Question 1

An individual with only $10,000 to invest is most likely better off investing in:

Accepted Answer

With only $10,000 to invest, it is difficult to achieve enough diversification and mitigate risk through individual equities or bonds. Mutual funds and ETFs provide a diversified portfolio with exposure to different industries, sectors, and asset classes. However, ETFs have lower fees and greater flexibility for buying and selling, making them a more cost-effective and efficient choice for small investors.

Question 2

Investments with predetermined contractual payments are known as:

Accepted Answer

Investments with predetermined contractual payments are typically associated with fixed-income securities, such as bonds or certificates of deposit (CDs). These securities offer investors a predictable stream of income, making them a popular choice for those seeking stable returns. Real estate, real assets, equities, and low liquidity investments do not necessarily have predetermined contractual payments.

Question 3

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array}{l}
\text { Real Returns }\
\begin{array} { l c } 
\text { Investment } & \text { Real Annual Return } \
\hline \text { Large company stock } & 6.50 \% \
\text { Small capitalization stock } & 8.60 \% \
\text { Long-term corporate bonds } & 3.60 \% \
\text { Long-term government bonds } & 2.80 \% \
\text { U.S. Treasury bills } & 1.03 \%
\end{array}
\end{array}$$ The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2. What is the large company stock nominal return?

Accepted Answer

The answer of Exhibit 3.2
USE THE INFORMATION BELOW FOR THE...

Question 4

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $\begin{array}{lr} \text {Security }& \text {Annual Percentage Return }\
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small capitalization common stocks } & 15.60
\end{array}$ The annual rate of inflation is 2%.
-Refer to Exhibit 3.1. What is the real return on T-bills?

Accepted Answer

Real return on T-bills = 1.02% = [(1.034)/(1.02)] - 1

Question 5

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $\begin{array}{lr} \text {Security }& \text {Annual Percentage Return }\
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small capitalization common stocks } & 15.60
\end{array}$ The annual rate of inflation is 2%.
-Refer to Exhibit 3.1. What is the real return on large capitalization stocks?

Accepted Answer

Real return on large cap stocks = 11.27% = [(1.135)/(1.02)] - 1

Question 6

What range of returns would an investor expect to achieve 99% of the time on an investment with an expected return of 11% and a standard deviation of 16%?

Accepted Answer

The answer of What range of returns would an investor...

Question 7

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 90% of the time?

Accepted Answer

To find the range of returns that an investor would expect to receive 90% of the time, we first need to determine the z-score associated with the 90th percentile. This can be found using a standard normal distribution table or by using a calculator.

Using a calculator, we can use the following formula:

z = invNorm(0.9) ≈ 1.28

Next, we need to find the corresponding return values using the given mean and standard deviation.

The lower expected return is:

12.8% - (1.28 x 7.8%) ≈ 2.8%

The upper expected return is:

12.8% + (1.28 x 7.8%) ≈ 22.8%

Thus, the range of returns that an investor would expect to receive 90% of the time is 2.8% to 22.8%. The closest answer choice to this range is C, which is F1F1F1S1F1F1F102.8% to 28.4%.

Question 8

A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time?

Accepted Answer

The answer of A return series has an arithmetic mean...

Question 9

A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 90% of the time?

Accepted Answer

To calculate the range of returns that an investor would expect to receive 90% of the time, we need to find the two return values that have a cumulative probability of 5% on both ends (since 100% - 90% = 10% and we need to split that among both tails).

Using a standard normal distribution table or calculator, we can find that the z-score corresponding to a 5% cumulative probability is -1.645. From there, we can use the formula:

return = mean + (z-score * standard deviation)

Upper Range:
return = 10.5% + (-1.645 * 13%) = 7.37%
Lower Range:
return = 10.5% + (1.645 * 13%) = 13.63%

Therefore, an investor would expect to receive returns between 7.37% and 13.63% 90% of the time. So, the best choice is D.

Question 10

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array}{l}
\text { Real Returns }\
\begin{array} { l c } 
\text { Investment } & \text { Real Annual Return } \
\hline \text { Large company stock } & 6.50 \% \
\text { Small capitalization stock } & 8.60 \% \
\text { Long-term corporate bonds } & 3.60 \% \
\text { Long-term government bonds } & 2.80 \% \
\text { U.S. Treasury bills } & 1.03 \%
\end{array}
\end{array}$$ The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2. What is the long term Treasury bond nominal return?

