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21
16) If a stock is purchased at the beginning of a year, a single dividend is paid at the end of the
year and the stock is sold immediately after the dividend has been received. In this case
A) the internal rate of return is lower than the holding period return.
B) the holding period return. is lower than the internal rate of return.
C) it is not possible to calculate the internal rate of return.
D) the internal rate of return equals the holding period return.
decision rules such as IRR and Payback
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
17) Ryan purchased a bond for $980 at the beginning of 2011. He received annual interest
payments of $55 at the end of each year through 2016 when the bond was redeemed at its face
value of $1,000. Compute the yield (internal rate of return) Ryan earned on his bond purchase.
A) 5.50%
B) 5.61%
C) 5.91%
D) .34%
decision rules such as IRR and Payback
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 4
18) Josh purchased 100 shares of XOM at the beginning of 2011. He received dividends per
share of $1.37 (2011), $1.55 (2012), $1.66 (2013), $1.74 (2014), $1.85 (2015). At the end of
2015, just after receiving the last dividend, he sold the stock for $84.76. At what rate did the
dividends grow from the end of 2011 to the end of 2015? Assume that all dividends were
received at the end of the year.
A) 7.8%
B) 6.2%
C) 13.1%
D) 35%
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 4
22
19) Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2011. He
received dividends per share of $1.37 (2011), $1.55 (2012), $1.66 (2013), $1.74 (2014), $1.85
(2015). At the end of 2015 just after receiving the last dividend, he sold the stock for $84.76.
What was his average annual rate of return form both dividends and capital gains? (Hint:
compute the IRR, assume that all dividends were received at the end of the year.)
A) 9.831%
B) 3.774%
C) 3.423%
D) 4.94%
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 4
20) Samantha bought a stock one year ago for $66 a share. She received a total of $2.00 in
dividends. Today she sold the stock for $70 a share. Which one of the following statements is
correct concerning this investment?
A) Samantha has current income of $6.00.
B) Samantha has a capital gain of $2.00.
C) Samantha has a total return of 9.1%.
D) Samantha has unrealized income of $4 a share.
decision rules such as IRR and Payback
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
21) Explain the similarities and differences between the holding period return and the internal
rate of return.
decision rules such as IRR and Payback
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23
22) Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He
received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85
(2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76.
What was his average annual rate of return form both dividends and capital gains? (Hint:
compute the IRR, assume that all dividends were received at the end of the year.)
decision rules such as IRR and Payback
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
4.5 Learning Goal 5
1) Risk can be defined as uncertainty concerning the actual return that an investment will
generate.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
2) Business risk resulting from uncertainty over a firm's earnings is a concern for stockholders,
but not for debt holders.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
24
3) Lower risk investments are associated with lower expected rates of return.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
4) The reluctance of Congress to tinker with tax rates and deductions has virtually eliminated
tax risk for U.S. businesses.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
5) Business risk is the risk associated with the amount of debt financing used by a firm.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
6) Investing in short-term debt decreases exposure to interest rate risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
7) Investors who limit themselves to risk free and low risk investments can avoid purchasing
power risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
25
8) Liquidity risk is defined as the risk of
A) having to trade a security in a broad market.
B) not being able to sell an investment conveniently and at a reasonable price.
C) having inflation erode the purchasing power of your investment.
D) having declining price levels affect the reinvestment rate of your current income stream.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
9) In some markets it may take many months to sell a residential property. This is an example
of
A) business risk.
B) credit risk.
C) market risk.
D) liquidity risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
10) The stock of Plomb Co. falls sharply on news that its CEO has drowned in a boating
accident while on vacation. This is an example of
A) liquidity risk.
B) event risk.
C) accidental risk.
D) flotation risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
26
11) As gasoline prices fell in 2015, sales of hybrid and electric vehicles dropped sharply. This
is an example of
A) liquidity risk.
B) event risk.
C) business risk.
D) purchasing power risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
12) A petroleum refinery in the Gulf region is forced to shut down for several months because
of hurricane damage. This is an example of
A) market risk.
B) speculation.
C) event risk.
D) business risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
13) A business has strong sales and profits, but its stock price falls anyway because stock prices
in general are declining. This is an example of
A) business risk.
B) financial risk.
C) market risk.
D) liquidity risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
27
14) Congress considers a bill that would eliminate the mortgage interest deduction for
individuals. For the housing industry, this is an example of
A) tax risk.
B) interest rate risk.
C) business risk.
D) event risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
15) Which of the following will lower the rate of return on a stock whose price has doubled
since you bought it?
A) an increase in the capital gains tax from 15% to 20%
B) an increase in the tax rate on dividend income from 15% to 20%
C) persistently low inflation rates
D) the Federal Reserve acts to lower interest rates
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
16) Which of the following factors will increase the risk level of an investment?
I. a firm's decision to use a high percentage of debt financing
II. an economic situation in which consumer prices are rising at a rapid rate
III. the ability to trade the investment in a broad market rather than in a thin market
IV. unstable currency values
A) I and II only
B) I, II and IV only
C) II and IV only
D) I, III and IV only
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
28
17) Identify and discuss five sources of risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
18) Which types of risk can not be avoided by carefully researching a company's business
prospects and financial statements?
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
29
4.6 Learning Goal 6
1) The standard deviation is computed by dividing the sum of the squared deviations by the
number of observations.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
2) Historical returns are of no use in estimating the risk of an investment.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
3) The greater the dispersion around an asset's expected return, the greater the risk.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
4) Investments with lower standard deviations can be expected to produce higher rates of
return.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
5) Historically speaking, the standard deviation of returns on U.S. Treasury Bills is zero.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
30
6) Most investors are risk averse, meaning they will always be willing to sacrifice higher return
if they can avoid risk.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
7) Each of the following investments produces the same rate of return. Which one has the
greatest amount of risk?
A) investment A with a standard deviation of 4%
B) investment B with a standard deviation of 12%
C) investment C with a standard deviation of 8%
D) investment D with a standard deviation of 19%
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
8) An investment produced annual rates of return of 5%, 12%, 8% and 11% respectively over
the past four years. What is the (sample) standard deviation of these returns?
A) 2.7%
B) 3.2%
C) 3.6%
D) 3.8%
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
9) An investment produced annual rates of return of 7%, -14%, 20% and 4% respectively over
the past four years. What is the standard deviation of these returns?
A) 12.1%
B) 14.0%
C) 1.5%
D) 7.0%
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
