Chapter 05
Inti•oduction to Risk, Retui•n, and the Histoi•ical Recoi d
multiple Choice Questions
1. OX 8f the past year you earned a nominal rate o1 interest of 10 percent on your rHoney. The
inflation fate was percent over the same period. The exact acttial growth rate of your
purchasing power was
.4. 1 . %.
B. 10.0%.
€ 5.0%.
D. 4.8%.
E 1 5.0 0. o.
= (1
R) (
I) — 1; 1 10: o,, 1 Ono o — 1 - 4 8: o
2. OX 8f the past year you earned a nominal rate o1 interest of 8 percent on your rHoney. The
inflation fate was 4 percent over the same period. The exact actual growth rate o1 your
purchasing power was
.4. 1 . %.
B. 10.0%.
C’. 3.8%.
D. 4.8%.
E 1 5.0 0. o.
= (1
R) (
I) — 1 ; 1 0g: o,, 1 Ono o — 1 -
8: o
3. A year aeo. you invested S 1.000 iii a savings account that pays an mutual interest rate o1 7oñ.
What is your a]3]3fOxiioate annual real rate of feturil If the rate of inflation was 3o'o over the
year?
.4%
B 10%.
C’ 7%
D 3%
4. A yeaf ago, you invested S10,000 iii a savings account that pays an annual interest fate of %.
What is your a]3]3fOxiioate annual real rate of feturil If the rate of inflation was 3.l o go over the
year?
.1 :%
B 10%.
C’ 7%
D 3%
5. I1 the annual feal rate of iiiterest is SOS and the expected inflation rate is 40a. the iiorHlnal fate
o1 interest s ould be approxiiiiately
.4. 1%.
B. 9%.
€ 20%.
D 1:%.
E 7O o.
6. II the annual feal rate of interest is 2.SOA and the expected imitation rate is 3.7 0'o. the nominal
rate o1 interest s ould be approxiiiiately
.4. 3.7%.
B. 6.2%.
( 2.5%.
D. -1.2%.
E 4. 3Ono.
7. You purchased a share of stock for 520. One year later you received SI as a dividend and sold
the share for 529. '’hat was your holding-period return?
.4. 4?%
B. 0%
( 5%
D. 40%
E . 32 0 o
(51 + 529 — 520), 520 - 0.5000, Or 50 o.
S. YOU ]3llfC1iased a share of stock for 530. One year later you received S1.50 as a dividend and
sold the share for 532.25. What was your holding-period renirii?
.12:%
B 110%
C’ 13 6%
D. 11.8%
E . 14. 1 Ono
(51.5 + 532.21 — 530), 530 - 0.125, or 12.50 o.
9. Which o1 the follow inn detefliiine(s) the level o1 real ilitefest rates ?
I) The supply of savings by households and business finns
II) The deiiiaiid for irrvestiiieiit funds
III) The eoveriiiiieiit's net supply and, or deiiiaiid for iimds
.4. I only
B. II only
C’ I and II only
D. I. II. and
E. III only
The value of savings by households is the iiiajof supply of fiinds: the demand for investment
iimds is a portion of the total demand for Grinds; the government's position can be one of either
net supplier, or net deiiiandef of druids. The above factors constitute the total supply and
deiiiaiid for ftmds. which deteriiiiiie real interest rates.
10. '’liich of the followiiie staterHent(s) is (are) true?
I) The real rate of interest is deteriiiiiied by the supply and demand fof llâ)S.
II) The real rate o1 interest is deteriiiiiied by the expected rate of inflation.
III) The real rate of interest caii be affected by actions o1 the Fed.
IV) The real rate of iiitefest is equal to the noiiiinal interest fate plus the expected rate o1
inflation.
.4. I and II only.
B. I and III only.
C’ III and IX' only.
D. II and
only.
E I, II, III, and I4 only.
The expected fate o1 inflation is a determinant of noiiiiiial, not real. iiitefest rat8S. Real rates are
deteriiiiiied by the supply and deiiiand for Grinds. which can be affected by the Fed.
11. Whicli o1 the follos inu stateiiients is ti ue
.4. liiiiatioii lias rio effect ori the noiiiiiial fate of intefest.
B The realized iiominal rate of illtefest iS 8ls ays ereater thaii the real rate of iiitefest.