Accepted Answer

The answer of Exhibit 3.2
USE THE INFORMATION BELOW FOR THE...

Question 11

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array}{l}
\text { Real Returns }\
\begin{array} { l c } 
\text { Investment } & \text { Real Annual Return } \
\hline \text { Large company stock } & 6.50 \% \
\text { Small capitalization stock } & 8.60 \% \
\text { Long-term corporate bonds } & 3.60 \% \
\text { Long-term government bonds } & 2.80 \% \
\text { U.S. Treasury bills } & 1.03 \%
\end{array}
\end{array}$$ The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2. What is the small capitalization stock nominal return?

Accepted Answer

Nominal return on small cap stocks = 11.32% = [(1.086)(1.025)] - 1

Question 12

If the real return for corporate bonds was 4% and the inflation rate was 2%, what is the nominal return for corporate bonds?

Accepted Answer

Nominal return = Real return + Inflation rate
Nominal return = 4% + 2% = 6% 
Therefore, the answer is D) 6.08% (rounded to the nearest hundredth).

Question 13

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $\begin{array}{lr} \text {Security }& \text {Annual Percentage Return }\
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small capitalization common stocks } & 15.60
\end{array}$ The annual rate of inflation is 2%.
-Refer to Exhibit 3.1. What is the real return on small capitalization stocks?

Accepted Answer

Real return on small cap stocks = 13.33% = [(1.156)/(1.02)] - 1

Question 14

You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are the same and you are in the 28% tax bracket, which bond should you choose and why?

Accepted Answer

The municipal bond has an equivalent taxable yield of 0.475/(1 - 0.28)= 0.066.This is higher than the bond yield of .0625.

Question 15

What type of mutual fund issues "redeemable securities" meaning that the fund stands ready to buy or sell the shares at their net asset value with a transaction fee?

Accepted Answer

The answer of What type of mutual fund issues "redeemable...

Question 16

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time?

Accepted Answer

The answer of A return series has an arithmetic mean...

Question 17

Which of the following investments can be purchased with future contracts?

Accepted Answer

The answer of Which of the following investments can be...

Question 18

If the nominal return on an investment of common stocks was 11% and inflation was 2.5% annually, what was the real return on common stock?

Accepted Answer

(1.11)/(1.025)- 1 = 0.0829 or 8.3%

Question 19

Exhibit 3.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array}{l}
\text { Real Returns }\
\begin{array} { l c } 
\text { Investment } & \text { Real Annual Return } \
\hline \text { Large company stock } & 6.50 \% \
\text { Small capitalization stock } & 8.60 \% \
\text { Long-term corporate bonds } & 3.60 \% \
\text { Long-term government bonds } & 2.80 \% \
\text { U.S. Treasury bills } & 1.03 \%
\end{array}
\end{array}$$ The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2. What is the T-bill nominal return?

Accepted Answer

The answer of Exhibit 3.2
USE THE INFORMATION BELOW FOR THE...

Question 20

Exhibit 3.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $\begin{array}{lr} \text {Security }& \text {Annual Percentage Return }\
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small capitalization common stocks } & 15.60
\end{array}$ The annual rate of inflation is 2%.
-Refer to Exhibit 3.1. What is the real return on long-term corporate bonds?

Accepted Answer

Real return on long term corporate bonds = 4.71% = [(1.068)/(1.02)] - 1

Quiz 3: Selecting Investments in a Global Market

An individual with only $10,000 to invest is most likely better off investing in:

Investments with predetermined contractual payments are known as:

What range of returns would an investor expect to achieve 99% of the time on an investment with an expected return of 11% and a standard deviation of 16%?

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 90% of the time?

A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time?

A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 90% of the time?

If the real return for corporate bonds was 4% and the inflation rate was 2%, what is the nominal return for corporate bonds?

You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are the same and you are in the 28% tax bracket, which bond should you choose and why?

What type of mutual fund issues "redeemable securities" meaning that the fund stands ready to buy or sell the shares at their net asset value with a transaction fee?

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time?

Which of the following investments can be purchased with future contracts?

If the nominal return on an investment of common stocks was 11% and inflation was 2.5% annually, what was the real return on common stock?