $$\begin{array} { l l l } \underline{\text { State }} &\underline{ \text { Probability} } &\underline{ \text { Price }} \\1 & 25 \% & \$ 50 \\2 & 40 \% & \$ 60 \\3 & 35 \% & \$ 70\end{array}$$ 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?

A)17.72%
B)18.89%
C)17.91%
D)18.18%
E)None of the above

Question 22

If a portfolio had a return of 15%,the risk free asset return was 3%,and the standard deviation of the portfolio's excess returns was 34%,the risk premium would be _____.

A)31%
B)18%
C)49%
D)12%
E)29%

Question 23

You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l } \text { State of } & \text { Probability } & \text { HPR } \\\text { Economy } & & \\\text { Boom } & .20 & 24 \% \\\text { Normal Growth } & .45 & 15 \% \\\text { Recession } & .35 & 8 \%\end{array}$$

-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)1.52%
B)0.50%
C)1.92%
D)0.01%
E)None of the above

Question 24

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.

Question 25

"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.

Question 26

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

Question 27

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.

Question 28

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)A and B.
E)A and C.

Question 29

Over the past year you earned a nominal rate of interest of 8 percent on your money.The inflation rate was 3.5 percent 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%.

Question 30

If a portfolio had a return of 10%,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)14%
B)6%
C)35%
D)21%
E)29%

Question 31

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 4%.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%.
E)none of the above.

Question 32

Over the past year you earned a nominal rate of interest of 12.5 percent on your money.The inflation rate was 2.6 percent 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%.
E)none of the above.

Question 33

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

Question 34

The historical arithmetic rate of return on U.S.small stocks over the 1926-2009 period has been _______.The standard deviation of small stocks' returns has been ________ than the standard deviation of large stocks' returns.

A)12.43%, lower
B)13.11%, lower
C)16.24%, higher
D)17.43%, higher
E)21.53%,higher

Question 35

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 above

Question 36

You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l } \text { State of } & \text { Probability } & \text { HPR } \\\text { Economy } & & \\\text { Boom } & .20 & 24 \% \\\text { Normal Growth } & .45 & 15 \% \\\text { Recession } & .35 & 8 \%\end{array}$$

-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%
E)None of the above

Question 37

You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l } \text { State of } & \text { Probability } & \text { HPR } \\\text { Economy } & & \\\text { Boom } & .20 & 24 \% \\\text { Normal Growth } & .45 & 15 \% \\\text { Recession } & .35 & 8 \%\end{array}$$

-Assuming that the expected return on Cheese's stock is 14.35%,what is the standard deviation of these returns?

A)4.72%
B)6.30%
C)4.38%
D)5.74%
E)None of the above

Question 38

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.

Question 39

Over the past year you earned a nominal rate of interest of 14 percent on your money.The inflation rate was 2 percent 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%.
E)none of the above.

Question 40

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%.
E)none of the above.

Question 41

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 above.

Question 42

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 above.

Question 43

You have been given this probability distribution for the holding-period return for a stock: $\begin{array}{lll}\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\\\text { Boom } & .40 & 22\% \\\text { Normal growth } & .35 & 11\%\\\text { Recession } & .25 & -9 \%\end{array}$


-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 above

Question 44

You have been given this probability distribution for the holding-period return for GM stock: $\begin{array}{lll}\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\\\text { Boom } & .40 & 30\% \\\text { Normal growth } & .40& 11\%\\\text { Recession } & .20 & -10 \%\end{array}$


-What is the expected holding-period return for GM stock?

A)10.4%
B)11.4%
C)12.4%
D)13.4%
E)14.4%

Question 45

You have been given this probability distribution for the holding-period return for a stock: $\begin{array}{lll}\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\\\text { Boom } & .40 & 22\% \\\text { Normal growth } & .35 & 11\%\\\text { Recession } & .25 & -9 \%\end{array}$


-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 above

Question 46

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 above

Question 47

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%.
E)none of the above.

Question 48

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 above.

Question 49

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%.
E)none of the above.

Question 50

You have been given this probability distribution for the holding-period return for GM stock: $\begin{array}{lll}\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\\\text { Boom } & .40 & 30\% \\\text { Normal growth } & .40& 11\%\\\text { Recession } & .20 & -10 \%\end{array}$


-What is the expected variance for GM stock?

A)200.00%
B)221.04%
C)246.37%
D)14.87%
E)16.13%

Question 51

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 above

Question 52

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 1.6% over the year?

A)4.1%.
B)2.5%.
C)2.9%.
D)1.6%.
E)none of the above.

Question 53

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 above

Question 54

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 above

Question 55

Over the past year you earned a nominal rate of interest of 3.6 percent on your money.The inflation rate was 3.1 percent 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%.
E)none of the above

Question 56

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 above.

Question 57

You have been given this probability distribution for the holding-period return for GM stock: $\begin{array}{lll}\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\\\text { Boom } & .40 & 30\% \\\text { Normal growth } & .40& 11\%\\\text { Recession } & .20 & -10 \%\end{array}$


-What is the expected standard deviation for GM stock?

A)16.91%
B)16.13%
C)13.79%
D)15.25%
E)14.87%

Question 58

A year ago,you invested $12,000 in an investment that produced a return of 16%.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%.
E)none of the above.

Question 59

You have been given this probability distribution for the holding-period return for a stock: $\begin{array}{lll}\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\\\text { Boom } & .40 & 22\% \\\text { Normal growth } & .35 & 11\%\\\text { Recession } & .25 & -9 \%\end{array}$


-What is the expected variance for the stock?

A)142.07%
B)189.96%
C)177.04%
D)128.17%
E)None of the above

Question 60

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 above

Question 61

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 above.

Question 62

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 above

Question 63

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%.
E)none of the above.

Question 64

Annual Percentage Rates (APRs)are computed using

A)simple interest.
B)compound interest.
C)either A or B can be used.
D)best estimates of expected real costs.
E)none of the above.

Question 65

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%.
E)none of the above.

Question 66

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%.
E)none of the above.

Question 67

________ is a risk measure that indicates vulnerability to extreme negative returns.

A)Value at risk
B)Lower partial standard deviation
C)Standard deviation
D)None of the above
E)A and B

Question 68

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

Question 69

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
E)none of the above

Question 70

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)A and C

Question 71

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
E)none of the above

Question 72

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

Question 73

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%

Question 74

If a distribution has "fat tails" it exhibits

A)positive skewness
B)negative skewness
C)a kurtosis of zero
D)kurtosis
E)A and D

Question 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 _____.

A)0.20
B)0.35
C)0.45
D)0.33
E)0.25

Question 76

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
E)none of the above

Question 77

An investment provides a 3% return semi-annually,its effective annual rate is

A)3%.
B)6%.
C)6.06%.
D)6.09%.
E)none of the above.

Question 78

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
E)none of the above

Question 79

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%
E)none of the above

Question 80

________ 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 above
E)All of the above