Question 1

Toyota stock has the following probability distribution of expected prices one year from now: $$\begin{array} { l l l } 
\underline{\text { State }} &\underline{ \text { Probability} } &\underline{ \text { Price }} \
1 & 25 \% & \$ 50 \
2 & 40 \% & \$ 60 \
3 & 35 \% & \$ 70
\end{array}$$ If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share,what is your expected holding-period return on Toyota?
A)17.72%
B)18.89%
C)17.91%
D)18.18%
E)None of the above

Accepted Answer

The answer of Toyota stock has the following probability distribution...

Question 2

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%

Accepted Answer

The answer of If a portfolio had a return of...

Question 3

You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l } 
\text { State of } & \text { Probability } & \text { HPR } \
\text { Economy } & & \
\text { Boom } & .20 & 24 \% \
\text { Normal Growth } & .45 & 15 \% \
\text { Recession } & .35 & 8 \%
\end{array}$$
-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)1.92%
D)0.01%
E)None of the above

Accepted Answer

The answer of You have been given this probability distribution...

Question 4

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.

Accepted Answer

The holding-period return (HPR) for a stock is the total return earned from holding the stock over a specific time period, typically expressed as a percentage. It includes both the dividend yield, which is the income earned from any dividends paid by the stock, and the capital gains yield, which is the increase in the stock's price over the holding period. Therefore, the correct choice is E, which adds the dividend yield and capital gains yield together.

Question 5

"Bracket Creep" happens when
A)tax liabilities are based on real income and there is a negative inflation rate.
B)tax liabilities are based on real income and there is a positive inflation rate.
C)tax liabilities are based on nominal income and there is a negative inflation rate.
D)tax liabilities are based on nominal income and there is a positive inflation rate.
E)too many peculiar people make their way into the highest tax bracket.

Accepted Answer

"Bracket Creep" occurs when tax liabilities are based on nominal income and there is a positive inflation rate. This happens when inflation increases wages and salaries, pushing taxpayers into higher tax brackets without a real increase in income. As a result, taxpayers pay higher taxes without any corresponding increase in their standard of living.

Question 6

If the Federal Reserve 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

Accepted Answer

Lowering the discount rate makes it cheaper for banks to borrow from the Federal Reserve. This will encourage banks to borrow more funds, leading to an increase in the equilibrium levels of funds lent.  As banks will have more funds to lend to consumers and firms, it will lead to higher demand for loans, which will lead to a decrease in the equilibrium level of real interest rates.

Question 7

What has been the relationship between T-Bill rates and inflation rates since the 1980s?
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 almost the entire period.
E)The T-Bill rate has been lower than the inflation rate almost the entire period.

Accepted Answer

The T-Bill rate was higher than the inflation rate for over two decades.

Question 8

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.

Accepted Answer

The risk premium for common stocks cannot be zero because investors require compensation for taking on additional risk. In theory, it must always be positive to incentivize investment in riskier assets like common stocks.

Question 9

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%.

Accepted Answer

The actual growth rate of purchasing power is the nominal interest rate minus the inflation rate. So, 8% - 3.5% = 4.5%.

Question 10

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%

Accepted Answer

The risk premium is calculated as the portfolio return minus the risk-free rate. Here, it is 10% - 4% = 6%.

Question 11

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)none of the above.

Accepted Answer

The nominal interest rate is 4%, and with 2% inflation, the real rate of return is approximately 2% (4% - 2%).

Question 12

Over the past year you earned a nominal rate of interest of 12.5 percent on your money.The inflation rate was 2.6 percent over the same period.The exact actual growth rate of your purchasing power was
A)9.15%.
B)9.90%.
C)9.65%.
D)10.52%.
E)none of the above.

Accepted Answer

The answer of Over the past year you earned a...

Question 13

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

Accepted Answer

The coupon rate on previously issued government bonds is a fixed rate determined when the bond was issued and does not change based on market conditions such as supply and demand for loanable funds or changes in inflation rates. The nominal interest rate is affected by factors such as supply and demand, inflation expectations, and government spending and borrowing.

Question 14

The historical arithmetic rate of return on U.S.small stocks over the 1926-2009 period has been _______.The standard deviation of small stocks' returns has been ________ than the standard deviation of large stocks' returns.
A)12.43%, lower
B)13.11%, lower
C)16.24%, higher
D)17.43%, higher
E)21.53%,higher

Accepted Answer

The historical arithmetic rate of return on U.S. small stocks over the 1926-2009 period has been 17.43%, and the standard deviation of small stocks' returns has been higher than that of large stocks, reflecting their greater volatility.

