Deck 2: Valuation, Risk, Return, and Uncertainty

Question 1

An ordinary annuity is a _____ series of _____ cash.

A) finite, constant
B) finite, growing
C) infinite, constant
D) infinite, growing

Answer 1

finite, constant

Question 2

The winner of a state lottery usually receives a(n)

A) ordinary annuity
B) annuity due
C) growing annuity
D) perpetuity

Answer 2

annuity due

Question 3

Using a discount rate of 8% per year, what is the present value of an ordinary annuity of $100 per year for 10 years?

A) $1,000
B) $671
C) $887
D) $557

Answer 3

$671

Question 4

Using a discount rate of 8% per year, what is the present value of an annuity due of $100 per year with 10 payments?

A) $725
B) $559
C) $793
D) $772

Question 5

Using a discount rate of 8% per year (compounded quarterly), what is the present value of an ordinary annuity of $100 per year for 10 years?

A) $726
B) $662
C) $811
D) $684

Question 6

A perpetual cash flow stream makes its first payment of $500 in one year. Using a 7% annual discount rate and a 3% growth rate in the value of subsequent payments, what is the present value of this growing perpetuity?

A) $2,000
B) $20,000
C) $12,500
D) $125,000

Question 7

A perpetuity makes annual payments of $250. The perpetuity is valued using a 10% discount rate. What is the value of the perpetuity if the first payment is made immediately?

A) $2,500
B) $2,750
C) $25,000
D) $2,525

Question 8

The fact that most investors are risk averse means they will

A) only take risks for which they are properly rewarded
B) not take a risk
C) not voluntarily take a risk
D) not take a risk unless they know the outcome in advance

Question 9

Which of the following statements is true?

A) Some people are risk averse and others are not
B) Some people are more risk averse than others
C) Risk averse people will not take a risk
D) Risk averse people are willing to settle for less return than risk neutral people

Question 10

Risk must involve

A) a chance of loss
B) an unknown probability distribution
C) actual dollars
D) negative expected returns

Question 11

Overall variability of returns is called

A) systematic risk
B) unsystematic risk
C) total risk
D) undiversifiable risk

Question 12

Risk is often measured as

A) central tendency of returns
B) dispersion of returns
C) expected value of returns
D) possibility of negative returns

Question 13

Riskier securities have _____ returns.

A) higher expected
B) lower realized
C) higher instantaneous
D) lower long-term

Question 14

The market rewards investors for bearing _____risk.

A) diversifiable
B) undiversifiable
C) unsystematic
D) total

Question 15

The diminishing marginal utility of money explains why

A) some stocks sell for more than others
B) most people will not take a fair bet
C) people view the stock market as risky
D) people tend to pay too much

Question 16

The text described an example of the diminishing marginal utility of money with a statement made by a _____ player.

A) hockey
B) football
C) tennis
D) basketball

Question 17

Individual investment behavior is more a function of _____ than _____.

A) risk, expected return
B) expected return, utility
C) utility, expected return
D) expected return, risk

Question 18

The St. Petersburg paradox explains why

A) some stocks sell for more than others
B) most people will not take a fair bet
C) people view the stock market as risky
D) people tend to pay too much

Question 19

In economic theory, if money is not saved, it is

A) consumed
B) invested
C) unrealized
D) deferred

Question 20

Wearing a Rolex watch is an example of someone getting

A) psychic return
B) utility
C) satisfaction
D) all of the above

Question 21

Two large classes of risk are

A) systematic and undiversifiable
B) price and convenience
C) realized and psychic
D) market and intermarket

Question 22

Individual consumption decisions are a major factor in determining

A) credit ratings of corporations
B) dividend rates
C) market interest rates
D) levels of perceived risk

Question 23

If a stock has a higher than average expected return, you would logically expect it is

A) widely held by investors
B) riskier than average
C) in an industry with good prospects
D) a well-managed company

Question 24

What is the present value of a growing perpetuity with an initial cash flow of 1000 (C₀), a growth rate of 3% per year (g), and a required rate of return of 8% (R)?

A) $7777.64
B) $12,500
C) $20,000
D) $20,600

Question 25

Most investors would not be interested in a fair bet because

A) they would be concerned whether it is really fair
B) investors do not willingly take a risk when it is possible to lose money
C) losing a given amount of money would reduce utility more than winning the same amount would increase utility
D) they accept only bets with a sure outcome

Question 26

The holding period return is calculated as

A)

B)

C)

D)

Question 27

You bought 100 shares of stock at $35, received $3 per share in dividends, and sold the shares for $50. Your holding period return is

A) 36%
B) $1,503
C) 51.4%
D) $5,300

Question 28

Which of the following is true of the holding period return?

A) It considers the time value of money
B) It is independent of the passage of time
C) It explicitly considers risk
D) It only considers capital gains or losses

Question 29

A holding period return should only be compared with returns calculated

A) over shorter periods
B) over longer periods
C) over periods of the same length
D) over periods of the same length or less

Question 30

A stock's return is 15.5%. The return relative is

A) 0.845
B) -0.845
C) 0.155
D) 1.155

Question 31

Return relatives are calculated primarily to deal with the potential problem of

A) changing returns
B) large returns
C) zero returns
D) negative returns

Question 32

A stock has monthly returns of 4%, 5%, 2%, and -3%. Its arithmetic average return is

A) 2%
B) 3%
C) 4%
D) 5%

Question 33

A stock has monthly returns of 4%, 5%, 2%, and -3%. Its geometric average return is

A) 1.9%
B) 2.1%
C) 3.3%
D) cannot be determined

Question 34

You buy a stock for $50 per share. Over the next four months, it has monthly returns of 4%, 5%, 2%, and -3%. The value of a share at the end of the fourth month is

A) $51.20
B) $54.02
C) $54.12
D) $56.45

Question 35

Suppose a stock pays no dividends. Another method of calculating the return relative is

A)

B)

C)

D)

Question 36

The arithmetic mean is always _______ the geometric mean.

