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1、Multiple Choice QuestionsOver 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 wasA) 15.5%.B) 10.0%.C) 5.0%.D) 4.8%.E) 15.0%Answer: D Difficulty: ModerateRatio
2、nale: r = (l+R)/(l+I)- 1; 1.10%/1.5%- 1 =4.8%.1. 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 inflation was 3% over the year?4%.10%.7%.3%.none of the above.Answer: A Difficulty: Easy
3、Rationale: 7% - 3% = 4%.2. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately 1%. 9%. 20%. 15%. none of the above.Answer: B Difficulty: Easy Rationale: 5% + 4% = 9%.25. What has been the relationship between T-Bill rat
4、es 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 rat
5、e 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.Answer: D Difficulty: ModerateRationale: The T-Bill rate was higher than the inflation rate for over two decades.26. Bracket Creep” happens when)z 7 !
6、/ A B c D E)z 7 !/ A B c D Etax liabilities are based on real income and there is a negative inflation rate.tax liabilities are based on real income and there is a positive inflation rate.tax liabilities are based on nominal income and there is a negative inflation rate, tax liabilities are based on
7、 nominal income and there is a positive inflation rate, too many peculiar people make their way into the highest tax bracket.Answer: D Difficulty: ModerateRationale: A positive inflation rate typically leads to higher nominal income. Higher nominal income means people will have higher tax liabilitie
8、s and in some cases will 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 toA) 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
9、) the capital gains yield minus the dividend yield.E) the dividend yield plus the capital gains yield.Answer: E Difficulty: EasyRationale: 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 capita
10、l gains yield.28. The historical arithmetic rate of return on small stocks over the 1926-2005 period has been. The standard deviation of small stocks returns has been thanthe standard deviation of large stocks* returns.x)z |7 x)z A B c D E12.43%, lower13.11%, lower16.24%, higher17.95%, higher21.53%,
11、 higherAnswer: D Difficulty: Moderate Rationale: See Table 5-5.Use the following to answer question 29:You have been given this probability distribution for the holding period return for Cheese, Inc stock:Piobnbility.20.45.35HPR24%15%8%Stnte of EconomyBoomNormal GrowthRecession29. Assuming that the
12、expected return on Cheeses stock is 14.35%, what is the standard deviation of these returns?A) 4.72%6.30%B) 4.38%5.74%C) None of the aboveAnswer: D Difficulty: ModerateRationale: Variance = ,20*(24-14.35)2 + .45*(15-14.35)2 + .35*(8-14.35)2 = 32.9275.Standard deviation = 32.9275,1/2 = 5.74.30.An inv
13、estor 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?1.52%0.50%1.92%0.01%None of the aboveAnswer: E Difficulty: EasyRationale: HPR = ($15+980-985)/$985 = .010152284 = approximately 1.02%.31. Over the
14、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 wasA) 15.55%.B) 4.35%.C) 5.02%.D) 4.81%.E) 15.04%Answer: B Difficulty: ModerateRationale: r = (1+R) / (1+1) - 1;
15、1.08/ 1.035 - 1 = 4.35%.32. 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 wasA) 11.76%.B) 16.00%.C) 15.02%.D) 14.32%.E) none of the above.Answer: A Dif
16、ficulty: ModerateRationale: r = (l+R)/(l+I)- 1; 1.14/1.02- 1 二 11.76%.33. 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 wasA) 9.15%.B) 9.90%.C) 9.6
17、5%.D) 10.52%.E) none of the above.Answer: C Difficulty: ModerateRationale: r = (l+R)/(l+I)- 1; 1.125/ 1.026- 1 = 9.65%.34. 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%
18、 over the year?)z x7 X)/ A B c D E4%.2%.6%.3%.none of the above.Answer: B Difficulty: Easy Rationale: 4% - 2% = 2%.35.A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 2.5%. What is your approximate annual real rate of return if the rate of inflation was 1.6%
19、over the year?4.1%.2.5%.2.9%.1.6%.none of the above.Answer: E Difficulty: Easy Rationale: 2.5% - 1.6% = 0.9%.36. A year ago, you invested $ 12,000 in an investment that produced a return of 16%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year?A) 18%.
