Deck 4: Mutual Funds and Other Investment Companies

Question 1

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 7%.What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

A) 4%.
B) 10%.
C) 7%.
D) 3%.
E) none of these.

Answer 1

A

Question 2

The holding period return (HPR)on a share of stock is equal to

A) the capital gain yield over the period plus the inflation rate.
B) the capital gain yield over the period plus the dividend yield.
C) the current yield plus the dividend yield.
D) the dividend yield plus the risk premium.
E) the change in stock price

Answer 2

B

Question 3

Other things equal,an increase in the government budget deficit

A) drives the interest rate down
B) drives the interest rate up
C) might not have any effect on interest rates
D) increases business prospects
E) none of these.

Answer 3

B

Question 4

If both the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation:

A) borrowers gain and savers lose.
B) savers gain and borrowers lose.
C) both borrowers and savers lose.
D) neither borrowers nor savers gain or lose.
E) both borrowers and savers gain.

Question 5

The risk premium for common stocks

A) cannot be zero,for investors would be unwilling to invest in common stocks.
B) must always be positive,in theory.
C) is negative,as common stocks are risky.
D) a and b.
E) a and c.

Question 6

Which of the following statements is true?

A) Inflation has no effect on the nominal rate of interest.
B) The realized nominal rate of interest is always positive.
C) The realized nominal rate of interest is always greater than the real rate of interest.
D) Certificates of deposit offer a guaranteed real rate of interest.
E) None of these is true.

Question 7

Which of the following determine(s)the level of real interest rates?
I)the supply of savings by households and business firms
II)the demand for investment funds
III)the government's net supply and/or demand for funds

A) I only
B) II only
C) I and II only
D) I,II,and III (all of these)
E) none of these

Question 8

Historical records regarding return on stocks,bonds,and Treasury bills between 1957 and 2009 show that

A) stocks offered investors greater rates of return than bonds and bills.
B) stock returns were less volatile than those of bonds and bills.
C) bonds offered investors greater rates of return than stocks and bills.
D) bills outperformed stocks and bonds.
E) treasury bills always offered a rate of return greater than inflation

Question 9

If the nominal return is constant,the after-tax real rate of return

A) declines as the inflation rate increases.
B) increases as the inflation rate increases.
C) declines as the inflation rate declines.
D) increases as the inflation rate decreases.
E) a and d.

Question 10

You have been given this probability distribution for the holding period return for XYZ stock: $$\begin{array} { l c c } \text { State of the Economy } & \text { Probability } & \text { HPR } \\\hline \text { Boom } & .30 & 18 \% \\\text { Normal growth } & .50 & 12 \% \\\text { Recession } & .20 & - 5 \%\end{array}$$
What is the expected standard deviation for XYZ stock?

A) 2.07%
B) 9.96%
C) 7.04%
D) 1.44%
E) 8.13%

Question 11

You purchased a share of stock for $20.One year later you received $1 as dividend and sold the share for $29.What was your holding period return?

A) 45%
B) 50%
C) 5%
D) 40%
E) none of these

Question 12

Which of the following statement(s)is(are)true?
I)The real rate of interest is determined by the supply and demand for funds.
II)The real rate of interest is determined by the expected rate of inflation.
III)The real rate of interest can be affected by actions of the Bank of Canada.
IV)The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.

A) I and II only.
B) I and III only.
C) III and IV only.
D) II and III only.
E) I,II,III,and IV only

Question 13

LJP,Inc.has the following probability distribution of holding period returns on its stock. $$\begin{array} { l c c } \text { State of the Economy } & \text { Probability } & \text { HPR } \\\hline \text { Boom } & .25 & 25 \% \\\text { Normal growth } & .45 & 15 \% \\\text { Recession } & .30 & 9 \%\end{array}$$
The expected return on LJP's stock is

A) 15.7%.
B) 12.4%.
C) 16.5%.
D) 17.8%.
E) 11.6%.

Question 14

Over the past year you earned a nominal rate of interest of 8 percent on your money.The inflation rate was 4 percent over the same period.The exact actual growth rate of your purchasing power was

A) 15.5%.
B) 10.0%.
C) 3.8%.
D) 4.8%.
E) 15.0%.

Question 15

Ceteris paribus,a decrease in the demand for loanable funds

A) drives the interest rate down.
B) drives the interest rate up.
C) might not have any effect on interest rate.
D) results from an increase in business prospects and a decrease in the level of savings.
E) none of these.

Question 16

Over the past year you earned a nominal rate of interest of 10 percent on your money.The inflation rate was 5 percent over the same period.The exact actual growth rate of your purchasing power was

A) 15.5%.
B) 10.0%.
C) 5.0%.
D) 4.8%.
E) 15.0%

Question 17

A risk-free intermediate or long-term investment

A) is free of all types of risk.
B) does not guarantee the future purchasing power of its cash flows.
C) does guarantee the future purchasing power of its cash flows as it is insured by the Canadian government.
D) a and b.
E) b and c.

Question 18

You have been given this probability distribution for the holding period return for XYZ stock: $$\begin{array} { l c c } \text { State of the Economy } & \text { Probability } &\text { HPR } \\\hline\text { Boom } & .30 & 18 \% \\\text { Normal growth } & .50 & 12 \% \\\text { Recession } & .20 & - 5 \%\end{array}$$
What is the expected holding period return for XYZ stock?

A) 11.67%
B) 8.33%
C) 10.4%
D) 12.4%
E) 7.88%

Question 19

You purchased a share of stock for $30.One year later you received $1.50 as a dividend and sold the share for $32.25.What was your holding-period return?