A) greater than or equal to
B) greater than
C) less than or equal to
D) less than

Question 37

The _____ the dispersion in a series of numbers, the ____ the gap between the arithmetic and geometric mean.

A) greater, greater
B) greater, smaller
C) smaller, greater
D) more predictable, less predictable

Question 38

Technically, _____ refers to the past; _____ refers to the future.

A) return, expected return
B) realized return, return
C) return relative, return
D) return, return relative

Question 39

According to the book, which of the following terms can mean different things to different people?

A) Return on assets
B) Return on equity
C) Return on investment
D) Return of principal

Question 40

The use of _____ can dramatically affect an investor's return.

A) historical data
B) leverage
C) arithmetic averages
D) variance calculations

Question 41

Total risk can be measured by all of the following except

A) variance
B) standard deviation
C) semi-variance
D) arithmetic mean

Question 42

The variance of x is 25. What is the variance of 2x?

A) 25
B) 50
C) 75
D) 100

Question 43

Semi-variance only considers

A) extreme variation
B) adverse variation
C) unexpected variation
D) anticipated variation

Question 44

Discrete random variables are _____; continuous random variables are ______.

A) quantifiable, unquantifiable
B) objective, subjective
C) counted, measured
D) dependent, independent

Question 45

A variable whose value is based on the value of other variables is a(n)

A) independent variable
B) dependent variable
C) stochastic variable
D) estimated variable

Question 46

Random variables reside in a population

A) sample
B) continuous set
C) discrete set

Question 47

A jar contains a mixture of coins; you need a quarter. From your perspective, the distribution of coins in the jar is univariate

A) bivariate
B) trivariate
C) multivariate

Question 48

If a distribution shows more possible outcomes on one side of the mean than the other, the distribution shows

A) uniformity
B) normal characteristics
C) random characteristics
D) skewness

Question 49

A coin-flipping experiment in which you measure heads or tails takes observations from a _____ distribution.

A) chi-square
B) exponential
C) Poisson
D) binomial

Question 50

The expected value of a random variable is also called the

A) skewness
B) variance
C) kurtosis
D) mean

Question 51

A jar contains 100 quarters, 50 dimes, and 50 nickels. What is the expected value of a single observation from this coin population?

A) $0.375
B) $0.200
C) $0.133
D) $0.163

Question 52

Which of the following can help reduce the effect of outliers?

A) Rounding
B) Regression
C) Interpolation
D) Logarithms

Question 53

The expected value of x is 5%. What is E(6x)?

A) 0.833%
B) 5%
C) 30%
D) Cannot be determined

Question 54

The correlation coefficient is equal to

A)

B)

C)

D)

Question 55

The minimum value of the correlation coefficient is

A) -1
B) 0
C) +1
D) there is no minimum value

Question 56

The minimum value of covariance is

A) -1
B) 0
C) +1
D) there is no minimum value

Question 57

R squared is a measure of

A) goodness of fit
B) partial dispersion
C) central tendency
D) skewness

Question 58

A sample of 100 observations has a standard deviation of 25. What is the standard error?

A) 5
B) 2.5
C) .25
D) Cannot be determined

Question 59

A sample of 100 observations has a standard deviation of 25 and a mean of 75. What is the 95% confidence interval?

A)

B)

C)

D)

Question 60

The expected return on A is 12%; the expected return on B is 15%. What is the expected return of a portfolio that contains one-third A and the remainder B?

A) 12%
B) 14%
C) 15%
D) 13.5%

Question 61

A tilde (~) over a symbol indicates it is a

A) random variable
B) constant
C) continuous random variable
D) discrete random variable

Question 62

If two securities are negatively correlated, their covariance is

A) positive
B) negative
C) zero
D) cannot be determined

Question 63

The covariance between a random variable and a constant is

A) negative
B) positive
C) zero
D) non-negative

Question 64

Return is the

A) benefit associated with an investment
B) realized gain from an investment
C) realized and unrealized gain from an investment
D) measurable gain from an investment

Question 65

Assume the risk-free rate is constant over time. The correlation between the return on security x and the return on the risk-free asset is

A) negative
B) positive
C) zero
D) cannot be determined without further information

Question 66

The correct method for measuring the average return over several periods in the past is with a(n)

A) geometric mean
B) arithmetic mean
C) statistical mean
D) multiple variation mean

Question 67

Using semivariance to measure risk is appropriate if the return distribution is

A) symmetrical
B) not symmetrical
C) normally distributed
D) uniformly distributed

Question 68

The median of a distribution is the

A) arithmetic average
B) geometric average
C) point where half of the observations lie on either side
D) value that occurs most frequently

Question 69

If the variance of x is 0.10, what is the variance of 2x?

A) 0.05
B) 0.10
C) 0.20
D) 0.40

Question 70

If the standard deviations of Stock A and B are 0.20 and 0.30 respectively and the COV(A,B) equals 0.012, what is the correlation coefficient?

A) 0.00072
B) 0.20
C) 0.30
D) 2