Question 1

________ is the absence of knowledge of the outcome of an event before it happens.

Accepted Answer

Uncertainty refers to the lack of information or knowledge about the outcome of an event before it happens, whereas certainty refers to a situation where the outcome is known for sure. Return and diversification are concepts that are related to investment and finance, and are not directly related to the absence of knowledge about an event's outcome.

Question 2

Rose bought a share of stock for $64.50 that paid a dividend of $.50 and sold nine months later for $64.00.What was her dollar profit or loss and holding period return?

Accepted Answer

C

Question 3

You purchased 1000 shares of stock for $25 per share.After holding the stock for 6 years and not receiving any dividends,you sell the stock for $42 per share.What are the holding period and annual return on this investment?

Accepted Answer

The holding period is 6 years. The annual return can be calculated using the formula for compound annual growth rate (CAGR): $$CAGR = \left(\frac{Ending\:Value}{Beginning\:Value}\right)^{\frac{1}{Number\:of\:Periods}} - 1$$ Substituting the given values: $$CAGR = \left(\frac{42}{25}\right)^{\frac{1}{6}} - 1 \approx 0.0903$$ or 9.03%. The total return over the 6 years is $(\frac{42 - 25}{25}) \times 100 = 68\%$.

Question 4

Felix bought a share of stock for $33.50 that paid a dividend of $.75 and sold six months later for $31.50.What was his dollar profit or loss and holding period return?

Accepted Answer

The answer of Felix bought a share of stock for...

Question 5

________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.

Accepted Answer

Risk is the correct choice as it refers to the potential for loss or harm in a given situation. Diversification refers to spreading investments to reduce risk, while uncertainty refers to a lack of knowledge or information about an event or situation. Collaboration refers to working together with others towards a common goal.

Question 6

The holding period return (HPR)is the return measured from the initial purchase to the final sale of the investment without regard to the length of time the investment is held.

Accepted Answer

The definition of HPR describes that it is calculated based on the initial purchase price and the final sale price, without considering the duration of the holding period.

Question 7

Which of the following investments is considered to be default risk-free?

Accepted Answer

Treasury bills are considered to be default risk-free because they are backed by the U.S. government. AAA rated corporate bonds may have a low risk of default, but there is still a possibility. Currency options and common stock are much riskier investments with a higher level of uncertainty.

Question 8

Which of the statements below is TRUE?

Accepted Answer

Investors generally want to maximize their return or profits, but they also want to minimize the risk of loss or fluctuations in the value of their investment. Thus, the most common objective of investors is to maximize return and minimize risk, making choice (B) the correct answer.

Question 9

Define risk.Give an example of a risk-free investment and explain why you claim it has no risk.Give an example of a risky investment and explain why you claim the investment to be risky.

Accepted Answer

The answer of Define risk.Give an example of a risk-free...

Question 10

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States.Rank the average returns from the highest to lowest over this time period.

Accepted Answer

Historically, small-company stocks have provided higher average returns than large-company stocks, which in turn have outperformed long-term government bonds and 3-month U.S. Treasury bills, reflecting the risk-return trade-off.

Question 11

Simple interest is akin to the effective annual rate (EAR)and compound interest is akin to the annual percentage rate (APR).

Accepted Answer

Simple interest is calculated based on the initial principal and does not take into account any interest earned over time. Effective annual rate (EAR) takes into account compounding to give a more accurate representation of the true interest earned. Compound interest, on the other hand, takes into account both the initial principal and any interest earned over time, and is represented by the annual percentage rate (APR).

Question 12

Your investment advisor informs you that you do not need to pay a fee for his services.Instead,he invests your money for one month and keeps all of the proceeds before investing it for you.If your advisor makes and keeps a 1% return on your investment,what is his EAR if the earnings rate could be extrapolated for one year?

Accepted Answer

The fee the advisor charges is built-in to the return he earns on your investment. Since he earns a 1% return for one month, we can use the formula for EAR to extrapolate that to one year:
EAR = (1 + (1/12))^12 - 1 = 12.68%
Therefore, the advisor's effective annual return (EAR) is 12.68%.

Question 13

Robert invested in stock and received a positive return over a 9-month period.Which of the following types of returns will be greater?

Accepted Answer

Effective annual return takes into account the compounding effects of the investment, whereas HPR and APR do not. As Robert received positive returns, the compounding effect will increase the effective annual return, making it greater than the other options.

Question 14

Gary bought a share of stock for $15.75 that paid a dividend of $.45 and sold three months later for $18.65.What was his dollar profit or loss and holding period return?

Accepted Answer

Gary's dollar profit is calculated by adding the dividend received to the difference between the selling price and the purchase price: ($.45 + ($18.65 - $15.75)) = $3.35. The holding period return is the profit divided by the purchase price: ($3.35 / $15.75) * 100 = 21.27%.

Question 15

Janet bought a share of stock for $47.50 that paid a dividend of $.72 and sold one year later for $51.38.What was her dollar profit or loss and holding period return?

Accepted Answer

To calculate the dollar profit, we need to subtract the purchase price from the sale price and add any dividends received:

Profit = Sale Price - Purchase Price + Dividends
Profit = $51.38 - $47.50 + $0.72
Profit = $4.60

To calculate the holding period return, we need to divide the profit by the initial investment and express it as a percentage:

Holding Period Return = (Sale Price + Dividends - Purchase Price) / Purchase Price
Holding Period Return = ($51.38 + $0.72 - $47.50) / $47.50
Holding Period Return = 0.0968 or 9.68%

Therefore, the correct answer is C, $4.60 and 9.68%.

Question 16

Lila purchased Hampton Industries Inc.stock for $18.35 and sold it 6 months later for $21.45 after receiving a $0.50 dividend.What was her holding period return (HPR),Annual Percentage Rate (APR),and Effective Annual Rate (EAR)?

Accepted Answer

Holding Period Return (HPR) = (Ending price + Dividend - Beginning price) / Beginning price
HPR = (21.45 + 0.5 - 18.35) / 18.35
HPR = 0.1962 or 19.62%

Annual Percentage Rate (APR) = (1 + HPR)^(365/183) - 1
APR = (1 + 0.1962)^(365/183) - 1
APR = 0.3924 or 39.24%

Effective Annual Rate (EAR) = (1 + APR/365)^365 - 1
EAR = (1 + 0.3924/365)^365 - 1
EAR = 0.4309 or 43.09%

Therefore, the best choice is C with HPR of 19.62%, APR of 39.24%, and EAR of 43.09%.

Question 17

One definition of return is: profit (or loss)
original cost .

Accepted Answer

Return is defined as the profit or loss made on an investment, which is calculated by dividing the profit or loss by the original cost.

Question 18

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States.Rank the average standard deviation ( measure of risk)from the highest to lowest over this time period.

Accepted Answer

Small-company stocks typically exhibit higher volatility compared to large-company stocks, reflecting their higher risk. Long-term government bonds also carry risk, particularly interest rate risk, but less so than stocks. 3-month U.S. Treasury bills are considered the safest and least volatile, as they are short-term government securities.

Question 19

Finance functions in a two-parameter world of risk and return.Define risk and return in a financial sense and discuss how these two concepts are "joined at the hip."

Accepted Answer

The answer of Finance functions in a two-parameter world of...

Question 20

Even if there is certainty of future payoffs,there can still be risk.

Accepted Answer

Risk involves uncertainty about future payoffs; if there is certainty about future payoffs, then by definition, there is no risk involved.

Quiz 8: Risk and Return