Exam 1: An Overview of the Investment Process

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Which of the following is not a component of the risk premium?

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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% -Refer to Exhibit 1.6.Calculate the risk premium for the market portfolio.

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Nominal rates are averages of all possible real rates.

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Which of the following is not a component of the required rate of return?

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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. -Refer to Exhibit 1.10.Compute the standard deviation of the annual rate of return for Stock Z.

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The uncertainty of investment returns associated with how a firm finances its investments is known as

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Use the Information Below for the Following Problem(S) The common stock of XMen Inc. had the following historic prices. Time Price af 2-Tech 3/01/1999 50.00 3/01/2000 47.00 3/01/2001 76.00 3/01/2002 8000 3/01/2003 85.00 3/01/2004 90.00 -Refer to Exhibit 1.3.What was your arithmetic mean annual yield for the investment in XMen Industries.

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Two measures of the risk premium are the standard deviation and the variance.

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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. -Refer to Exhibit 1.10.Compute the arithmetic mean annual rate of return for Stock Z.

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An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed,the expected rate of inflation and the uncertainty of future payments.

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The basic trade-off in the investment process is

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The risk premium is a function of the volatility of operating earnings,sales volatility and inflation.

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The holding period return (HPR)is equal to the holding period yield (HPY)stated as a percentage.

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All of the following are major sources of uncertainty EXCEPT

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Use the Information Below for the Following Problem(S) Assume that you hold a two stock portfolio. You are provided with the following information on your holdings: stack shares Price(t) Price (+1) 1 15 10 12 2 25 15 16 -Refer to Exhibit 1.8.Calculate the HPY for stock 2.

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The variability of operating earnings is associated with

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Use the Information Below for the Following Problem(S) The common stock of XMen Inc. had the following historic prices. Time Price af 2-Tech 3/01/1999 50.00 3/01/2000 47.00 3/01/2001 76.00 3/01/2002 8000 3/01/2003 85.00 3/01/2004 90.00 -Refer to Exhibit 1.3.What was your holding period return for the time period 3/1/1999 to 3/1/2004?

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In the phrase "nominal risk free rate," nominal means

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Use the Information Below for the Following Problem(S) You have concluded that next year the following relationships are possible: Esanamic Status Prabability Rate of Return Weak Economy .15 -5\% Static Ecanomy .60 5\% Strane Ecanamy 25 15\% -Refer to Exhibit 1.4.Compute the coefficient of variation for your portfolio.

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Use the Information Below for the Following Problem(S) Assume that during the past year the consumer price index increased by 1.5 percent and the securities listed below returned the following nominal rates of return. U.S. Govermment T-bills U. S. Lonf-term bonfs 2.75\% 4.75\% -Refer to Exhibit 1.5.If next year the real rates all rise by 10 percent while inflation climbs from 1.5 percent to 2.5 percent,what will be the nominal rate of return on each security?

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