Question 1

Jarvis 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

Jarvis bought the stock for $15.75, and received a dividend of $.45, so the total cost of buying the stock was $15.30 ($15.75 - $.45).

After three months, he sold the stock for $18.65.

His dollar profit was $3.35 ($18.65 - $15.30).

To calculate his holding period return:

- First, we need to calculate the total gain from the investment, which is the sum of the dividend and the dollar profit:

$3.35 + $.45 = $3.80

- Second, we need to calculate the return on the investment, which is the total gain divided by the initial investment:

$3.80 ÷ $15.30 = 0.2484

- Finally, we convert the decimal to a percentage:

0.2484 x 100 = 24.84%

Therefore, Jarvis had a dollar profit of $3.35 and a holding period return of 21.27% (closest to answer choice B).

Question 2

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 2% return on your investment, what is his EAR if the earnings rate could be extrapolated for one year?

Accepted Answer

To find the EAR, we need to use the formula:
EAR = (1 + APR/n)^n - 1
where APR is the annual percentage rate and n is the number of compounding periods in one year.
In this case, the APR is 2%, and there is one compounding period (one month). Therefore, we have:
EAR = (1 + 0.02/1)^1 - 1 = 2.00%
However, this is only for one month, and we want to extrapolate it for one year. To do this, we use the formula:
Annual rate = (1 + Monthly rate)^12 - 1
Plugging in the monthly rate of 2%, we get:
Annual rate = (1 + 0.02)^12 - 1 = 0.2682 or 26.82%
Therefore, the answer is C.

Question 3

Travis bought a share of stock for $31.50 that paid a dividend of $.85 and sold six months later for $27.65. What was his dollar profit or loss and holding period return?

Accepted Answer

The dollar profit or loss is the difference between the selling price and the purchase price, minus the dividend received. In this case, the dollar profit or loss is $27.65 - $31.50 - $0.85 = -$3.85. The holding period return is the dollar profit or loss divided by the purchase price, multiplied by 100%. In this case, the holding period return is -$3.85 / $31.50 * 100% = -12.22%.

Question 4

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 5

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 6

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

Accepted Answer

Compound interest is akin to the effective annual rate (EAR) and simple interest is akin to the annual percentage rate (APR). This is because compound interest takes into account the compounding effect of earning interest on the interest earned, similar to how EAR takes into account the effect of compounding on an investment, while simple interest only calculates interest based on the principal amount, similar to how APR only considers the interest charged on the principal borrowed.

Question 7

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

The effective annual return takes into account compounding of returns over the entire year, while the holding period return and annual percentage rate are calculated based on the return over a shorter period of time (in this case, 9 months). Therefore, the effective annual return will likely be greater than the other types of returns.

Question 8

Alice purchased Hampton Industries Inc. stock for $14.65 and sold it 6 months later for $17.38 after receiving a $0.25 dividend. What was Alice's holding period return (HPR), Annual Percentage Rate (APR), and Effective Annual Rate (EAR)?

Accepted Answer

The holding period return (HPR) is calculated as [(17.38 + 0.25 - 14.65) / 14.65] = 20.34%. The APR is the HPR annualized, so 20.34% * 2 = 40.68%. The EAR is calculated using the formula (1 + HPR)^(1/n) - 1, where n is the number of periods in a year, so (1 + 0.2034)^(2) - 1 = 44.82%.

Question 9

Which of the statements below is TRUE?

Accepted Answer

Most investors want to maximize their return on investment (ROI) while minimizing their risk. This means they want to earn as much return as possible without taking on too much risk. Therefore, option B is the correct statement.

Question 10

One definition of return is:

Accepted Answer

The answer of One definition of return is: ...

Question 11

________ 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 commonly defined as the possibility of loss, injury, or negative outcomes. It involves the uncertainty surrounding potential outcomes, particularly those that may result in some type of harm or financial detriment. Diversification refers to the practice of spreading investments across different asset classes to reduce risk, while collaboration refers to cooperation or working together towards a common goal. Uncertainty is a related concept, but it may be broader in scope and may refer to any situation in which the outcome is not certain or predictable, regardless of the potential for loss.

Question 12

The practice of not putting all of your eggs in one basket is an illustration of ________.

Accepted Answer

The practice of not putting all of your eggs in one basket is an illustration of diversification, which means spreading investments across different assets to reduce risk.

Question 13

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.

Question 14

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

Accepted Answer

Joe's dollar profit = (sale price - purchase price) + dividends received = ($51.38 - $47.50) + $0.72 = $4.60
Holding period return = (dollar profit / purchase price) x 100% = ($4.60 / $47.50) x 100% = 9.68%

Therefore, the best choice is C.

Question 15

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 16

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 issued by the U.S. government, which is considered to be one of the safest credit risks in the world. Currency options, AAA rated corporate bonds, and common stock all carry some degree of default risk.

Question 17

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

Accepted Answer

Uncertainty refers to the lack of knowledge or predictability of the outcome of an event before it occurs. Return and diversification are not relevant to this definition, while certainty assumes that the outcome is already known with full confidence.

Question 18

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 holding period return is a measure of the return earned on an investment over the period of time that the investment was held. It is calculated as the difference between the ending price and the beginning price, plus any income generated during the holding period, all divided by the beginning price. It is not dependent on the length of time the investment was held; it can apply to any investment, whether held for a short or long period of time.

Question 19

Amy 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

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

Question 20

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...

Quiz 8: Risk and Return