C’ C ertilicates of deposit o11“ef a guaraiiteed feal fate of iiiterest.
D. C ertificates of deposit off8f 8 8iiaranteed noiiiiiial rate of interest.
E Inflatioii lias iio effect ori the iiominal rate of iiiterest. the fealized iioiiiiiial fate of iiitefest is
ali ays gfeater thail the real rate of interest. and certificates of deposit offer a uuaraiiteed real
rate o1 interest
Expected inflation rates are a determinant of nominal interest rates. The realized noiiiiiial rate o1
interest s ould be negative if the difference between actual and anticipated inflation rates
exceeded the real rate. The realized noiiiinal rate of illtefest would be less than the feal rate if the
unexpected inflation were greatef than the real rate of interest. C’ertificates o1 deposit contain a
real rate based on an estiiiiate of inflation that is not guaranteed.
12. Other things equal, an iiicrease in the goveflâiiieiit buduet deficit
.4. drives the iiiterest rate domn.
B. drives the interest fate up.
C’ might not have any effect oii iiiterest rates.
D. als ays increases busiiiess prospects.
E never increases business prospects.
An increase in the uoveriiiiient budget deficit. other things equal, causes the goveflâiiient to
incfease its borrowing. which increases the deiiiaiid for iimds and drives interest rates up.
13. C’eteris pafibiis, a decrease iii the demand for loaiiable funds
A. drives the interest rate down.
B drives the interest fate up.
C might not have any effect on interest fates.
D. results Horn an incfease in business prospects and a decrease iii the level o1 savings.
E results from an increase in business prospects and a increase iii the level of savings.
A decfease iii demand, ceteris paribiis, always drives interest fates down. An increase in
business pfospects would increase the deiiiaiid for fluids. The savings level affects the supply o1.
not the deiiiaiid for, funds.
14. The holding-period renirii (HPR) On a shafe of stock is equal to
.4. the capital gain yield dUrinu the pefiOd. plus the irritation rate.
B. the capital eain yield during the period. plus the dividend yield.
C’ the current yield. plus the dividend yield.
D. the dividend yield, plus the risk preiiiiuiii.
E the chance iii stock price.
The HPR o1 any iiivestioeiit is the suni of the capitol gain and the cash flow over the period.
u hich for coiiiiiion stock is B.
15. Historical recofds regarding rettirn on stocks, Tfeasury bonds. and Treasury bills benveen
1926 and 2009 show that
A. stocks offered investors greater rates o1 retuflâ than bonds and bills.
B stock returns were less volatile than those o1 bonds and bills.
C’ bonds offered irrvestors gfeater rates of renirii than stocks and bills.
D. bills outperformed stocks and bonds.
E tfeasuy bills als ays o11“ered a rate of return greater than inflation.
The historical data show that. as expected. stocks offer a greater retuflâ 811d greater volatility
than the other investment alternatives. Inflation soiiietiiiies exceeded the T-bill return.
1 6. If the interest rate paid by borroii"8fS 8nd the interest fate feceived by sav8f S accurately
reflect the fealized rate of imitation:
.4. borrowers gain and savers lose.
B savers gain and borrowers lose.
C’ both borrO\\'8fS 8nd savers lose.
D. neither borrowers nor savers eaiii or lose.
E both bOffOwers and savers eain.
II the described interest rate accurately feiiects the fate o1 irritation. both borros ef s and lelid8f S
are paying and receiving, respectively. the real fate of interest; thus. iieitli8f QfOlip gaills.
17. '’hat is the expected holding-period return for KMP stock?
A. 10.40%
B 9.32%
C’ 11.63%
D 11. 4%
E 10.550. o
HPR - .30 ( 18%) + .10 ( 120 o) + .20 (—? O no) = 10 4?fi
18. What is the expected standard deviation for
.4. 6.91%
B. 8.13%
C’ 7. 79%
D. 7.2 %
[ i0 ( s — 0 4)
4P stock?
•0 ( 12 — 10 4)' — i0 (—s — 10 4)']
19. '’hat is the expected variance for
A. 66.04%
B 69.96%
€ 77.04%
- 8 1i%
4P stock?
variance - [.30 (18 — 10.4)' + .10 ( 12 — 10.4)' — .20 (—5 — 10.4) ] = 66.040 'o
20. If the noiiiiiial fetufli is constant, the after-tax feal rate of retuflâ
.4. declines as the inflatioli fate iiicfeases.
