Question 1

The basic trade-off in the investment process is

Accepted Answer

A)  between the anticipated rate of return for a given investment instrument and its degree of risk.
B)  between understanding the nature of a particular investment and having the opportunity to purchase it.
C)  between high returns available on single instruments and the diversification of instruments into a portfolio.
D)  between the desired level of investment and possessing the resources necessary to carry it out.
E)  None of these are correct.F) B) and D)
G) A) and C)

Question 2

In the phrase "nominal risk-free rate," nominal means

Accepted Answer

A)  computed.
B)  historical.
C)  market.
D)  average.
E)  risk adverse.F) A) and B)
G) A) and C)

Question 3

Exhibit 1.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
You are provided with the following information:
Nominal return on risk-free asset = 4.5%
Expected return for asset i = 12.75%
Expected return on the market portfolio = 9.25%
-Refer to Exhibit 1.9. Calculate the risk premium for asset i.

Accepted Answer

A)  4.5%
B)  8.25%
C)  4.75%
D)  3.5%
E)  0%F) A) and B)
G) B) and C)

Question 4

Which of the following is not a component of the required rate of return?

Accepted Answer

A)  expected rate of inflation
B)  time value of money
C)  risk
D)  holding period return
E)  nominal returnsF) B) and D)
G) All of the above

Question 5

The ____ the variance of returns, everything else remaining constant, the ____ the dispersion of expectations and the ____ the risk.

Accepted Answer

A)  larger, greater, lower
B)  larger, smaller, higher
C)  larger, greater, higher
D)  smaller, greater, lower
E)  smaller, greater, greaterF) B) and E)
G) B) and C)

Question 6

Sources of risk for an investment include

Accepted Answer

A)  variance of returns and business risk.
B)  coefficient of variation of returns and financial risk.
C)  business risk and financial risk.
D)  variance of returns and coefficient of variation of returns.
E)  variance of returns and economic risk.F) None of the above
G) C) and D)

Question 7

Exhibit 1.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
The common stock of XMen Inc. had the following historic prices.   Time  Price of X− Tech 3/01/199950.003/01/200047.003/01/200176.003/01/200280.003/01/200385.003/01/200490.00\begin{array} { c c } 	ext { Time } & 	ext { Price of } \mathrm { X } - 	ext { Tech } \3 / 01 / 1999 & 50.00 \3 / 01 / 2000 & 47.00 \3 / 01 / 2001 & 76.00 \3 / 01 / 2002 & 80.00 \3 / 01 / 2003 & 85.00 \3 / 01 / 2004 & 90.00\end{array} Time 3/01/19993/01/20003/01/20013/01/20023/01/20033/01/2004​ Price of X− Tech 50.0047.0076.0080.0085.0090.00​ 
-Refer to Exhibit 1.3. What was your annual holding period yield (Annual HPY) ?

Accepted Answer

A)  0.1462
B)  0.1247
C)  1.8
D)  0.40
E)  0.25 F) C) and D)
G) A) and E)

Question 8

Exhibit 1.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
You have concluded that next year the following relationships are possible:   Economic Status  Probability  Rate of Return  Weak Economy .15−5% Static Economy .605% Strong Economy .2515%\begin{array}{lcc}	ext { Economic Status }& 	ext { Probability } & 	ext { Rate of Return }\\hline	ext { Weak Economy } & .15 & -5 \% \	ext { Static Economy } & .60 & 5 \% \	ext { Strong Economy } & .25 & 15 \%\end{array} Economic Status  Weak Economy  Static Economy  Strong Economy ​ Probability .15.60.25​ Rate of Return −5%5%15%​​ 
-Refer to Exhibit 1.4. Compute the standard deviation of the rate of return for the one-year period.

Accepted Answer

A)  0.65%
B)  1.45%
C)  4.0%
D)  6.25%
E)  6.4% F) All of the above
G) None of the above

Question 9

Exhibit 1.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
You purchased 100 shares of GE common stock on January 1, for $29 a share. A year later you received $1.25 in dividends per share and you sold it for $28 a share.
-Refer to Exhibit 1.7. Calculate your holding period yield (HPY)  for this investment in GE stock.

Accepted Answer

A)  -0.0345
B)  -0.0090
C)  0.0086
D)  0.0643
E)  0.0804F) A) and E)
G) A) and B)

Question 10

Exhibit 1.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) 
Assume that you hold a two-stock portfolio. You are provided with the following information on your holdings:   Stock  Shares  Price (t)  Price (t+1) 11510122251516\begin{array} { c c c c } 	ext { Stock } & 	ext { Shares } & 	ext { Price } ( \mathbf { t } )  & 	ext { Price } ( \mathbf { t } + \mathbf { 1 } )  \\hline 1 & 15 & 10 & 12 \2 & 25 & 15 & 16\end{array} Stock 12​ Shares 1525​ Price (t) 1015​ Price (t+1) 1216​​ 
-Refer to Exhibit 1.6. Calculate the market weights for stock 1 and 2 based on period t values.

Accepted Answer

A)  39%for stock 1 and 61% for stock 2
B)  50% for stock 1 and 50% for stock 2
C)  71% for stock 1 and 29% for stock 2
D)  29% for stock 1 and 71% for stock 2
E)  30% for stock 1 and 82% for stock 2 F) B) and D)
G) A) and C)

Question 11

The uncertainty of investment returns associated with how a firm finances its investments is known as

Accepted Answer

A)  business risk.
B)  liquidity risk.
C)  exchange rate risk.
D)  financial risk.
E)  market risk.F) C) and D)
G) B) and D)

Question 12

If over the past 20 years the annual returns on the S&P 500 market index averaged 12 percent with a standard deviation of 18 percent, what was the coefficient of variation?

Accepted Answer

A)  0.6
B)  0.6%
C)  1.5
D)  1.5%
E)  0.66%F) D) and E)
G) A) and B)

Exam 1: The Investment Setting

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The the variance of returns, everything else remaining constant, the the dispersion of expectations and the the risk.

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If over the past 20 years the annual returns on the S&P 500 market index averaged 12 percent with a standard deviation of 18 percent, what was the coefficient of variation?

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The basic trade-off in the investment process is

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In the phrase "nominal risk-free rate," nominal means

Correct Answer
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Which of the following is not a component of the required rate of return?

Correct Answer
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The uncertainty of investment returns associated with how a firm finances its investments is known as

Correct Answer
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Sources of risk for an investment include

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Exam 1: The Investment Setting

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The ____ the variance of returns, everything else remaining constant, the ____ the dispersion of expectations and the ____ the risk.

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If over the past 20 years the annual returns on the S&P 500 market index averaged 12 percent with a standard deviation of 18 percent, what was the coefficient of variation?

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The basic trade-off in the investment process is

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In the phrase "nominal risk-free rate," nominal means

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Which of the following is not a component of the required rate of return?

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The uncertainty of investment returns associated with how a firm finances its investments is known as

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Sources of risk for an investment include

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The the variance of returns, everything else remaining constant, the the dispersion of expectations and the the risk.

Correct Answer
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