Question 1

Calculate the nominal rate if the real rate is 4.25% and the inflation rate is 3%.

Accepted Answer

A)  10.18% 
B)  9.28% 
C)  8.83% 
D)  7.38% 
A)  10.18% 
B)  9.28% 
C)  8.83% 
D)  7.38%

Question 2

The addition of a negative risk asset to a portfolio of assets will:

Accepted Answer

A)  increase the portfolio's expected return. 
B)  decrease the portfolio's expected return. 
C)  increase the portfolio's expected volatility. 
D)  decrease the portfolio's expected volatility. 
A)  increase the portfolio's expected return. 
B)  decrease the portfolio's expected return. 
C)  increase the portfolio's expected volatility. 
D)  decrease the portfolio's expected volatility.

Question 3

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?

Accepted Answer

A)  it reduces the variance. 
B)  it increases the variance. 
C)  variance is not affected by negatives or positives. 
D)  the effect cannot be determined from this information. 
A)  it reduces the variance. 
B)  it increases the variance. 
C)  variance is not affected by negatives or positives. 
D)  the effect cannot be determined from this information.

Question 4

Calculate the real rate of interest if the nominal rate of interest is 8.65% and the inflation rate is 2.24%.

Accepted Answer

A)  9.50% 
B)  8.49% 
C)  7.38% 
D)  6.27% 
A)  9.50% 
B)  8.49% 
C)  7.38% 
D)  6.27%

Question 5

How is it possible for real rates of return to increase during times when the rate of inflation increases?

Accepted Answer

A)  inflation increased more than the real return 
B)  nominal returns actually decreased 
C)  nominal returns increased more than inflation 
D)  nominal returns increased less than inflation 
A)  inflation increased more than the real return 
B)  nominal returns actually decreased 
C)  nominal returns increased more than inflation 
D)  nominal returns increased less than inflation

Question 6

Discuss the concept of a "negative risk asset."

Accepted Answer

A negative risk asset is one that reduce

Question 7

What is the approximate standard deviation of returns if over the past four years an investment returned 8.0%,-12.0%,-12% and 15.0%?

Accepted Answer

A)  9.26% 
B)  10.26% 
C)  11.26% 
D)  12.26% 
A)  9.26% 
B)  10.26% 
C)  11.26% 
D)  12.26%

Question 8

From a historical perspective (1926-2014),what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?

Accepted Answer

A)  8.5 percent 
B)  12.5 percent 
C)  14.5 percent 
D)  19.5 percent 
A)  8.5 percent 
B)  12.5 percent 
C)  14.5 percent 
D)  19.5 percent

Question 9

Determine the nominal rate of interest,if the real rate is 6% and the inflation rate is 1.85%.

Accepted Answer

A)  8.84% 
B)  7.96% 
C)  6.75% 
D)  3.24% 
A)  8.84% 
B)  7.96% 
C)  6.75% 
D)  3.24%

Question 10

Although several stock indexes are available to inform U.S.investors of market changes,the Dow Jones Industrial Average:

Accepted Answer

A)  is the broadest-based of the market indices. 
B)  is the only reliable market index. 
C)  accounts for approximately 70 percent of U.S. market value. 
D)  is the best-known of the U.S. market indexes. 
A)  is the broadest-based of the market indices. 
B)  is the only reliable market index. 
C)  accounts for approximately 70 percent of U.S. market value. 
D)  is the best-known of the U.S. market indexes.

Question 11

What is the variance of a three-stock portfolio that produced returns of 20 percent,25 percent and 30 percent?

Accepted Answer

A)  0.17% 
B)  0.33% 
C)  0.50% 
D)  0.10% 
A)  0.17% 
B)  0.33% 
C)  0.50% 
D)  0.10%

Question 12

How is the standard deviation of returns for individual common stocks or for a stock portfolio calculated?

Accepted Answer

The spread of outcomes on different inve

Question 13

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

Accepted Answer

A)  offer higher returns. 
B)  have more systematic risk. 
C)  have no diversification of risk. 
D)  do not have unique risk. 
A)  offer higher returns. 
B)  have more systematic risk. 
C)  have no diversification of risk. 
D)  do not have unique risk.

Question 14

Why does diversification reduce risk?

Accepted Answer

The standard deviation of returns is gen

Question 15

If one portfolio's variance exceeds that of another portfolio,its standard deviation will also be greater than that of the other portfolio.

Accepted Answer

A) True 
 B)False

Question 16

Real rates of return are typically less than nominal rates of return due to:

Accepted Answer

A)  Inflation. 
B)  Capital gains. 
C)  Dividend payments. 
D)  Depreciation. 
A)  Inflation. 
B)  Capital gains. 
C)  Dividend payments. 
D)  Depreciation.

Question 17

When the annual rate of return on Canadian Treasury bills is historically high,investors expect the risk premium on the stock market to be:

Accepted Answer

A)  considerably lower than normal. 
B)  considerably higher than normal. 
C)  approximately normal. 
D)  approximately equal to zero. 
A)  considerably lower than normal. 
B)  considerably higher than normal. 
C)  approximately normal. 
D)  approximately equal to zero.

Question 18

What is the difference between unique risk,which can be diversified away,and market risk,which cannot?

Accepted Answer

Even if you hold a well-diversified port

Question 19

The benefits of portfolio diversification are highest when the individual securities have returns that:

Accepted Answer

A)  vary directly with the rest of the portfolio. 
B)  vary indirectly with the rest of the portfolio. 
C)  are uncorrelated with the rest of the portfolio. 
D)  are countercyclical. 
A)  vary directly with the rest of the portfolio. 
B)  vary indirectly with the rest of the portfolio. 
C)  are uncorrelated with the rest of the portfolio. 
D)  are countercyclical.

Question 20

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:

Accepted Answer

A)  the variance of treasury bill returns is zero. 
B)  the standard deviation of treasury bill returns is negative. 
C)  the real return on treasury bills has been zero. 
D)  common stocks should offer a higher return than treasury bills. 
A)  the variance of treasury bill returns is zero. 
B)  the standard deviation of treasury bill returns is negative. 
C)  the real return on treasury bills has been zero. 
D)  common stocks should offer a higher return than treasury bills.

Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

Calculate the nominal rate if the real rate is 4.25% and the inflation rate is 3%.

The addition of a negative risk asset to a portfolio of assets will:

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?

Calculate the real rate of interest if the nominal rate of interest is 8.65% and the inflation rate is 2.24%.

How is it possible for real rates of return to increase during times when the rate of inflation increases?

Discuss the concept of a "negative risk asset."

What is the approximate standard deviation of returns if over the past four years an investment returned 8.0%,-12.0%,-12% and 15.0%?

From a historical perspective (1926-2014),what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?

Determine the nominal rate of interest,if the real rate is 6% and the inflation rate is 1.85%.

Although several stock indexes are available to inform U.S.investors of market changes,the Dow Jones Industrial Average:

What is the variance of a three-stock portfolio that produced returns of 20 percent,25 percent and 30 percent?

How is the standard deviation of returns for individual common stocks or for a stock portfolio calculated?

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

Why does diversification reduce risk?

If one portfolio's variance exceeds that of another portfolio,its standard deviation will also be greater than that of the other portfolio.

Real rates of return are typically less than nominal rates of return due to:

When the annual rate of return on Canadian Treasury bills is historically high,investors expect the risk premium on the stock market to be:

What is the difference between unique risk,which can be diversified away,and market risk,which cannot?

The benefits of portfolio diversification are highest when the individual securities have returns that:

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:

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