B incfeases as the irritation rate increases.
C declines as the inflatioli fate declines.
D. increases as the inflation rate decreases.
E. declines as the inflatioli fate incfeases and increases as the inflation rate decfeases.
Illilatioli fates have an inverse effect on afief-tax real rates of fetuflâ.
21. The risk preiiiiiim for conunoii stocks
.4. cannot be zero. for iiii"8StOfS U'Oil1d be uns illing to irrvest in condition stocks.
B. rHust always be positive. in theory.
C’ is negative. as cognition stocks are risky.
D. cannot be zero. for iiii"8StOfS U'Oil1d be uns illing to irrvest in condition stocks and Purist
always be positive. in theory.
E cannot be zero. for investors would be unwilling to invest iii coiiuiion stocks and is negative,
as conunoii stocks afe risky.
H the risk preiiiiuio for coinmoii stocks were zero or neeative, investors s ould be unwilling to
accept the lOwer retuflis for the incfeased fisk.
22. If a portfolio had a rettirn of 11ono, the risk free asset return was 3%. and the staiid8f)
deviation of t1l8 ]3Oftfo1io s excess reniriis s as 340 o. the risk preiiiiuio would be
.4. 31%
B. 18%
C’ 49%
D. 12%
E . 2 90 o
15 — 3 = 12
0
'o.
23. You purchase a share of Boeing stock fof 590. One year l8ter, altef receiving a dividend of
S3. you sell the stock for 592. Wll8t was youf holdilig-period retuflâ?
HPR - (9c — 90
3) 90 -
s6: o
24. Toyota stock lra s the followiiig probability distributioii o1 expected prices one year from
,
Stote Prol›ol›ilit
1
?5°
Pi-ice
S tJ
2
Sfi(1
7(1
4(1* o
‘o
II you buy Toyota today fof 555 and it will pay a dividend during the yeaf of S4 per sliafe. s hat
is your expected holding-period return on Toyota?
.4. 17. 72%
B. 18.89%
C’ 17.91%
D. 18.18%
E(P1) - .21 (o4 55 — 1) + .40 (64 11 — 1) — .35 (74 55 — 1) - 18.18%.
25. Which o1 the follos inn factof S \VOUld not be expected to affect the noiiiiiial iiitefest rate?
.4. The supply of loanable iimds
B The demand for loanable fluids
C. The coupon rate on previously issued goveriuoeiit bonds
D. The expected rate of inflation
E C oveflâiiient spending and borrowing
The nominal interest fate is affected by supply, deiiiand, Government actions and inflation.
C’oiipoii rates on previously issued goveriuoeiit bonds retract historical illtefest rates but should
not affect the current level Of interest fates.
26. II 8 ]3Oftfolio had a renirii of 100 ñ. the risk ffee asset renirii was 40 o, alld the standard
deviation of t1l8 ]3Oftfo1io s excess reniriis s as 250 o, the risk preiiiiuio would be
D. 1%
E . 2 90 o
10 — 4 - 6 0 *0.
27. lii words. the feal rate of iiiterest is appfOXiioately equal to
A. the noiiiiiial rate minus the iiiilation rate.
B the iiiilation rate iiiiiius the noiiiiiial rate.
C’ the noiiiinal rate times the iiiilation fate.
D. the iiiliatioii rate divided by the iiorHlnal rate.
E the iiominal rate plus the inflatioii rate.
The actual relationship is ( 1 + real rate) - ( 1 + iioiiiinal rate) ( 1 — inflatioli fate). This can be
approximated by the equation: feal rate - noiiiiiial rate - imitation rate.
2S. If the Federal Resel e los ef S the discount fate, ceteris paribus, the equilibriuiii levels of
iimds lent will
and the equilibrium level of real interest fates s ill
.4. increase: increase
B. incfease: decfease
C decrease: iiicfease
D. decfease: decrease
E reverse difectioii front their previous trends
A lower discount rate would eiicoufage banks to intake iiiore loans. which would iiicfease the
money supply. The supply ctrl e would shift to the fight and the equilibrium level of druids
would incfease s liile the equilibriuiii interest rate would fall.
29. '’hat has been the relationship between T-Bill rates and inflation rates since the 1980s'?
