Question 1

Real rates of return are typically less than nominal rates of return due to:
A) inflation.
B) capital gains.
C) dividend payments.
D) depreciation.

Accepted Answer

Inflation erodes the purchasing power of money, and as a result, the real rate of return is typically lower than the nominal rate of return. For example, if an investment has a nominal rate of return of 10%, but the inflation rate is 3%, then the real rate of return is only 7%.

Question 2

"Dow up 14.Story at 6:00." This means that:
A) the Dow was up 14% during today's trading.
B) 14 of the Dow's 30 stocks increased in price today.
C) a share of Dow stock went up by $14 today.
D) the Dow index increased by 14 points in today's trading.

Accepted Answer

"Dow up 14" refers to the Dow Jones Industrial Average increasing by 14 points during today's trading. It does not refer to percentage gains, individual stocks, or specific dollar changes.

Question 3

Although several stock indexes are available to inform investors of market changes,the Dow Jones Industrial Average:
A) is the broadest-based of the market indexes.
B) is the only reliable market index.
C) accounts for approximately 90% of U.S. market value.
D) is one of the best-known of the U.S. market indexes.

Accepted Answer

The question asks for the best answer, and the correct answer is D. The Dow Jones Industrial Average is one of the most well-known and widely followed stock indexes, but it is not the broadest-based nor is it the only reliable market index. While it is a significant index, it does not account for approximately 90% of U.S. market value, making option C incorrect.

Question 4

A maturity premium is offered on long-term Treasury bonds due to:
A) the risk of changing interest rates.
B) the risk of default.
C) their specific risk.
D) the uncertainty of their maturity date.

Accepted Answer

The maturity premium is offered on long-term Treasury bonds due to the risk of changing interest rates. As interest rates may fluctuate over a long period of time, long-term bondholders are more exposed to interest rate risk than short-term bondholders. To compensate for this additional risk, long-term bonds carry a maturity premium.

Question 5

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00?
A) −2.50%
B) −0.39%
C) −0.04%
D) −2.56%

Accepted Answer

R = ($39 − 40) / $40 = −0.0250, or −2.50%

Question 6

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life.If the investor sells now,he or she is likely to realize a total return that is:
A) greater than 6%.
B) less than 6%.
C) equal to 2%.
D) equal to 6%.

Accepted Answer

When market interest rates rise, the value of existing bonds with lower interest rates decreases. This is because investors can now buy new bonds with higher interest rates, making the older bonds less attractive. As a result, the investor who purchased the Treasury bonds at 6% return will likely need to sell them at a lower price in order to entice buyers who can now purchase new bonds with higher returns. This means that the total return realized by the investor upon selling the bonds will be less than 6%.

Question 7

What is the percentage return on a stock that was purchased for $48.40,paid a $1.67 dividend,and was then sold after one year for $46.20?
A) −2.50%
B) −1.10%
C) 0.23%
D) −0.33%

Accepted Answer

R = ($46.20 + 1.67 − 48.40) / $48.40 = −0.0110, or −1.10%

Question 8

Sue purchased a stock for $25 a share,held it for one year,received a $1.34 dividend,and sold the stock for $26.45.What nominal rate of return did she earn?
A) 11.16%
B) 14.23%
C) 12.09%
D) 10.55%

Accepted Answer

R = ($26.45 + 1.34 − 25) / $25 = 0.1116, or 11.16%

Question 9

An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain.How much was received in dividend income during the year?
A) $2.00
B) $2.20
C) $4.00
D) $4.40

Accepted Answer

Dividend income = (0.15 − 0.05) × $40 = $4.00

Question 10

If a share of stock provided a 14.84% nominal rate of return over the previous year while the real rate of return was 6.65%,then the inflation rate was:
A) 8.89%.
B) 7.68%.
C) 8.03%.
D) 9.12%.

Accepted Answer

h = 1.1484 / 1.0665 − 1 = 0.0768, or 7.68%

Question 11

How is it possible for real rates of return to increase during times when the rate of inflation increases?
A) Inflation increased more than the real return.
B) Nominal returns actually decreased.
C) Nominal returns increased more than inflation.
D) Nominal returns increased less than inflation.

Accepted Answer

Real rates of return can increase if nominal returns increase more than the rate of inflation, as the real return is the nominal return adjusted for inflation.

Question 12

What nominal return was received by an investor when inflation averaged 3.46% and the real rate of return was 2.5%?
A) 0.96%
B) 5.96%
C) 6.05%
D) 5.47%

Accepted Answer

R = (1.0346 × 1.025) − 1 = 0.0605, or 6.05%

Question 13

Stock A has 10 million shares outstanding and stock B has 5 million shares outstanding.Both stocks sell for $10 a share.What is their relative weighting if both stocks are represented in the S&P 500?
A) They have equal weighting, like all S&P 500 stocks.
B) B has twice the weighting, to account for having fewer shares.
C) A has twice the weighting, to account for having more shares.
D) They are weighted according to their expected performance.

