Question 1

An investment earns 10% during the first six months of the year, and then loses 10% during the second six months. For the year, the holding period return was

Accepted Answer

A)  0% 
B)  20% 
C)  -1% 
D)  -5% 
A)  0% 
B)  20% 
C)  -1% 
D)  -5% C

Question 2

An opportunity cost is what you give up in exchange for a chance at something better.

Accepted Answer

A) True 
 B)False  True

Question 3

A stock rises 2.5% in one week. What is the annualized return?

Accepted Answer

A)  13% 
B)  25% 
C)  89% 
D)  130% 
A)  13% 
B)  25% 
C)  89% 
D)  130% D

Question 4

The future risk of an equity security can be accurately estimated by considering the past series of security returns.

Accepted Answer

A) True 
 B)False

Question 5

Holding period returns are normally calculated for one-year periods.

Accepted Answer

A) True 
 B)False

Question 6

What is the most you would pay for a $100 per year ordinary annuity over ten years using an 8% annual interest rate.

Accepted Answer

A)  $671 
B)  $800 
C)  $1000 
D)  $2159 
A)  $671 
B)  $800 
C)  $1000 
D)  $2159

Question 7

For a common stock, the current yield is equivalent to the dividend yield.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is most accurate?

Accepted Answer

A)  A dominated investment is desirable. 
B)  Dominated investments are rare. 
C)  A safe security with the same expected return as a riskier security dominates the riskier security. 
D)  An investor should only purchase a dominated stock. 
A)  A dominated investment is desirable. 
B)  Dominated investments are rare. 
C)  A safe security with the same expected return as a riskier security dominates the riskier security. 
D)  An investor should only purchase a dominated stock.

Question 9

Total risk is composed of two broad classes: diversifiable and unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is most accurate?

Accepted Answer

A)  A risk averse person will not take a risk. 
B)  A risk averse person seldom takes a risk. 
C)  A risk averse person prefers not to take a risk if it can be avoided. 
D)  A risk averse person only takes a risk if the potential reward justifies it. 
A)  A risk averse person will not take a risk. 
B)  A risk averse person seldom takes a risk. 
C)  A risk averse person prefers not to take a risk if it can be avoided. 
D)  A risk averse person only takes a risk if the potential reward justifies it.

Question 11

The two key concepts in finance are the time value of money and the concept of present and future values.

Accepted Answer

A) True 
 B)False

Question 12

The more frequent the compounding, the greater the amount of interest earned.

Accepted Answer

A) True 
 B)False

Question 13

The holding period return is a function of all of the following except

Accepted Answer

A)  purchase price. 
B)  sales price. 
C)  income received. 
D)  the time the security was held. 
A)  purchase price. 
B)  sales price. 
C)  income received. 
D)  the time the security was held.

Question 14

A U.S. investor owns a 15-year yen-denominated bond from the Central Bank of Japan. The investor will incur all but one of the following risks?

Accepted Answer

A)  financial risk 
B)  interest rate risk 
C)  foreign exchange risk 
D)  purchasing power risk 
A)  financial risk 
B)  interest rate risk 
C)  foreign exchange risk 
D)  purchasing power risk

Question 15

Which of the following produces the highest effective annual rate?

Accepted Answer

A)  6% compounded annually 
B)  6% compounded monthly 
C)  6% compounded daily 
D)  6% compounded continuously. 
A)  6% compounded annually 
B)  6% compounded monthly 
C)  6% compounded daily 
D)  6% compounded continuously.

Question 16

_____ is the increase in value of an investment.

Accepted Answer

A)  Appreciation 
B)  Holding period return 
C)  Yield 
D)  None of the above. 
A)  Appreciation 
B)  Holding period return 
C)  Yield 
D)  None of the above.

Question 17

Smith sold 100 shares of Microsoft (which pays no dividends) for $120 each. Her three-year holding period return was about 77%. At what price did she purchase the stock?

Accepted Answer

A)  $155.84 
B)  $77.00 
C)  $92.40 
D)  $67.80 
A)  $155.84 
B)  $77.00 
C)  $92.40 
D)  $67.80

Question 18

The notion that equivalent securities should sell for the same price is the

Accepted Answer

A)  equivalence theorem. 
B)  law of one price. 
C)  law of large numbers. 
D)  central limit theorem. 
A)  equivalence theorem. 
B)  law of one price. 
C)  law of large numbers. 
D)  central limit theorem.

Question 19

Theoretically, a risky situation must involve a chance of loss.

Accepted Answer

A) True 
 B)False

Question 20

There is an inverse relationship between risk and expected return.

Accepted Answer

A) True 
 B)False

Exam 2: Understanding Risk and Return

An investment earns 10% during the first six months of the year, and then loses 10% during the second six months. For the year, the holding period return was

An opportunity cost is what you give up in exchange for a chance at something better.

A stock rises 2.5% in one week. What is the annualized return?

The future risk of an equity security can be accurately estimated by considering the past series of security returns.

Holding period returns are normally calculated for one-year periods.

What is the most you would pay for a $100 per year ordinary annuity over ten years using an 8% annual interest rate.

For a common stock, the current yield is equivalent to the dividend yield.

Which of the following statements is most accurate?

Total risk is composed of two broad classes: diversifiable and unsystematic risk.

Which of the following statements is most accurate?

The two key concepts in finance are the time value of money and the concept of present and future values.

The more frequent the compounding, the greater the amount of interest earned.

The holding period return is a function of all of the following except

A U.S. investor owns a 15-year yen-denominated bond from the Central Bank of Japan. The investor will incur all but one of the following risks?

Which of the following produces the highest effective annual rate?

_____ is the increase in value of an investment.

Smith sold 100 shares of Microsoft (which pays no dividends) for $120 each. Her three-year holding period return was about 77%. At what price did she purchase the stock?

The notion that equivalent securities should sell for the same price is the

Theoretically, a risky situation must involve a chance of loss.

There is an inverse relationship between risk and expected return.

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