.4. The T-Bill rate was soiiietiiiies liigli8f than and soiiietiiiies lower than the inflation fate.
B The T-Bill rate has equated the imitation rate plus a constant percentage.
C The irritation rate has eqiialed the T-Bill rate plus a constant percentage.
D. The T-Bill rate has been hillier than the inflation rate almost the entire period.
E The T-Bill rate has been lO\i"8f than the inflation fate aliiiost the eiitife period.
The T-Bill rate was liiull8f than the inflation rate fof over Evo decades.
30. ”Bracket C reep" happens when
.4. tax liabilities are based on real income and there is a negative imitation rate.
B tax liabilities afe based on real iiicoiiie and there is a positive irritation rate.
C’ tax liabilities afe based on noiiiiiial iiicoiiie and there is a negative inflation rate.
D. tax liabilities are based on noiiiiiial iiicoiiie and there is a positive irritation rate.
E too iiiany peculiar people make their way into the hilliest tax bracket.
A positive imitation rate typically leads to higher noiiiiiial iiicoiiie. Higher noiiiiiial iiicoiiie
means people will have higher tax liabilities and iii sonic cases will put tll8lii iii liiuhef tax
brackets. This can happen even s hen feal iiicoiiie has declined.
3. 1. The holding-period fettiril (HPR) for a stock is equal to
.4. the real yield rHlnus the imitation rate.
B the noiiiinal yield minus the real yield.
C’ the capital eains yield iiiiHus the tax rate.
D. the capital gains yield rHlnus the dividend yield.
E. the dividend yield plus the capital gains yield.
HPR consists of an income coiiiponeiit and a pfiCe change component. The income component
on a stock is the dividend yield. The price change component is the capital gains yield.
32. The liistorical aritliiiietic rate o1 returii ori U.S. small stOCkS O¥'8f the 1926-2009 period lias
beeii
. The standard deviatioii o1 small Stocks' fettirlls lias beeii
tlian the
standard deviation of large stocks’ returiis.
.4. 12.43%. lower
B 13.11%. lower
C’ 16.24%. liiuhef
D. 17.43%. lilgli8f
E 21.53o o, iiielier
See Table .3.
You have been eiven this probability distribution for the holding-period return for C lieese. Inc
stock:
State c I
Ecoiioiiij
Probnbilit2’
HPR
33. Assuiiiiiig that the expected rettirn on Cheese's stock is 14.3 %. what is the staiid8f)
deviation of these fettirns'?
472%
B 630%
C’438%
D. . 74%
E. 6.6 70 o
Variance - .20*(24 — 14.3 )' — .45*(15 — 14.35) + .3 *(8 — 14.3 )' - 32.9275. Standard
deviation - 32 9275' - 5.74.
34. Air investor piirchased a bond 4 days alo for 5985. He received S 15 in interest and sold
the bond for 5980. U'hat is the holdiiig-period return ori his investioeiit?
.4. 1. 2%
B 0. 0%
C’ 1.92%
D. 0.01%
E. 0.94%
HPR - (SI
+ 950 — 955) 5981 - .010152284 - approxiiiiately 1.020s.
35. Air investor piirchased a bond 63 days alo for 5980. He received 517 in interest and sold
the bond for 5987. U'hat is the holdiiig-period return ori his investioeiit?
.4. 1.?2%
B. 2.4 %
C’ 1.92%
D. 2.68%
E. 3.250 o
HPR - (517 + 957 — 950) 5980 - .0244898 - approxiiiiately 2.4 %.
36. OX 8f the past year you earned a nominal rate o1 interest of 8 percent on your rHoney. The
inflatioli fate was 3. percent over the same period. The exact acnial growth rate of your
purchasing power was
.4. 15.55%.
B. 4.3 %.
€ 5.02%.
D. 4.81%.
E . 1 5.040 o.
37. OX 8f the past year you earned a nominal rate o1 interest of 14 percent on your rHoney. The
inflation fate was 2 percent over the same period. The exact actual growth rate o1 your
purchasing power was
A. 11. 76%.
B. 16.00%.
€ 15.02%.
D. 14.32%.
E 10.530. o.
38. Over the past year you eafned a nominal rate of illtefest of 12.1 pefcent on your rHoney. The
inflation fate was 2.6 percent over the sarHe period. The exact actual urou4li rate o1 your
purchasing power was
.4. 9.1?%.
