Question 1

The weighted aggregate price index assigns a lower weight to the items that are sold in higher quantities.

Accepted Answer

The weighted aggregate price index assigns higher weights to items that are sold in higher quantities, reflecting their greater importance or share in the market or economy.

Question 2

The only possible income from an investment is the direct cash payment from the underlying asset.

Accepted Answer

The possible income from an investment can also include capital gains from the sale of the asset, dividends or interest payments, and other forms of financial return.

Question 3

As long as an investor does not sell an asset,there is no capital gain or loss involved.

Accepted Answer

Even if an investor does not sell an asset, there may be a capital gain or loss involved. This is because the value of the asset may go up or down, resulting in an unrealized gain or loss.

Question 4

Which of the following statements is true of investment returns?
A)A change in the price of the underlying asset usually has no impact on returns to investment.
B)Income yield always accounts for the bulk of the returns from an investment.
C)The higher the price of the asset during the time of purchase,the lower the returns from that investment.
D)The higher the income yield,the lower the overall returns from that investment.

Accepted Answer

The statement "The higher the price of the asset during the time of purchase, the lower the returns from that investment" is true. This is because when the price of an asset is higher, an investor will need to put more money into the investment to earn the same return, making the return lower overall. The other statements are not true.

Question 5

Price indices are used to remove the effect of inflation so that business and economic time series can be evaluated in a more meaningful way.

Accepted Answer

Price indices measure the changes in the price of goods and services over time, and are designed to remove the impact of inflation so that changes in business and economic activity can be evaluated more accurately.

Question 6

Donna Warne purchased a share of company X at $700 one year ago.The share is now trading at $850.Calculate the percent capital gain if Donna sells her share at the current price.
A)17.6%
B)150%
C)6.7%
D)21.4%

Accepted Answer

We can calculate the percent capital gain using the formula:
Percent Capital Gain = ((Current Price - Purchase Price) / Purchase Price) * 100%

Plugging in the given values, we get:
Percent Capital Gain = (($850 - $700) / $700) * 100%
= ($150 / $700) * 100%
= 21.4%

Therefore, the answer is D) 21.4%.

Question 7

The aggregate price index is used to represent relative price movements for a group of items.

Accepted Answer

The aggregate price index, such as the Consumer Price Index (CPI), is designed to measure the changes in the average prices of a basket of goods and services consumed by households over time. It is used to represent the relative price movements of a group of items.

Question 8

Index numbers provide direct comparisons of prices not only with respect to the base year,but also between non-base years.

Accepted Answer

The answer of Index numbers provide direct comparisons of prices...

Question 9

There is no need to have a constant base value for a price index.

Accepted Answer

A constant base value is essential for a price index to measure relative changes in price levels or cost of living over time accurately, providing a consistent point of comparison.

Question 10

The Laspeyres and Paasche indices tend to differ when the length of time between the periods increases since the relative quantities of items adjust to the changes in consumer demand over time.

Accepted Answer

The Laspeyres and Paasche indices use different weighting methods to calculate price changes. The Laspeyres index uses a fixed base period quantity, while the Paasche index uses a current period quantity. As consumer demand shifts over time, the relative quantities of items in the fixed base period and current period can vary, causing the indices to diverge when longer time periods are considered.

Question 11

The returns to which of the following investments comprises only on capital gains?
A)Shares
B)Bonds
C)Real estate investments
D)Treasury bills

Accepted Answer

The answer of The returns to which of the following...

Question 12

An unweighted price index for different types of properties will unfairly treat all property prices equally.

Accepted Answer

An unweighted price index does not take into account the varying importance or proportion of each type of property in the overall market. Therefore, it will not accurately reflect changes in the market if some types of properties are more valuable or in higher demand than others.

Question 13

If the nominal rate of return is positive,then the real rate of return must also be positive.

Accepted Answer

The real rate of return can be negative if the inflation rate is higher than the nominal rate of return.

Question 14

Rates of return expressed in nominal terms do not represent a true picture because they are not adjusted for inflation.

Accepted Answer

Nominal rates of return only reflect the percentage change in the value of an investment without taking into account the impact of inflation. Inflation erodes the purchasing power of money over time, so the real rate of return must be adjusted for inflation to give a more accurate picture of an investment's performance.

Question 15

The Consumer Price Index and the Producer Price Index must always move in sync with each other.

Accepted Answer

The Consumer Price Index (CPI) measures the changes in prices of goods and services purchased by consumers, while the Producer Price Index (PPI) measures the changes in prices of goods and services sold by producers. These two indices may move in opposite directions due to factors such as changes in supply and demand, production costs, and market competition. Therefore, they do not always move in sync with each other.

Question 16

Since both the Laspeyres and Paasche indices are weighted aggregate price indices,they will yield the same value for a given evaluation period.

Accepted Answer

The Laspeyres and Paasche indices use different weighting methods, and therefore can yield different values for a given evaluation period. The Laspeyres index uses fixed weights based on a base period, while the Paasche index uses current period weights.

Question 17

Emily Myers purchased a share of company X at $700 one year ago and earned a dividend of $50 during the year.The share is trading now at $850.Calculate Emily's return from investment if she sells her share at $850.
A)7.14%
B)21.43%
C)28.57%
D)14.29%

Accepted Answer

Emily's total return from the investment includes both the capital gain and the dividend she received. 
Capital gain = $850 - $700 = $150
Total return = (Capital gain + Dividend) / Original investment * 100%
Total return = ($150 + $50) / $700 * 100% = 28.57%

Question 18

The Laspeyres price index uses the quantities evaluated in the base period to compute the weighted aggregate price index.

Accepted Answer

The Laspeyres price index uses the quantities from the base period to determine the value of the market basket, which is then compared to the current period prices to determine the weighted aggregate price index.

Question 19

Allen Gibbs purchased 50 shares of ABC Corp. ,each worth $110.If the price of the share increases to $135 after a year,what will be the capital gain if Allen sells all his shares?
A)$1,250
B)$25
C)$6,750
D)$5,500

Accepted Answer

The answer of Allen Gibbs purchased 50 shares of ABC...

Question 20

If the year 2000 is used as a base year and the value of the price index in 2001 is 105,it implies that there was a 5% increase in the price level in 2001.

Accepted Answer

A price index of 105 in 2001 compared to a base year index of 100 in 2000 indicates a 5% increase in the price level.

Quiz 19: Returns, Index Numbers and Inflation