20、B) 2%.C) 16%.D) 15%.E) none of the above.Answer: E Difficulty: EasyRationale: 16% - 2% = 14%.37. If the annual real rate of interest is 3.5% and the expected inflation rate is 2.5%, the nominal rate of interest would be approximately|7 XI/ 7 lz A B c D E|7 XI/ 7 lz A B c D E3.5%.2.5%.1%.6.8%.none of
21、 the above.Answer: E Difficulty: EasyRationale: 3.5% + 2.5% = 6%.38. If the annual real rate of interest is 2.5% and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately)z A B c D E)z A B c D E4.9%.0.9%.-0.9%.7%.none of the above.Answer: E Difficulty: Easy Rationa
22、le: 2.5% + 3.4% = 5.9%.39.If the annual real rate of interest is 4% and the expected inflation rate is 3%, the nominal rate of interest would be approximately4%.3%.1%.5%.none of the above.Answer: E Difficulty: Easy Rationale: 4% + 3% = 7%.40. You purchased a share of stock for $12. One year later yo
23、u received $0.25 as dividend and sold the share for $12.92. What was your holding period return?x)z 7 x7 A B c D E9.75%10.65%11.75%11.25%none of the aboveAnswer: A Difficulty: ModerateRationale: ($0.25 + $12.92 - $12)/$12 = 0.975, or 9.75%.41. You purchased a share of stock for $ 120. One year later
24、 you received $1.82 as dividend and sold the share for $136. What was your holding period return?15.67%22.12%15.67%13.24%none of the aboveAnswer: E Difficulty: ModerateRationale: ($1.82 + $136 - $120)/$ 120 = 0.1485, or 14.85%.42. You purchased a share of stock for $65. One year later you received $
25、2.37 as dividend and sold the share for $63. What was your holding period return?)z x)z lz x)z A B c D E0.57%-0.2550%-0.89%1.63%none of the aboveAnswer: A Difficulty: ModerateRationale: ($2.37 + $63 - $65)/$65 = 0.0056, or 0.57%.Use the following to answer questions 43-45:You have been given this pr
26、obability distribution for the holding period return for a stock:State of the Economy Boom Normal growth RecessionProbability HPR,4022%,3511%,25-9%43. What is the expected holding period return for the stock?11.67%8.33%9.56%12.4%None of the aboveAnswer: E Difficulty: ModerateRationale: HPR = .40 (22
27、%) + .35(11%) + .25 (-9%) = 10.4%44. What is the expected standard deviation for the stock?X)/ x)z XI/ X17 / A B c D E2.07%9.96%7.04%1.44%None of the aboveAnswer: E Difficulty: DifficultRationale: s = .40 (22 - 10.4)2 + .35 (11 - 10.4)2 + .25 (-9 - 10.4)21/2 = 12.167%45. What is the expected varianc
28、e for the stock?142.07%189.96%177.04%128.17%None of the aboveAnswer: E Difficulty: DifficultRationale: s = .40 (22 - 10.4)2 + .35 (11 - 10.4)2 + .25 (-9 - 10.4)2 = 148.04%Which of the following measures of risk best highlights the potential loss from extreme negative returns?A) Standard deviationB)
29、VarianceC) Upper partial standard deviationD) Value at Risk (VaR)E) None of the aboveAnswer: D Difficulty: ModerateOver the past year you earned a nominal rate of interest of 3.6 percent on your money. The inflation rate was 3.1 percent over the same period. The exact actual growth rate of your purc
30、hasing power wasA) 3.6%.B) 3.1%.C) 0.5%.D) 6.7%.E) none of the aboveAnswer: E Difficulty: ModerateRationale: r = (1+R) / (1+1) - 1; 1.036/ 1.031% - 1 = 0.328%.46. A year ago, you invested $ 1,000 in a savings account that pays an annual interest rate of 4.3%. What is your approximate annual real rat
31、e of return if the rate of inflation was 3% over the year?)z A B c D E4.3%.-1.3%.7.3%.3%.none of the above.Answer: E Difficulty: Easy Rationale: 4.3% - 3% = 1.3%.47. If the annual real rate of interest is 3.5% and the expected inflation rate is 3.5%, the nominal rate of interest would be approximate
32、ly 0%.3.5%.12.25%.7%.none of the above.Answer: D Difficulty: EasyRationale: 3.5% + 3.5% = 7%.48. You purchased a share of CSCO stock for $20, One year later you received $2 as dividend and sold the share for $31. What was your holding period return?x)z 7 x7 A B c D E45%50%60%40%none of the aboveAnsw
33、er: E Difnculty: ModerateRationale: ($2 + $31 - $20)/$20 = 0.65, or 65%.Use the following to answer questions 51-53:You have been given this probability distribution for the holding period return for GM stock:State of the EconomyProbabilityHPRBoom.4030%Normal growth.4011%Recession.20- 10%49. What is