B 9.90%.
C’. 9.65%.
D. 10.52%.
E 4.3 50 o.
39. A year ago, you invested S1,000 iii a savings account that pays an annual interest rate of 4o'o.
What is your a]3]3fOxiioate annual real rate of feturil If the rate of inflation was 2o'o over the
year?
.4. 4%.
B. 2%.
?”. 6%.
D. ?%.
40. A year ago, you invested S 10.000 in a savings account that pays an annual interest rate o1
30a. '’Hat iS yOilr a]3]3fOxiiiiate mutual real fate o1 return if the rate of inflation w8S 4% OX"8f the
year?
D. 3%.
E . -2 0 o.
41. A year ago, you invested 52.500 in a savings account that pays an annual interest rate o1
2.Son. What is your approxiiiiate annual feal rate of renirii if the rate of inflation was 1.60a over
the yeaf?
.4. 4.1%.
B 2. %.
C’ 2.9%.
D. 1.6%.
E. 0.9%.
42. A year ago, you invested 52.500 in a savings account that pays an mutual iiitefest rate o1
2.Son. What is your approxiiiiate annual feal rate of renirii if the rate of inflation was 3.40a over
the yeaf?
.4. 0.9%.
B. -0 9?t.
C’ ?.9%.
D. 3.4%.
E . - 1.2 0 o.
43. A yeaf aeo. you invested 51.000 iii an investment that produced a return of 160 ñ. What is
your a]3]3fOximate annual real rate of return if the rate o1 inflation was 2o o over the year?
.4. 18%.
B 2%.
C’ 16%.
D 1 %.
E. 14%.
44. II the mutual real rate o1 interest is 3.1 0'o alld the expected inflation rate is 2.SOA. the nominal
rate o1 interest s ould be approxiiiiately
.4. 3.?%.
B 2. %.
C’ 1 %.
D. 6.8%.
E. 6%.
45. II the mutual real rate o1 interest is 2.10 o alld the expected inflation rate is 3.40 o, the nominal
rate o1 interest sould be approxiiiiately
.4. 4.9%.
B 0.9%.
€ -0.90o.
D. 7%.
E. .9%.
46. II the annual real fate of interest is 40 'o and the expected inflation rate is 30 o, the noiiiiiial rate
o1 interest sould be approxiiiiately
.4. 4%.
B. 3%.
C’. 1%.
D. 0%.
E. 7%.
47. YOli pllfCliased a share o1 stock for S12. One year later you received SO.21 as a dividend and
sold the share for 51.92. What was your holding-period renirii?
A. 9.7 %
B 10.6 %
C’ 11. 7 %
D 11 ? %
E. S 46 0 o
(50.25 + S12.92 — S12), 512 - 0.0975, or 9.750 o.
48. Yoll ]3llfC l8Std 8 Share o1 stock fof S120. One year latef you received S1.82 as a dividend
and sold the share fof S136. '’hat was your holding-period fettirii?
.4. 1 .67%
B.
C’
D.
E.
22.12%
18.8 %
13.24%
14.8 %
(S1.82 + S 136 — S 120) S120 - 0.1455, or 14.550 o.
49. You purchased a share of stock for 565. One year later you received S2.37 as a dividend
and sold the share fof S63. '’hat uas your holding-period fettirii?
A. 0.57%
B -0 2550?t
€ -0 890o
D. 1.63%
E . -0.460 o
(52.37 + 563 — S61), 565 - 0.00569, or 0.570 o.
You have been given this probability distribution for the holding-period reulflâ fof 8 StOCk:
State of the Economic
Pi’ol al ilitv
HPR
Booiii
N‹›i31ial ’ti» th
Recession
.4(I
.fi
.25
22°«
11 o
- 9° o
50. What is the expected holding-period retuflâ fOf the stock?
.4. 11.67%
B 8.33%
C’ 9. 6%
D. 12.4%
E. 10.4%
HPR - .40 (22%) + .35 ( 1 1Ono) + .?
(—90 'o) = 10 40 o
51. '’hat is the expected staiid8fd deviatioli for the stock'?
