978-0134083308 Chapter 4 Part 4

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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

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Question Status: Previous Edition

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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%

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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

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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

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AACSB: 3 Analytical thinking

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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

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AACSB: 3 Analytical thinking

Question Status: Previous Edition

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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.

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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

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17) Explain the relationship between risk, the expected rate of return and the actual rate of

return.

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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.

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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

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2) For a given stated rate of interest, a sum compounded monthly will earn more interest than a

sum compounded annually.

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3) An ordinary annuity is defined as an annuity for which the cash flows occur at the beginning

of each year or payment period.

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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.

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5) There is no limit to the increase in the true rate of interest as compounding becomes more

frequent.

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6) When using a financial calculator to compute the present value of a lump sum, the future

value is entered as PMT.

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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

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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

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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

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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.

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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.

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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

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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

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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.

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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

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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%

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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

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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

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