Question 1

Latisha invested $1,000 in XYZ stock. Two years later she sold the stock for $1,200. During the time she owned the stock, she received a total of $80 in dividends. What was her total return on this investment?

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Question 2

A prerequisite to investing is to perform a financial reality check. Explain its 3 parts.

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Question 3

The nominal rate of interest that investors demand will increase with an increase in the expected rate of inflation.

Accepted Answer

This is because investors demand compensation for the loss in purchasing power that inflation causes. Therefore, as inflation is expected to increase, investors will demand a higher nominal rate of interest in order to maintain their real rate of return.

Question 4

You recently purchased a stock for $25. It is now worth $35, and it paid a $5 dividend during the time you held it. Your rate of return on this stock is closest to which of the following?

Accepted Answer

The rate of return can be calculated by taking the total gains (or losses) and dividing it by the initial investment. Here, the gains include both the increase in stock value ($35 - $25 = $10) and the dividend paid ($5), totaling $15. The initial investment was $25. Thus, the rate of return is ($15 / $25) * 100% = 60%.

Question 5

You recently purchased a stock for $50. It is now worth $75, and it paid a $15 dividend during the two years you held it. What is your annualized rate of return on this stock?

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Question 6

Why is speculating in derivatives, futures contracts and options not appropriate for the typical, long-term investor?

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Question 7

What is the purpose of return on investment?

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Question 8

Juan purchased shares in ABC company for $5,000 three years ago. During these three years he received $600 in dividends. He just sold the stock for $4,300. What was his total return on this investment?

Accepted Answer

Juan's initial investment was $5,000 and he received $600 in dividends. 
Total investment = $5,000 
Total return = $600 + $4,300 = $4,900 
Percentage return = (Total return / Total investment) x 100 
= (4,900 / 5,000) x 100 
= 98% 
Since the selling price is less than the initial investment, we consider it a loss. Therefore, the total return is -2%, which is closest to choice B: -2%.

Question 9

Compare and contrast lending and ownership investments.

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Question 10

The real rate of return is the nominal rate of return adjusted for inflation.

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The real rate of return accounts for the impact of inflation on the nominal rate of return, resulting in a more accurate measurement of the percentage increase or decrease in purchasing power of an investment.

Question 11

If the total rate of return is multiplied by 1/N, where N is the number of years for which the investment was held, the result is the ________.

Accepted Answer

The result of multiplying the total rate of return by 1/N is the annualized rate of return. This is because the total rate of return is the return over the entire period of investment, while the annualized rate of return is the return on an annual basis. Multiplying by 1/N adjusts the total return to an annualized return by dividing it by the number of years the investment was held.

Question 12

You recently purchased 100 shares of stock at $15 per share. The stock is now worth $20 per share, and it paid a $2 dividend during the time you held it. Your rate of return on this stock is closest to which of the following?

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Question 13

What are the four financial questions that help focus on investing goals?

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Question 14

You recently purchased a stock for $30. It is now worth $40, and it paid a $5 dividend during the time you held it. Your rate of return on this stock is closest to which of the following?

Accepted Answer

The rate of return can be calculated by taking the total gains (or losses) and dividing it by the initial investment. Here, the gains include both the increase in stock value ($40 - $30 = $10) and the dividend paid ($5), totaling $15. The initial investment was $30. Thus, the rate of return is ($15 / $30) * 100% = 50%.

Question 15

Lavon has his money invested into an asset that has averaged the following returns the last three years: +22%, -8%, +13%. Most likely what type of asset is he invested in?

Accepted Answer

The pattern of returns (+22%, -8%, +13%) indicates that Lavon is likely invested in common stock, which is a type of investment that has the potential for higher returns but also comes with higher risk and more volatility. The variability of the returns from year to year is more typical of stock market investments than the other options listed. Corporate bonds and income producing real estate generally have more stable returns, while gold coins are typically viewed as a hedge against inflation and economic instability, but not as a primary growth investment.

Question 16

Louis purchased $5,000 worth of stock three years ago and sold it today for $7,000. He received no dividends from this investment. Inflation averaged 4% during the three years he owned the stock. What was his annualized real rate of return on this investment?

Accepted Answer

To find the annualized real rate of return, we need to adjust for inflation using the following formula:
Real Rate of Return = ((1 + Nominal Rate of Return) / (1 + Inflation Rate)) - 1
First, we need to find the nominal rate of return, which is the percentage gain on the investment without adjusting for inflation:
Nominal Rate of Return = (Sale Price - Purchase Price) / Purchase Price = (7000 - 5000) / 5000 = 0.4 or 40%
Next, we need to find the average inflation rate for the three years:
Inflation Rate = ((1 + 4%) x (1 + 4%) x (1 + 4%))^(1/3) - 1 = 4.04%
Finally, we can calculate the real rate of return:
Real Rate of Return = ((1 + 40%) / (1 + 4.04%)) - 1 = 9.33%
Therefore, the best choice is B.

Question 17

If you are too conservative with your investments, they may not keep up with inflation.

Accepted Answer

Inflation reduces the purchasing power of money over time. If your investments do not keep up with inflation, their value will decrease in terms of real purchasing power. Therefore, it's essential to balance your portfolio with a mix of conservative and growth-oriented investments that can help fight inflation.

Question 18

You purchased an investment for $1,000 on which you earned $120 investment last year. The inflation rate during that time was 3%. What was your real rate of return?

Accepted Answer

Real rate of return = [(1 + nominal rate of return) / (1 + inflation rate)] - 1
= [(1 + 120/1000) / (1 + 3%)] - 1
= 9.03% - 3%
= 6.03%
Therefore, the real rate of return is 6.03%, which is option B.

Question 19

Paula bought a stock for $200 last year and sold it today for $150. If she earned a dividend of $100 while she held the stock her rate of return was

Accepted Answer

Paula's total return is the sum of the capital loss and the dividend received. The capital loss is $150 - $200 = -$50. The dividend received is $100. So, the total return is -$50 + $100 = $50. The rate of return is the total return divided by the initial investment: $50 / $200 = 0.25 or 25%.

Question 20

Tran purchased a house for a rental property for $100,000 five years ago. During the time he owned this rental, his net rental income was a total of $4,000. He just sold the property for $120,000. What was his average annual return on this investment?

Accepted Answer

Tran's total profit from the investment is the sum of the net rental income and the profit from the sale of the property. This equals $4,000 (net rental income) + ($120,000 - $100,000) (profit from sale) = $24,000. To find the average annual return, divide the total profit by the initial investment and then by the number of years: ($24,000 / $100,000) / 5 = 0.048 or 4.8%.

Quiz 11: Investment Basics