.4. 2.07%
B 9.96%
€ 7.04%
D. 1.44%
E. 12.17%
s - [.40 (22 — 10.4) + .31 ( 11 — 10.4)' — .25 (—9 — 10.4)']1 - 12.167%
52. What is the expected variance for the stock?
.4. 142.07%
B 189.96%
€ 1 77.04%
D. 128.17%
E. 148.04%
Varia ce - [ 40 (ii — 10 4)' — 3 ( 11 — 10 4)’ + c› (—9 — 10 4)'] - 14s 04:›
53. '’hich of the following measufes of fisk best highlights the potential loss frown extreiiie
negative reniflis?
.4. Standard deviation
B ariaiice
C Upper paftl8l St8nd8fd deviation
D. alue at Risk (X'aR)
E Sharpe rHeasiife
Only VaR measures potential loss frown extreme negative returns.
54. OX 8f the past year you eafned a nominal fate of interest of 3.6 pefcent on your iiioiiey. The
inflation fate was 3.1 percent over the same period. The exact acnial growth rate of your
purchasing power was
.4. 3.6%.
B 3.1%.
C’. 0.48%.
D. 6. )O 0.
E -0.630 0
55. A year ago, you invested 51.000 in a savings account that pays an annual interest rate of
4.30a. What is your a]3]3fOxiiiiate aiBulal real rate of rettirn if the rate o1 inflation s as 3o'o over
the yeaf?
C 7.3%.
D. 3%.
E. 1.3%.
56. If the mutual real rate o1 interest is 3 SOA and the expected iiiliatiOll fate is 3.l ogo, the nominal
rate o1 interest sould be approxiiiiately
D. 7%.
E . 2.6
0
o.
57. You purchased a shafe o1 CSCO stock for 520. One year later you received S2 as a dividend
and sold the share fof S3 1. '’hat s as your holding-period fettirii?
.4. 4?%
B 0%
€ 60%
D. 40%
E. 6 %
You have been given this pfObability distfibiition for the holding-period return for C SI stock:
fitiite t›f the Ecoii‹aiii
l'i olioliiliti
HPR
SS. '’hat is the expected holding-period return for GM stock?
.4. 10.4%
B. 11.4%
C’ 12.4%
D. 13.4%
E. 14.4%
HPR
.40 ( 30%)
.40 (
0
o)
.?0 (—1 00 o) = 4 4? o
59. '’hat is the expected staiid8fd deviatioli for CRM stock'?
.4. 16.91%
B 16.13%
C’ 13. 79%
D. 1 .2 %
E. 14.87%
[ 40 (30 — 4 4)
40 ( 11 — 1" ")' — i0 (—10 — 14 4)—]
- 14 87%
60. What is the expected variance for GUI stock?
.4. 200.00%
B. 221.04%
C’ 246.37%
D. 14.87%
variance - [.40 (30 — 14.4)' + .40 ( 11 — 14.4)' — .20 (—10 — 14.4) ] = 221. 040 'o
61. YOli pllfCliase a shafe of C AT stock for 590. One year latef, aftef receiving a dividend o1 S4.
you sell the stock for 597. Wh8t was youf holding-period retuflâ'?
HPR - ([97 — 90] + 4) 90 = 12.220 o
62. When corHpafille investioeiits with different liorizoiis the
accurate corHparison.
.4. aritlunetic averaee
B. effective annual rate
C’ averaue aiuiual rettirn
D. liistorical aimiial average
E ueometric fettirn
]3fOvides the rHore
The effective annual rate provides the moore acciifate coioparisoii of investiiieiits with differeiit
liorizoiis because it expfesses the retuflis in a coiiiiiioii period.
63. Annual Perceiitaee Rates (APRs) are coioputed iisiiie
A. siiiiple iiitefest.
B coiiipound iiitefest.
C’ eitlier siiiiple iiiterest or coiiipound iiitefest caii be used.
D. best estimates of expected real costs.
E real iiitefest.
APRs use simple interest.
64. An irrvestiiieiit provides a 20 o returii semi-aiuiually. its effective aimiial fate iS
.4. 2%.
B 4%.
€ 4.02%.
D. 4.04%.
E 4. 53Ooo.
( 1.02)' — 1 = 4.040 'o
65. An irrvestiiieiit provides a 1.250 o returli quarterly, its effective annual rate is
.4. 0.23%.
B. .09%.
€ . 4.02%.
D. 4.04%.
E. 2.6 10 o.
66. An investment provides a 0.78o'o rettirn iiioiitlily, its effective annual rate is
.4. 9.36%.
