Chapter 01 – The Investment Setting
40. Refer to Exhibit 1.6. Calculate the HPY for the portfolio.
a.
10.6%
b.
6.95%
c.
13.5%
d.
10%
e.
15.7%
Exhibit 1.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You purchased 100 shares of GE common stock on January 1, for $29 a share. A year later you received $1.25 in
dividends per share and you sold it for $28 a share.
41. Refer to Exhibit 1.7. Calculate your holding period return (HPR) for this investment in GE stock.
a.
0.9655
b.
1.0086
c.
1.0357
d.
1.0804
e.
1.0973
42. Refer to Exhibit 1.7. Calculate your holding period yield (HPY) for this investment in GE stock.
Chapter 01 – The Investment Setting
a.
b.
c.
d.
e.
Exhibit 1.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The annual rates of return of Stock Z for the last four years are 0.10, 0.15, −0.05, and 0.20, respectively.
43. Refer to Exhibit 1.8. Compute the arithmetic mean annual rate of return for Stock Z.
a.
0.03
b.
0.04
c.
0.06
d.
0.10
e.
0.40
44. Refer to Exhibit 1.8. Compute the standard deviation of the annual rate of return for Stock Z.
a.
0.0070
b.
0.0088
c.
0.0837
d.
0.0935
Chapter 01 – The Investment Setting
e.
0.1145
45. Refer to Exhibit 1.8. Compute the coefficient of variation for Stock Z.
a.
0.837
b.
0.935
c.
1.070
d.
1.145
e.
1.281
46. Refer to Exhibit 1.8. Compute the geometric mean rate of return for Stock Z.
a.
0.051
b.
0.074
c.
0.096
d.
0.150
e.
1.090
47. Which of the following is not a component of the required rate of return?
a.
expected rate of inflation
b.
time value of money
c.
risk
d.
holding period return
e.
nominal returns
48. Which of the following is NOT a component of the risk premium?
a.
business risk
b.
financial risk
c.
liquidity risk
d.
exchange rate risk
e.
unsystematic market risk
49. The ability to sell an asset quickly at a fair price is associated with
a.
business risk.
b.
liquidity risk.
c.
exchange rate risk.
d.
financial risk.
e.
market risk.
50. The variability of operating earnings is associated with
a.
business risk.
b.
liquidity risk.
c.
exchange rate risk.
d.
financial risk.
e.
market risk.
51. The uncertainty of investment returns associated with how a firm finances its investments is known as
a.
business risk.
b.
liquidity risk.
c.
exchange rate risk.
d.
financial risk.
e.
market risk.
52. The total risk for a security can be measured by its
a.
beta with the market portfolio.
Chapter 01 – The Investment Setting
b.
systematic risk.
c.
standard deviation of returns.
d.
unsystematic risk.
e.
alpha with the market portfolio.
53. If over the past 20 years the annual returns on the S&P 500 market index averaged 12 percent with a standard
deviation of 18 percent, what was the coefficient of variation?
a.
0.6
b.
0.6%
c.
1.5
d.
1.5%
e.
0.66%
54. Given investments A and B with the following risk return characteristics, which one would you prefer and why?
Standard Deviation
Investment
Expected Return
of Expected Returns
A
12.2%
7%
B
8.8%
5%
a.
Investment A because it has the highest expected return.
b.
Investment A because it has the lowest relative risk.
c.
Investment B because it has the lowest absolute risk.
d.
Investment B because it has the lowest coefficient of variation.
e.
Investment A because it has the highest coefficient of variation.
Chapter 01 – The Investment Setting
Exhibit 1.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information:
Nominal return on risk-free asset = 4.5%
Expected return for asset i = 12.75%
Expected return on the market portfolio = 9.25%
55. Refer to Exhibit 1.9. Calculate the risk premium for asset i.
a.
4.5%
b.
8.25%
c.
4.75%
d.
3.5%
e.
0%
56. Refer to Exhibit 1.9. Calculate the risk premium for the market portfolio.
a.
4.5%
b.
8.25%
c.
4.75%
d.
3.5%
e.
