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1、Chapter 5 Learning About Risk and Return From the Historical Record 88 Multiple Choice Questions1. Over the past year you earned a nominal rate of interest of 10 percent on your money. The inflation rate was 5 percent over the same period. The exact actual growth rate of your purchasing power was A)
2、 15.5%. B) 10.0%. C) 5.0%. D) 4.8%. E) 15.0% Answer: D Difficulty: Moderate Rationale: r = (1+R) / (1+I) - 1; 1.10% / 1.5% - 1 = 4.8%. 2. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 7%. What is your approximate annual real rate of return if the rate of i
3、nflation was 3% over the year? A) 4%. B) 10%. C) 7%. D) 3%. E) none of the above. Answer: A Difficulty: Easy Rationale: 7% - 3% = 4%. 3. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately A) 1%. B) 9%. C) 20%. D) 15%.
4、E) none of the above. Answer: B Difficulty: Easy Rationale: 5% + 4% = 9%. 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 1 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical Record 89 4. You purchased a share of stock for $20. One
5、 year later you received $1 as dividend and sold the share for $29. What was your holding period return? A) 45% B) 50% C) 5% D) 40% E) none of the above Answer: B Difficulty: Moderate Rationale: ($1 + $29 - $20)/$20 = 0.5000, or 50%. 5. Which of the following determine(s) the level of real interest
6、rates? I)the supply of savings by households and business firms II)the demand for investment funds III)the governments net supply and/or demand for funds A) I only B) II only C) I and II only D) I, II, and III E) none of the above Answer: D Difficulty: Moderate Rationale: The value of savings by hou
7、seholds is the major supply of funds; the demand for investment funds is a portion of the total demand for funds; the governments position can be one of either net supplier, or net demander of funds. The above factors constitute the total supply and demand for funds, which determine real interest ra
8、tes. 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 2 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical Record 90 6. Which of the following statement(s) is (are) true? I)The real rate of interest is determined by the supply and d
9、emand for funds. II)The real rate of interest is determined by the expected rate of inflation. III)The real rate of interest can be affected by actions of the Fed. IV)The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation. A) I and II only. B) I and III o
10、nly. C) III and IV only. D) II and III only. E) I, II, III, and IV only Answer: B Difficulty: Moderate Rationale: The expected rate of inflation is a determinant of nominal, not real, interest rates. Real rates are determined by the supply and demand for funds, which can be affected by the Fed. 7. W
11、hich of the following statements is true? A) Inflation has no effect on the nominal rate of interest. B) The realized nominal rate of interest is always greater than the real rate of interest. C) Certificates of deposit offer a guaranteed real rate of interest. D) None of the above is true. E) A, B
12、and C Answer: D Difficulty: Moderate Rationale: Expected inflation rates are a determinant of nominal interest rates. The realized nominal rate of interest would be negative if the difference between actual and anticipated inflation rates exceeded the real rate. The realized nominal rate of interest
13、 would be less than the real rate if the unexpected inflation were greater than the real rate of interest. Certificates of deposit contain a real rate based on an estimate of inflation that is not guaranteed. 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 3 页，共 24 页
14、- - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical Record 91 8. Other things equal, an increase in the government budget deficit A) drives the interest rate down. B) drives the interest rate up. C) might not have any effect on interest rates. D) increases business prospec
15、ts. E) none of the above. Answer: B Difficulty: Moderate Rationale: An increase in the government budget deficit, other things equal, causes the government to increase its borrowing, which increases the demand for funds and drives interest rates up. 9. Ceteris paribus, a decrease in the demand for l
16、oanable funds A) drives the interest rate down. B) drives the interest rate up. C) might not have any effect on interest rate. D) results from an increase in business prospects and a decrease in the level of savings. E) none of the above. Answer: A Difficulty: Moderate Rationale: A decrease in deman
17、d, ceteris paribus, always drives interest rates down. An increase in business prospects would increase the demand for funds. The savings level affects the supply of, not the demand for, funds. 10. The holding period return (HPR) on a share of stock is equal to A) the capital gain yield during the p
18、eriod, plus the inflation rate. B) the capital gain yield during the period, plus the dividend yield. C) the current yield, plus the dividend yield. D) the dividend yield, plus the risk premium. E) the change in stock price. Answer: B Difficulty: Moderate Rationale: The HPR of any investment is the
19、sum of the capital gain and the cash flow over the period, which for common stock is B. 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 4 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical Record 92 11. Historical records regarding
20、 return on stocks, Treasury bonds, and Treasury bills between 1926 and 2005 show that A) stocks offered investors greater rates of return than bonds and bills. B) stock returns were less volatile than those of bonds and bills. C) bonds offered investors greater rates of return than stocks and bills.
21、 D) bills outperformed stocks and bonds. E) treasury bills always offered a rate of return greater than inflation. Answer: A Difficulty: Moderate Rationale: The historical data show that, as expected, stocks offer a greater return and greater volatility than the other investment alternatives. Inflat
22、ion sometimes exceeded the T-bill return. 12. If the interest rate paid by borrowers and the interest rate received by savers accurately reflects the realized rate of inflation: A) borrowers gain and savers lose. B) savers gain and borrowers lose. C) both borrowers and savers lose. D) neither borrow
23、ers nor savers gain or lose. E) both borrowers and savers gain. Answer: D Difficulty: Moderate Rationale: If the described interest rate accurately reflects the rate of inflation, both borrowers and lenders are paying and receiving, respectively, the real rate of interest; thus, neither group gains.