34、 the expected holding period return for GM stock?10.4%11.4%12.4%13.4%14.4%Answer: E Difficulty: ModerateRationale: HPR = .40 (30%) + .40 (11%) + .20 (40%) = 14.4%50. What is the expected standard deviation for GM stock?x)z x)z XI/ X)/ A B c D E16.91%16.13%13.79%15.25%14.87%Answer: E Difficulty: Diff
35、icultRationale: s = .40 (30 - 14.4)2 + .40(11 - 14.4)2 + .20 (-10 - 14.4)2172 = 14.87%What is the expected variance for GM stock?200.00%221.04%246.37%14.87%16.13%Answer: B Difficulty: DifficultRationale: s = .40 (30 - 14.4)2 + .40(11 - 14.4)2 + .20 (-10- 14.4)2 = 221.04%You purchase a share of CAT s
36、tock for $90. One year later, after receiving a dividend of $4, you sell the stock for $97. What was your holding period return?)z x)z x)z !/ A B c D E14.44%12.22%13.33%5.56%none of the aboveAnswer: B Difficulty: ModerateRationale: HPR =(97 - 90 + 4) / 90 = 12.22%When comparing investments with diff
37、erent horizons the provides themore accurate comparison.arithmetic average effective annual rate average annual return historical annual average none of the aboveAnswer: B Difficulty: Easy4. You purchased a share of stock for $20, One year later you received $ 1 as dividend and sold the share for $2
38、9. What was your holding period return?45%50%5%40%none of the aboveAnswer: B Difficulty: ModerateRationale: ($1 + $29 - $20)/$20 = 0.5000, or 50%.5. Which of the following determine(s) the level of real interest rates?I) the supply of savings by households and business firmsII) the demand for invest
39、ment fundsIII) the governments net supply and/or demand for fundsI onlyII onlyI and II onlyI, II, and IIInone of the aboveAnswer: D Difficulty: ModerateRationale: The value of savings by households is the major supply of funds; the demand for investment funds is a portion of the total demand for fun
40、ds; 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 rates.56. Annual Percentage Rates (APRs) are computed using simple pound interest.either A or B can be used.best
41、 estimates of expected real costs.none of the above.x)z x)z XI/ X)/ A B c D EAnswer: B Difficulty: Easy57. An investment provides a 2% return semi-annually, its effective annual rate is 2%.4%.4.02%4.04%none of the aboveAnswer: D Difficulty: Moderate Rationale: (1.02)2-1 = 4.04%58.An investment provi
42、des a 3% return semi-annually, its effective annual rate is 3%.6%.Xu/ x)z X)/ x)z x7 A B c D E6.06%6.09%none of the aboveAnswer: D Difficulty: Moderate Rationale: (1.03)2-1 = 6.09%59. An investment provides a 2.1% return quarterly, its effective annual rate is2.1%.8.4%.8.56%8.67%none of the aboveX17
43、 x)z )z X17 )z A B c D EAnswer: D Difficulty: Moderate Rationale: (1.021)4-1 = 8.67%x)z x)z XI/ X)/ A B c D E60. Skewnes is a measure of. how fat the tails of a distribution are the downside risk of a distribution the normality of a distribution the dividend yield of the distribution None of the abo
44、veAnswer: C Difficulty: Moderate61. Kurtosis is a measure of. how fat the tails of a distribution are the downside risk of a distribution the normality of a distribution the dividend yield of the distribution A and CAnswer: C Difficulty: Moderatex)z x)z lz )z x)z A B c D E62. When a distribution is
45、positively skewed, standard deviation overestimates risk standard deviation correctly estimates risk standard deviation underestimates risk the tails are fatter than in a normal distribution none of the aboveAnswer: A Difficulty: Moderate63. When a distribution is negatively skewed, standard deviati
46、on overestimates risk standard deviation correctly estimates risk standard deviation underestimates risk the tails are fatter than in a normal distribution none of the aboveAnswer: C Difficulty: Moderatex)z x)z XI/ X)/ A B c D E64. If a distribution has fat tails it exhibits positive skewness negati
47、ve skewness a kurtosis of zero kutrosis A and DAnswer: D Difficulty: ModerateEssay QuestionsDiscuss the relationships between interest rates (both real and nominal), expected inflation rates, and tax rates on investment returns.Difficulty: ModerateAnswer:The nominal interest rate is the quoted interest rate; however this rate is approximately equal to the real rate of interest plus the expected rate of inflation. Thus, an investor is expecting to earn the real rate in terms of