Question 15

You purchase a share of Boeing 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)4.44%
B)2.22%
C)3.33%
D)5.56%
E)none of the above

Accepted Answer

The holding-period return can be calculated using the formula:
Holding-Period Return = (Ending Price + Dividends - Beginning Price)/Beginning Price

Plugging in the numbers given:
(92 + 3 - 90)/90 = 5.56%

Therefore, the answer is D) 5.56%.

Question 16

You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l } 
\text { State of } & \text { Probability } & \text { HPR } \
\text { Economy } & & \
\text { Boom } & .20 & 24 \% \
\text { Normal Growth } & .45 & 15 \% \
\text { Recession } & .35 & 8 \%
\end{array}$$
-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)None of the above

Accepted Answer

First, we need to calculate the purchase price of the bond. Since the investor received $17 in interest, we can use the following formula:

Purchase price = Selling price - Accrued interest

Purchase price = $987 - $17 = $970

Next, we can use the following formula to calculate the holding-period return:

HPR = (Ending price - Beginning price + Income) / Beginning price

HPR = ($987 - $970 + $17) / $970

HPR = 0.01753 or 1.753%

However, the question asks for the answer to be expressed in annual terms. Since the holding period is 63 days, we need to annualize the holding-period return by using the following formula:

Annualized HPR = (1 + Holding-period return)^365/63 - 1

Annualized HPR = (1 + 0.01753)^365/63 - 1

Annualized HPR = 0.0245 or 2.45%

Therefore, the answer is B) 2.45%.

Question 17

You have been given this probability distribution for the holding-period return for Cheese, Inc stock: $$\begin{array} { l c l } 
\text { State of } & \text { Probability } & \text { HPR } \
\text { Economy } & & \
\text { Boom } & .20 & 24 \% \
\text { Normal Growth } & .45 & 15 \% \
\text { Recession } & .35 & 8 \%
\end{array}$$
-Assuming that the expected return on Cheese's stock is 14.35%,what is the standard deviation of these returns?
A)4.72%
B)6.30%
C)4.38%
D)5.74%
E)None of the above

Accepted Answer

The answer of You have been given this probability distribution...

Question 18

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.

Accepted Answer

The real rate of interest is the nominal rate adjusted for inflation. This means that the real rate of interest is equal to the nominal rate minus the inflation rate. Therefore, option A is the correct answer.

Question 19

Over the past year you earned a nominal rate of interest of 14 percent on your money.The inflation rate was 2 percent over the same period.The exact actual growth rate of your purchasing power was
A)11.76%.
B)16.00%.
C)15.02%.
D)14.32%.
E)none of the above.

Accepted Answer

The actual growth rate of purchasing power can be calculated using the formula: (1 + nominal rate) / (1 + inflation rate) - 1. Substituting the given values: (1 + 0.14) / (1 + 0.02) - 1 = 0.1176 or 11.76%.

Question 20

A year ago,you invested $10,000 in a savings account that pays an annual interest rate of 3%.What is your approximate annual real rate of return if the rate of inflation was 4% over the year?
A)1%.
B)-1%.
C)7%.
D)3%.
E)none of the above.

Accepted Answer

Real rate of return = (1 + nominal rate of return) / (1 + inflation rate) - 1
= (1 + 0.03) / (1 + 0.04) - 1
= 0.0288 or 2.88%
However, since the inflation rate is higher than the nominal rate of return, the real rate of return is negative, which means the purchasing power of the investment has decreased. Therefore, the best choice is B, which represents a -1% real rate of return.

Quiz 5: Introduction to Risk,return,and the Historical Record

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 _____.

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

"Bracket Creep" happens when

If the Federal Reserve lowers the discount rate,ceteris paribus,the equilibrium levels of funds lent will and the equilibrium level of real interest rates will _.

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

The risk premium for common stocks

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

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 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?

Over the past year you earned a nominal rate of interest of 12.5 percent on your money.The inflation rate was 2.6 percent over the same period.The exact actual growth rate of your purchasing power was

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

The historical arithmetic rate of return on U.S.small stocks over the 1926-2009 period has been _.The standard deviation of small stocks' returns has been __ than the standard deviation of large stocks' returns.

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

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

Over the past year you earned a nominal rate of interest of 14 percent on your money.The inflation rate was 2 percent over the same period.The exact actual growth rate of your purchasing power was

A year ago,you invested $10,000 in a savings account that pays an annual interest rate of 3%.What is your approximate annual real rate of return if the rate of inflation was 4% over the year?