B 9.63%.
€ 10.02%.
D. 9.77%.
E 10.3SO. o.
( 1.0078) ' — 1 - 9.770
67. An investment provides a 3o'o rettirn seiiii-annually, its effective mutual fate is
.4. 3%.
B 6%.
€ 6.06%.
D. 6.09%.
( 1.03)' — 1 - ). 0) 0*0
68. An irrvestiiieiit provides a 2. 1 Ono retur1i quarterly. its effective mutual rate is
.4. 2.1%.
B 8.4%.
C’ 8. 6%.
D. 8.67%.
E . 9.3 4 0 o.
69. Skewness is a measufe of
.4. how fat the tails o1 a distribution are
B the dos nside fisk of a distribution
C. the noriiiality o1 a distribution
D. the dividend yield of the distribution
E the average of the distfibiition
Skewness is a measufe of the noriiiality o1 a distribution.
70. Kurtosis is a iiieasure of
.4. how fat the tails o1 a distribution are
B the dos nside fisk of a distribution
C’ the nonnality of a distribution
D. the dividend yield of the distribution
E. how fat the tails 01. 8 dlstflbiition are and the noriiiality o1 a distribution
Kurtosis is a measure o1 the normality of a distribution that specifically measures hos lat the
tails are.
7.1. '’lien a distribution is positively skewed,
A. staiid8fd deviation ovefestiiiiates risk
B standard deviation correctly estimates risk
C standard deviation underestiiiiates fisk
D. the tails are fattef than in a iionoal distribution
E the tails are skiimief than in a normal distribution
When a distfibiition is positively skes ed staiid8fd deviation ovefestiiiiates risk.
72. When a distfibiition is negatively skes ed.
.4. staiid8fd deviation ovefestiiiiates risk
B standard deviation correctly estimates risk
C . staiid8fd deviation ulldefestiiiiates risk
D. the tails are fatt8f than in a normal distribution
E the tails are skiimief than in a normal distribution
When a distfibiition is negatively skes ed standard deviation uiiderestiiiiates risk.
73. Il a distribution Iras "Ht tails" it exliibits
.4. positive skewness
B iieuative skewness
C’ a kmrtosis of zero
D. ktirtosis
E positive skeu'iiess and kau4osis
Kurtosis is a iiieasiire o1 the tails of a diStfibiitiOli Of "fat tails."
74. If a portfolio had a rettirn of 8o'o, the risk free asset return was 3%. and the staiid8f)
deviation of t1l8 ]3Oftfo1io s excess reniriis s as 200 o, the Sharpe iiieasure s ould be
.4. 0.08
B. 0.03
C’ 0.20
D. 0. 11
E. 0.2
75. II 8 ]3Oftfolio had a renirii of 120 ñ. the risk ffee asset renirii was 40 â, and the standard
deviation of tll8 ]3Oftfo1io s excess reniriis s as 250 o, the Sharpe iiieasure sould be
.4. 0.12
B. 0.04
C. 0.32
D. 0.16
E 0.25
76. If a portfolio had a rettirn of 11ono, the risk free asset return was %. and the staiid8f)
deviation of t1l8 ]3Oftfo1io s excess reniriis was 30o â. the Sharpe iiieasure would be
.4. 0.20
B 0.3
C’ 0.4?
D. 0.33
E 0 25
77. II 8 ]3Oftfolio had a renirii of 120 ñ. the risk ffee asset renirii was 40 o, alld the standard
deviation of t1l8 ]3Oftfo1io s excess reniriis s as 250 o. the risk preiiiiiim would be
A. 8%
B. 16%
C’ 37%
D. 1%
E . 2 90 o
12 — 4 = 8 o.
78.
is/are a risk measure that indicate(s) vulnerability to extreme negatix e returns.
A. Value at risk
B. Lower partial standard deviation
C’. Standard deviation
D. Variance
E. Value at risk and lower partial standard deviation
Value at risk and lower panial standard deviation are risk measures that indicate vulnerability to
exwenie negative returns.
79.
is/are a risk measure(s) that indicates vulnerability to extreme negative returns.
A. Value at risk
B. Lower partial standard deviation
C’. Expected shortfall
D. Variance
E. Value at risk, lower panial standard deviation, and expected shortfall
All of the abox e are risk measures that indicate vulnerability to extreme negative returns.