0%
57. Economists project the long-run real growth rate for the next five years to be 2.5 percent and the average annual rate
of inflation over this five-year period to be 3 percent. What is the expected nominal rate of return over the next five years?
a.
0.500 percent
b.
1.056 percent
c.
2.750 percent
d.
5.500 percent
e.
5.575 percent
Exhibit 1.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information
Nominal annual return on U.S. government T-bills for year 2018 = 3.5%
Nominal annual return on U.S. government long-term bonds for year 2018 = 4.75%
Nominal annual return on U.S. large-cap stocks for year 2018= 8.75%
Consumer price index January 1, 2018 = 165
Consumer price index December 31, 2018 = 169
58. Refer to Exhibit 1.10. Compute the rate of inflation for the year 2018.
a.
2.42%
b.
4.0%
c.
1.69%
d.
1.24%
e.
0%
59. Refer to Exhibit 1.10. Calculate the annual real rate of return for U.S. T-bills.
a.
2.26%
b.
1.81%
c.
−0.5%
d.
1.05%
e.
0%
60. Refer to Exhibit 1.10. Calculate the annual real rate of return for U.S. long-term bonds.
a.
3.06%
b.
2.27%
c.
2.51%
d.
3.5%
e.
0%
61. Refer to Exhibit 1.10. Calculate the annual real rate of return for U.S. large-cap stocks.
a.
7.06%
b.
6.18%
c.
4.75%
d.
3.75%
e.
0%
62. What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation
expectations increase, and (2) investors become more risk averse?
a.
shift up and keep the same slope
b.
shift up and have less slope
c.
shift up and have a steeper slope
d.
shift down and keep the same slope
e.
shift down and have less slope
63. A decrease in the market risk premium, all other things constant, will cause the security market line to
a.
shift up.
b.
shift down.
c.
have a steeper slope.
d.
have a flatter slope.
e.
remain unchanged.
64. A decrease in the expected real growth in the economy, all other things constant, will cause the security market line to
a.
shift up.
b.
shift down.
c.
have a steeper slope.
d.
have a flatter slope.
e.
remain unchanged.
65. Unsystematic risk refers to risk that is
a.
undiversifiable.
b.
diversifiable.
c.
due to fundamental risk factors.
d.
due to market risk.
e.
unexplainable.
66. The security market line (SML) graphs the expected relationship between
a.
business risk and financial risk.
b.
systematic risk and unsystematic risk.
Chapter 01 – The Investment Setting
c.
risk and return.
d.
systematic risk and unsystematic return.
e.
real and nominal returns.
67. Two factors that influence the nominal risk-free rate are
a.
the relative ease or tightness in capital markets and the expected rate of inflation.
b.
the expected rate of inflation and the set of investment opportunities available in the economy.
c.
the relative ease or tightness in capital markets and the set of investment opportunities available in the
economy.
d.
time preference for income consumption and the relative ease or tightness in capital markets.
e.
time preference for income consumption and the set of investment opportunities available in the economy.
68. Measures of risk for an investment include
a.
variance of returns and business risk.
b.
coefficient of variation of returns and financial risk.
c.
business risk and financial risk.
d.
variance of returns and coefficient of variation of returns.
e.
variance of returns and economic risk.
69. Sources of risk for an investment include
a.
variance of returns and business risk.
b.
coefficient of variation of returns and financial risk.
c.
business risk and financial risk.
d.
variance of returns and coefficient of variation of returns.
e.
variance of returns and economic risk.
70. Modern portfolio theory assumes that most investors are
a.
risk averse.
b.
risk neutral.
c.
risk seekers.
d.
risk tolerant.
e.
risk embracing.
71. All of the following are major sources of uncertainty EXCEPT
a.
business risk.
b.
financial risk.
c.
default risk.
d.
country risk.
Chapter 01 – The Investment Setting
e.
liquidity risk.
72. Which of the following is least likely to move a firm’s position to the right on the Security Market Line (SML)?
a.
an increase in the firm’s beta
b.
adding more financial debt to the firm’s balance sheet relative to equity
c.
changing the business strategy to include new product lines with more volatile expected cash flows
d.
Investors perceive the stock as being riskier.
e.
an increase in the risk-free required rate of return