A) 12.5%
B) 12.0%
C) 13.6%
D) 11.8%
E) 14.1%

Question 20

If the annual real rate of interest is 5% and the expected inflation rate is 4%,the nominal rate of interest would be approximately

A) 1%.
B) 9%.
C) 20%.
D) 15%.
E) none of these.

Question 21

What does it mean if we are being told that the 5% VaR of a portfolio is -4.75%?

A) The average return of the portfolio is -4.75%
B) The average loss of the portfolio is 4.75%
C) There is only a 5% probability of a loss greater than 4.75%
D) The maximum loss of the portfolio is 4.75% with probability 95%
E) c and d

Question 22

An investor purchased a bond 63 days ago for $980.He received $17 in interest and sold the bond for $987.What is the holding-period return on his investment?

A) 1.52%
B) 2.45%
C) 1.92%
D) 2.68%
E) 3.28%

Question 23

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 4%.What is your approximate annual real rate of return if the rate of inflation was 2% over the year?

A) 4%.
B) 2%.
C) 6%.
D) 3%.
E) 1%.

Question 24

Which of the following factors would not be expected to affect the nominal interest rate?

A) the supply of loanable funds
B) the demand for loanable funds
C) the coupon rate on previously issued government bonds
D) the expected rate of inflation
E) government spending and borrowing

Question 25

If a portfolio had a return of 15%,the risk free asset return was 3%,and the standard deviation of the portfolio's excess returns was 34%,the risk premium would be _____.

A) 31%
B) 18%
C) 49%
D) 12%
E) 29%

Question 26

Discuss some reasons why an investor with a long time horizon might choose to invest in common stocks,even though they have historically been riskier than government bonds or T-bills.

Question 27

Discuss the relationships between interest rates (both real and nominal),expected inflation rates,and tax rates on investment returns.

Question 28

An investor purchased a bond 45 days ago for $985.He received $15 in interest and sold the bond for $980.What is the holding period return on his investment?

A) 1.52%
B) 0.50%
C) 1.02%
D) 0.01%
E) 0.10%

Question 29

What has been the relationship between T-Bill rates and inflation rates throughout the 1980s and 1990s?

A) The T-Bill rate was sometimes higher than and sometimes lower than the inflation rate.
B) The T-Bill rate has equaled the inflation rate plus a constant percentage.
C) The inflation rate has equaled the T-Bill rate plus a constant percentage.
D) The T-Bill rate has been higher than the inflation rate.
E) The T-Bill rate has been lower than the inflation rate.

Question 30

In words,the real rate of interest is approximately equal to

A) the nominal rate minus the inflation rate.
B) the inflation rate minus the nominal rate.
C) the nominal rate times the inflation rate.
D) the inflation rate divided by the nominal rate.
E) the nominal rate plus the inflation rate.

Question 31

If the Bank of Canada lowers the discount rate,ceteris paribus,the equilibrium levels of funds lent will __________ and the equilibrium level of real interest rates will ___________

A) increase;increase
B) increase;decrease
C) decrease;increase
D) decrease;decrease
E) reverse direction from their previous trends

Question 32

Discuss concepts covariance and correlation.How do these concepts differ in terms of calculation and interpretation?

Question 33

You purchase a share of Yestel stock for $90.One year later,after receiving a dividend of $3,you sell the stock for $92.What was your holding period return?

A) 5.56%
B) 2.22%
C) 3.33%
D) 1.11%
E) 40%

Question 34

Discuss some reasons why an investor with a long time horizon might choose to invest in common stocks,even though they have historically been riskier than government bonds or T-bills.

Question 35

If a portfolio had a return of 10%,the risk free asset return was 4%,and the standard deviation of the portfolio's excess returns was 25%,the risk premium would be _____.

A) 14%
B) 6%
C) 35%
D) 21%
E) 29%

Question 36

Your Certificate of Deposit will mature in one week and you are considering how to invest the proceeds.If you invest in a 30-day CD the bank will pay you 4%.If you invest in a 2-year CD the bank will pay you 6% interest.Which option would you choose?

A) the 30-day CD,no matter what you expect interest rates to do in the future
B) the 2-year CD,no matter what you expect interest rates to do in the future
C) the 30-day CD if you expect that interest rates will fall in the future
D) the 2-year CD if you expect that interest rates will fall in the future
E) You would be indifferent between the 30-day and the 2-year CDs.

Question 37

Over the past year you earned a nominal rate of interest of 8 percent on your money.The inflation rate was 3.5 percent over the same period.The exact actual growth rate of your purchasing power was

A) 15.55%.
B) 4.35%.
C) 5.02%.
D) 4.81%.
E) 15.04%.

Question 38

The holding-period return (HPR)for a stock is equal to

A) the real yield minus the inflation rate.
B) the nominal yield minus the real yield.
C) the capital gains yield minus the tax rate.
D) the capital gains yield minus the dividend yield.
E) the dividend yield plus the capital gains yield.

Question 39

Toyco stock has the following probability distribution of expected prices one year from now: $\begin{array}{ccc}\text { State } & \text { Probability } & \text { Price } \\1 & 25\% & \$ 50 \\2&40\% & \$ 60\\3&35\%&\$70\end{array}$
If you buy Toyco today for $55 and it will pay a dividend during the year of $4 per share,what is your expected holding period return on Toyco?

A) 7.27%
B) 18.18%
C) 10.91%
D) 16.36%
E) 9.09%

Question 40

Which of the following measures of risk best highlights the potential loss from extreme negative returns?

A) Standard deviation
B) Variance
C) Upper partial standard deviation
D) Value at Risk (VaR)
E) none of these

Question 41

Discuss concepts covariance and correlation.How do these concepts differ in terms of calculation and interpretation?