Accepted Answer

The relative weighting of stocks in the S&P 500 is determined by market capitalization, which is the number of outstanding shares multiplied by the stock price. Therefore, stock A has a market capitalization of 10 million x $10 = $100 million, while stock B has a market capitalization of 5 million x $10 = $50 million. Since stock A has a higher market capitalization, it will have a higher weighting in the S&P 500. Specifically, it will have twice the weighting of stock B because it has twice the market capitalization.

Question 14

Although Standard and Poor's Composite Index contains a limited number of U.S.publicly traded stocks,the Index represents:
A) all stocks in the industrial sector.
B) all stocks priced at $50 a share or more.
C) approximately 40% of U.S. stocks traded, in market value.
D) approximately 75% of U.S. stocks traded, in market value.

Accepted Answer

The Standard and Poor's Composite Index, commonly known as the S&P 500, represents approximately 75% of the U.S. stock market's total market value, despite containing only 500 of the thousands of publicly traded stocks.

Question 15

Risks that are peculiar to a single firm:
A) are called market risks
B) cannot be diversified away
C) are called specific risks
D) tend to cause stocks to move together

Accepted Answer

Risks that are peculiar to a single firm are called specific risks. These risks are unique to a particular company and cannot be diversified away. They can include factors such as management changes, economic downturns, lawsuits, or unexpected events that affect the company's operations. Specific risks can cause fluctuations in the company's stock price and can have a significant impact on investors who are solely invested in that particular company.

Question 16

The primary difference between U.S.Treasury bills and U.S.Treasury bonds is that the bills:
A) do not have default risk.
B) have more price volatility.
C) have a shorter maturity at time of issue.
D) offer a higher return.

Accepted Answer

US Treasury bills have a maturity of one year or less while US Treasury bonds have a maturity of ten years or more. Therefore, US Treasury bills have a shorter maturity at the time of issue compared to US Treasury bonds.

Question 17

The Dow Jones Industrial Average is:
A) the most representative of the stock market indexes.
B) an index of 500 largest corporate stocks in America.
C) an index of 30 major stocks.
D) an equally weighted index of all stocks traded on the New York Stock Exchange.

Accepted Answer

The Dow Jones Industrial Average is an index of 30 major stocks, which makes it a limited representation of the overall stock market. It is not an index of 500 largest corporate stocks in America or an equally weighted index of all stocks traded on the New York Stock Exchange.

Question 18

The actual real rate of return on an investment will be positive as long as the:
A) nominal return is positive.
B) inflation rate is positive.
C) nominal return exceeds the inflation rate.
D) inflation rate exceeds the real return.

Accepted Answer

The actual real rate of return is calculated by subtracting the inflation rate from the nominal rate of return. Therefore, the real rate of return will be positive if the nominal return exceeds the inflation rate.

Question 19

Which one of these is the safest investment?
A) Corporate bonds
B) Common stock
C) U.S. Treasury bills
D) Preferred stock

Accepted Answer

U.S. Treasury bills are considered the safest investment as they are issued by the government and carry very low risk of default. Corporate bonds, preferred stock, and common stock carry higher risks and potential for losses.

Question 20

If inflation is 6%,what real rate of return is earned by an investor in a bond that was purchased for $1,000,has an annual coupon of 8%,and was sold at the end of the year for $960?
A) −1.89%
B) 1.92%
C) −2.66%
D) 2.47%

Accepted Answer

Nominal return = [$960 + (0.08 × $1,000) − $1,000] / $1,000 = 0.04Real return = 1.04 / 1.06 − 1 = −0.0189, or −1.89%

Quiz 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

Real rates of return are typically less than nominal rates of return due to:

"Dow up 14.Story at 6:00." This means that:

Although several stock indexes are available to inform investors of market changes,the Dow Jones Industrial Average:

A maturity premium is offered on long-term Treasury bonds due to:

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00?

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life.If the investor sells now,he or she is likely to realize a total return that is:

What is the percentage return on a stock that was purchased for $48.40,paid a $1.67 dividend,and was then sold after one year for $46.20?

Sue purchased a stock for $25 a share,held it for one year,received a $1.34 dividend,and sold the stock for $26.45.What nominal rate of return did she earn?

An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain.How much was received in dividend income during the year?

If a share of stock provided a 14.84% nominal rate of return over the previous year while the real rate of return was 6.65%,then the inflation rate was:

How is it possible for real rates of return to increase during times when the rate of inflation increases?

What nominal return was received by an investor when inflation averaged 3.46% and the real rate of return was 2.5%?

Stock A has 10 million shares outstanding and stock B has 5 million shares outstanding.Both stocks sell for $10 a share.What is their relative weighting if both stocks are represented in the S&P 500?

Although Standard and Poor's Composite Index contains a limited number of U.S.publicly traded stocks,the Index represents:

Risks that are peculiar to a single firm:

The primary difference between U.S.Treasury bills and U.S.Treasury bonds is that the bills:

The Dow Jones Industrial Average is:

The actual real rate of return on an investment will be positive as long as the:

Which one of these is the safest investment?

If inflation is 6%,what real rate of return is earned by an investor in a bond that was purchased for $1,000,has an annual coupon of 8%,and was sold at the end of the year for $960?