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31
Copyright © 2017 Pearson Education, Inc.
10) Which of the following choices is in the correct order from less risk to more risk?
A) corporate bonds, certificates of deposit, mutual funds that invest in stock, common stock
B) certificates of deposit, corporate bonds, common stock, mutual funds that invest in stock
C) certificates of deposit, mutual funds that invest in stock, common stock, corporate bonds
D) certificates of deposit, corporate bonds, mutual funds that invest in stock, common stock
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
11) An investment produced annual rates of return of 4%, 8%, 14% and 6%, respectively, over
the past four years. What is the standard deviation of these returns?
A) 3.7%
B) 4.1%
C) 4.3%
D) 4.6%
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
12) Which of the following statements about the standard deviation are correct?
I. The standard deviation is a measure of relative dispersion.
II. Standard deviations should be in conjunction with expected returns to compare investments.
III. The standard deviation is calculated by taking the square root of the variance.
IV. The higher the standard deviation of an investment, the lower its risk.
A) I and IV only
B) II and III only
C) I, III and IV only
D) I, II and III only
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
32
13) The expected rate of return and standard deviations, respectively for four stocks are given
below:
ABC 9%, 3%
CDE 11%, 9%
FGH 12%, 8%
IJK 14%, 10%
Which stock is clearly least desirable?
A) ABC
B) CDE
C) FGH
D) IJK
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
14) The expected rate of return and standard deviations, respectively for four stocks are given
below:
OPQ 11%, 8%
RST 11%, 9%
UVW 12%, 10%
XYZ 12%, 8%
Which stock is clearly most desirable?
A) OPQ
B) RST
C) UVW
D) XYZ
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
33
15) Most investors are risk-averse, which means they
A) refuse to accept any financial risk.
B) invest only in government insured securities.
C) require an increase in return for any increase in risk.
D) gain satisfaction from the excitement of risk.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
16) Which of the following should be considered when deciding among alternative
investments?
I. time value of money
II. risks associated with each investment
III. risk free rate of return
IV. personal risk tolerance level
A) I and II only
B) III and IV only
C) I, II and IV only
D) I, II, III and IV
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
17) Explain the relationship between risk, the expected rate of return and the actual rate of
return.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
34
18) Over the past 4 years, the annual rates of return on stock of Brown & Warren Inc. have
been -2%, 4%, 14% and 6%, respectively, over the past four years. Compute the standard
deviation of these returns.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
4.7 Appendix 4A The Time Value of Money
1) Sydney invested $10,000 for an indefinite period at 5% per year. At the end of each year,
she receives a $500 check for interest earned. This type of account pays simple interest.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
2) For a given stated rate of interest, a sum compounded monthly will earn more interest than a
sum compounded annually.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
35
3) An ordinary annuity is defined as an annuity for which the cash flows occur at the beginning
of each year or payment period.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
4) To calculate the interest rate or growth rate using a spreadsheet or financial calculator, the
present value and the future value most have opposite signs.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5) There is no limit to the increase in the true rate of interest as compounding becomes more
frequent.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
6) When using a financial calculator to compute the present value of a lump sum, the future
value is entered as PMT.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
36
7) Justin invests $4,000 in a savings account for two years. The account pays 2% interest
compounded annually. How much interest income will Justin earn on this investment?
A) $80.00
B) $81.60
C) $160.00
D) $161.60
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8) Justin invests $4,000 in a savings account for two years. The account pays 2% interest
compounded annually. How much money will be in the account at the end of the second year?
A) $4,161.60
B) $4,160.00
C) $4,080.00
D) $1,161.60
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9) Which one of the following is an example of an annuity?
A) the receipt of $50 in January, March, April, June, August, September and December
B) the payment of $259 a month for three consecutive years
C) the payment of $389 in January, $200 in February, and $200 in March
D) the receipt of $100 a month for three months and then $150 a month for two months
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
37
10) Which is most true of an annual rate of 4% compounded quarterly?
A) It is equivalent to 4.4% paid annually.
B) It is equivalent to 16.99% paid annually.
C) It is equivalent to 1% simple interest paid quarterly
D) It is equivalent to 4.06% paid annually.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
11) The maximum rate of return that can be earned for a given rate of interest occurs when
interest is compounded
A) annually.
B) daily.
C) monthly.
D) continuously.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12) If you invest $2,000 at the end of each year for five years and you earn 7% interest
compounded annually, how much will you have accumulated at the end of the fifth year?
A) $10,700
B) $11,501
C) $12,307
D) $14,026
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
38
13) Taylor has saved $400 at the end of every month for the last 4 years with the intention of
paying cash for a new car. She has earned a fixed annual rate of 4% over the 4 year period;
interest is compounded monthly. How much can she pay for her new car at the end of the
fourth year?
A) $20,784
B) $55,705
C) $17,716
D) $22,272
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
14) Assume that $100 is deposited at the end of each year for five years at 10% compound
interest and that no withdrawals are made over the five-year period. Based on this data, which
one of the following statements is correct?
A) The future value will be $550.
B) The present value can be determined by computing the present value of $500 in five years at
10%.
C) The present value can be determined by computing the present value of a $100 ordinary
annuity for five years at 10%.
D) The present value will be $500.
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
15) David has purchased an investment that he expects to produce an annual cash flow of
$3,000 for five years. He requires an 8% rate of return compounded annually. What is the
maximum amount that David can pay and still earn the required rate of return?
A) $19,008
B) $15,000
C) $14,764
D) $11,978
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
39
16) Jeremy purchased 100 shares of FB for $19 per share in September 2012 and sold them 3
years later at $91 per share. At what annual rate did the value of his investment grow?
A) about 95%
B) about 48%
C) about 69%
D) about 12%
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
17) To compute the present value of $1,000 annuity received at the end of each of the next
three years and discounted at the rate of 5% per year, you should enter the following variables
into a financial calculator.
A) N=3, i=5, PMT=1000
B) N=3, i=5, FV=3000
C) N=3, i=15, PMT=1000
D) N=1, i=5, PMT=3000
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
18) To compute the present value of $1,000 annuity received at the end of each of the next
three years and discounted at the rate of 5% per year, you should use which of the following
EXCEL commands?
A) ANN
B) TVM
C) RATE
D) PV
relationship between interest rates and the time value of money
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