80. The most common measure of loss associated with extremely negatix e returns is
A. lower panial standard deviation
B. value at risk
C’. expected shortfall
D. standard deviation
E. Variance
The most conunon measure of loss associated with extremely negative returns is value at risk.
81. Practitioners olden use a
exceed the VaR, and
A. 25. 75. 25
B. 75. 25. 75
C. 5. 95. 5
D. 95. 5. 95
E. 80, 80, 20
% VaR, meaning that
% will be norse.
% of returns will
Practitioners often use a 5% VaR. meaning that 95% of returns will exceed the VaR, and 5%
will be worse.
82. When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the
A. most realistic as it is the most complete measure of risk
B. most pessimistic as it is the most complete measure of risk
C’. most optimistic as it is the most complete measure of risk
D. most optimistic as it takes the highest return (smallest loss) of all the cases
E. most unrealistic as it is the least complete measure of risk
When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the most
optimistic as it takes the highest return (smallest loss) of all the cases.
83. When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of
downside exposure would be
A. expected shortfall
B. value at risk
C’. conditional tail expectation
D. expected shortfall and value at risk
E. expected shortfall and conditional tail expectation
When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of
downside exposure would be expected shonfall (or conditional tail expectation).
Sbort Ansn'er Questions
84. Discuss the relationships between interest rates (both real and nominal), expected inflation
rates. and tax rates on investment returns.
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 the increased purchasing power resulting from the investment. In
addition, the investor should consider the after-tax returns on the invesunent. The higher the
inflation rate. the lower the real after-tax rate of return. Investors suffer an inflation penalty
equal to the tax rate times the inflation rate.
Feedback: The rationale for this question is to ascertain that the student understands the
relationships among these basic determinants of the after-tax real rate of return.
85. Discuss why common stocks must earn a risk premium.
Most investors are risk averse; that is, in order to accept the risk involved in investing in
conunon stocks, the investors expect a return front the stocks over and abox e the return the
investors could earn from a risk-free incesunent, such as U.S. Treasury issues. This excess
return (the return in excess of the risk-free rate) is the risk premium required by the investors to
invest in common stocks.
Feedback: The purpose of this question is to ascertain that the students understand the basic
risk-return relationship, as the relationship applies to investing in common stocks vs. a risk-free
asset (i.e., why would investors be u illing to assume the risk of common stock as incestment
vehicles?).
86. Discuss the historical distributions of each of the following in terms of their average return
and the dispersion of their returns: U.S. small company stocks, U.S. large company stocks. and
U.S. long-term government bonds. Would any of these investments cause a loss in purchasing
power during a 1926-2009 holding period?
Whetli8f t1l8 averages afe iiieasiired on a geometric basis of 8li arithmetic basis, the ranking is
always the satire. with small coiiipany averaueñlarge company averager uoveflâiiient bond
average. fi ith feeard to risk, the relationships anions the standard deviations afe sm8ll
coiiipaiiy >large coiopaiiyñuovefiiiiient bonds. These raids indicate that the ex-post data
confirm what s ould be expected - hillier returns are earned to compensate for the increased
risk. None o1 these investiiieiits would have caused a loss iii piirchasille pOii"8f llfllig the
1926-2009 pefiOd. because all l18d average retuflâs liiuhef tll8n the avefage inflation rate.
Feedback: The goal o1 this question is to see if snideiits have a General idea of the histofiCal
relationships among the retuflis and fisk levels of various categories of irrvestiiieiits relative to
each other and to the level of irritation.
S7. Discuss sosire reasoiis wliy an investor with a loiie tiiiie horizoii might choose to invest iii
coinmoii stocks. eveii thougli they have historically been riskier thaii eovernment bOll S Of
T-hills.
C’oiiuiion stocks can be expected to provide fof the best gfO\\ah iii purchasing powef based on
historical data. An investor with a long time hOfiZOii can tolerate fluctuations iii stock returns
because of the long-term u]3\\"8f tf8lâd iii stock feturlls. How much corHliioii stock an investor is
willing to hold and what types of stocks lie chooses for his poftlolio will depend on his level of
risk aversion.
Feedback: The goal o1 this question is to see if snideiits have a General idea of the histofiCal
relationships among the retufns and fisk levels and why investors may choose stocks for
long-term investments.