24、 Use the following to answer questions 13-15: You have been given this probability distribution for the holding period return for KMP stock: 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 5 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the
25、Historical Record 93 13. What is the expected holding period return for KMP stock? A) 10.40% B) 9.32% C) 11.63% D) 11.54% E) 10.88% Answer: A Difficulty: Moderate Rationale: HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4% 14. What is the expected standard deviation for KMP stock? A) 6.91% B) 8.13% C
26、) 7.79% D) 7.25% E) 8.85% Answer: B Difficulty: Difficult Rationale: s = .30 (18 - 10.4)2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)21/2 = 8.13% 15. What is the expected variance for KMP stock? A) 66.04% B) 69.96% C) 77.04% D) 63.72% E) 78.45% Answer: A Difficulty: Difficult Rationale: s = .30 (18 - 10.4)
27、2 + .50 (12 - 10.4)2 + .20 (-5 - 10.4)2 = 66.04% 16. If the nominal return is constant, the after-tax real rate of return A) declines as the inflation rate increases. B) increases as the inflation rate increases. C) declines as the inflation rate declines. D) increases as the inflation rate decrease
28、s. E) A and D. Answer: E Difficulty: Moderate Rationale: Inflation rates have an inverse effect on after-tax real rates of return. 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 6 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical
29、 Record 94 17. 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. Answer: D Difficulty: Moderate Rationale: If the risk premium f
30、or common stocks were zero or negative, investors would be unwilling to accept the lower returns for the increased risk. 18. A risk-free intermediate or long-term investment A) is free of all types of risk. B) does not guarantee the future purchasing power of its cash flows. C) does guarantee the fu
31、ture purchasing power of its cash flows as it is insured by the U. S. Treasury. D) A and B. E) B and C. Answer: B Difficulty: Moderate Rationale: A risk-free U. S. Treasury bond is a fixed income instrument, and thus does not guarantee the future purchasing power of its cash flows. As a result, purc
32、hasing power risk is present. 19. 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 Answer: D Difficulty: Moderate Rationale: HPR =
33、(92 - 90 + 3) / 90 = 5.56% 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 7 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical Record 95 20. Toyota stock has the following probability distribution of expected prices one year from
34、now: 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 Answer: D Difficulty: Difficult Rationale: E(P1) = .25 (54/55 - 1) + .40 (64/55 - 1) +
35、.35 (74/55 - 1) = 18.18%. 21. 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 a
36、nd borrowing Answer: C Difficulty: Easy Rationale: The nominal interest rate is affected by supply, demand, government actions and inflation. Coupon rates on previously issued government bonds reflect historical interest rates but should not affect the current level of interest rates. 名师资料总结 - - -精品
37、资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 8 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical Record 96 22. Your Certificate of Deposit will mature in one week and you are considering how to invest the proceeds. If you invest in a 30-day
38、CD the bank will pay you 4%. If you invest in a 2-year CD the bank will pay you 6% interest. Which option would you choose? A) the 30-day CD, no matter what you expect interest rates to do in the future B) the 2-year CD, no matter what you expect interest rates to do in the future C) the 30-day CD i
39、f you expect that interest rates will fall in the future D) the 2-year CD if you expect that interest rates will fall in the future E) You would be indifferent between the 30-day and the 2-year CDs. Answer: D Difficulty: Moderate Rationale: You would prefer to lock in the higher rate on the 2-year C
40、D rather than subject yourself to reinvestment rate risk. If you expected interest rates to rise in the future the opposite choice would be better. 23. 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
41、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. Answer: A Difficulty: Easy Rationale: The actual relationship is (1 + real rate) = (1 + nominal rate) / (1 + inflation rate). This can be approximated b
42、y the equation: real rate = nominal rate - inflation rate. 24. 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) de
43、crease; decrease E) reverse direction from their previous trends Answer: B Difficulty: Moderate Rationale: A lower discount rate would encourage banks to make more loans, which would increase the money supply. The supply curve would shift to the right and the equilibrium level of funds would increas
44、e while the equilibrium interest rate would fall. 名师资料总结 - - -精品资料欢迎下载 - - - - - - - - - - - - - - - - - - 名师精心整理 - - - - - - - 第 9 页，共 24 页 - - - - - - - - - Chapter 5 Learning About Risk and Return From the Historical Record 97 25. What has been the relationship between T-Bill rates and inflation
45、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 hig
46、her than the inflation rate almost the entire period. E) The T-Bill rate has been lower than the inflation rate almost the entire period. Answer: D Difficulty: Moderate Rationale: The T-Bill rate was higher than the inflation rate for over two decades. 26. “Bracket Creep” happens when A) tax liabili
47、ties 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
48、 a positive inflation rate. E) too many peculiar people make their way into the highest tax bracket. Answer: D Difficulty: Moderate Rationale: A positive inflation rate typically leads to higher nominal income. Higher nominal income means people will have higher tax liabilities and in some cases wil
49、l put them in higher tax brackets. This can happen even when real income has declined. 27. 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 gain
50、s yield minus the dividend yield. E) the dividend yield plus the capital gains yield. Answer: E Difficulty: Easy Rationale: HPR consists of an income component and a price change component. The income component on a stock is the dividend yield. The price change component is the capital gains yield.