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Exam 1: The Investment Setting

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Question 1

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Most financial assets provide a high degree of liquidity.

A) True
B) False

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Question 2

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The holding period to qualify for long-term capital gains is:

A) at least 6 months.
B) at least 9 months.
C) at least 18 months.
D) at least 2 years.
E) more than one year.

F) A) and D)
G) All of the above

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Question 3

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Investment is the commitment of current funds in anticipation of receiving a larger flow of funds in the future.

a)The stock of Trudeau Corporation went from $27 to $40 last year.The firm also paid $1 in dividends during the year.Compute the rate of return. b)In the following year,the dividend was raised to $1.40.However,a declining market toward the end of the year caused the stock to fall to $24 per share from $40.Compute the rate of return (gain or loss)to the stockholder in the following year.

Unlike the risk-free rate,the level of the risk premium varies by investment.

Retirement questions should be asked 5-10 years before retirement.

Which of the following is not a form of real asset?

Those who attempt to engage in short-term market tactics are termed traders.

Because most investors are risk averse,

What is the rate of return on a share of common stock that increased in value from $40 to $50?

Every investment requires a total return comprised of a real rate of return,compensation for inflationary expectations,and a risk premium.

Common stock represents a direct equity claim.

Historically,the real rate of return in the U.S.economy has been:

The two components that make up the risk-free rate are:

Real assets,because of increasing replacement value and scarcity,tend to perform better than financial assets during periods of high inflation.

Diversification is the process of determining the risk premium.

An investor can totally eliminate time-consuming investment management activities by participating in a mutual fund or limited partnership.

Assume the real rate of return in the economy is 4.25%,the expected rate of inflation is 3.5%,and the risk premium is 6.75%.Compute the risk-free rate and required rate of return.

Those who engage in short-term market tactics are considered traders.

Real estate is a good example of an investment that lacks liquidity.