Question 1

If the annual real rate of interest is 3.5% and the expected inflation rate is 3.5%,the nominal rate of interest would be approximately

Accepted Answer

A) 0%. 
B) 3.5%. 
C) 12.25%. 
D) 7%. 
E) none of the above. 
A) 0%. 
B) 3.5%. 
C) 12.25%. 
D) 7%. 
E) none of the above.

Question 2

If the Federal Reserve lowers the discount rate,ceteris paribus,the equilibrium levels of funds lent will __________ and the equilibrium level of real interest rates will ___________.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
E) reverse direction from their previous trends 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
E) reverse direction from their previous trends

Question 3

When assessing tail risk by looking at the 5% worst-case scenario,the VaR is the ________.

Accepted Answer

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) none of the above 
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) none of the above

Question 4

If the annual real rate of interest is 4% and the expected inflation rate is 3%,the nominal rate of interest would be approximately

Accepted Answer

A) 4%. 
B) 3%. 
C) 1%. 
D) 5%. 
E) none of the above. 
A) 4%. 
B) 3%. 
C) 1%. 
D) 5%. 
E) none of the above.

Question 5

A year ago,you invested $2,500 in a savings account that pays an annual interest rate of 2.5%.What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year?

Accepted Answer

A) 4.1%. 
B) 2.5%. 
C) 2.9%. 
D) 1.6%. 
E) none of the above. 
A) 4.1%. 
B) 2.5%. 
C) 2.9%. 
D) 1.6%. 
E) none of the above.

Question 6

An investment provides a 0.78% return monthly,its effective annual rate is

Accepted Answer

A) 9.36%. 
B) 9.63%. 
C) 10.02%. 
D) 9.77%. 
E) none of the above. 
A) 9.36%. 
B) 9.63%. 
C) 10.02%. 
D) 9.77%. 
E) none of the above.

Question 7

If a portfolio had a return of 8%,the risk free asset return was 3%,and the standard deviation of the portfolio's excess returns was 20%,the Sharpe measure would be _____.

Accepted Answer

A) 0.08 
B) 0.03 
C) 0.20 
D) 0.11 
E) 0.25 
A) 0.08 
B) 0.03 
C) 0.20 
D) 0.11 
E) 0.25

Question 8

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 7%.What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

Accepted Answer

A) 4%. 
B) 10%. 
C) 7%. 
D) 3%. 
E) none of the above. 
A) 4%. 
B) 10%. 
C) 7%. 
D) 3%. 
E) none of the above.

Question 9

"Bracket Creep" happens when

Accepted Answer

A) tax liabilities are based on real income and there is a negative inflation rate. 
B) tax liabilities are based on real income and there is a positive inflation rate. 
C) tax liabilities are based on nominal income and there is a negative inflation rate. 
D) tax liabilities are based on nominal income and there is a positive inflation rate. 
E) too many peculiar people make their way into the highest tax bracket. 
A) tax liabilities are based on real income and there is a negative inflation rate. 
B) tax liabilities are based on real income and there is a positive inflation rate. 
C) tax liabilities are based on nominal income and there is a negative inflation rate. 
D) tax liabilities are based on nominal income and there is a positive inflation rate. 
E) too many peculiar people make their way into the highest tax bracket.

Question 10

Which of the following measures of risk best highlights the potential loss from extreme negative returns?

Accepted Answer

A) Standard deviation 
B) Variance 
C) Upper partial standard deviation 
D) Value at Risk (VaR) 
E) None of the above 
A) Standard deviation 
B) Variance 
C) Upper partial standard deviation 
D) Value at Risk (VaR) 
E) None of the above

Question 11

Over the past year you earned a nominal rate of interest of 10 percent on your money.The inflation rate was 5 percent over the same period.The exact actual growth rate of your purchasing power was

Accepted Answer

A) 15.5%. 
B) 10.0%. 
C) 5.0%. 
D) 4.8%. 
E) 15.0%. 
A) 15.5%. 
B) 10.0%. 
C) 5.0%. 
D) 4.8%. 
E) 15.0%.

Question 12

When assessing tail risk by looking at the 5% worst-case scenario,the most realistic view of downside exposure would be ________.

Accepted Answer

A) expected shortfall 
B) value at risk 
C) conditional tail expectation 
D) A and B 
E) A and C 
A) expected shortfall 
B) value at risk 
C) conditional tail expectation 
D) A and B 
E) A and C

Question 13

Which of the following statements is true

Accepted Answer

A) Inflation has no effect on the nominal rate of interest. 
B) The realized nominal rate of interest is always greater than the real rate of interest. 
C) Certificates of deposit offer a guaranteed real rate of interest. 
D) None of the above is true. 
E) A,B and C 
A) Inflation has no effect on the nominal rate of interest. 
B) The realized nominal rate of interest is always greater than the real rate of interest. 
C) Certificates of deposit offer a guaranteed real rate of interest. 
D) None of the above is true. 
E) A,B and C

Question 14

You purchased a share of stock for $12.One year later you received $0.25 as a dividend and sold the share for $12.92.What was your holding-period return?

Accepted Answer

A) 9.75% 
B) 10.65% 
C) 11.75% 
D) 11.25% 
E) none of the above 
A) 9.75% 
B) 10.65% 
C) 11.75% 
D) 11.25% 
E) none of the above

Question 15

Practitioners often use a ________ % VaR,meaning that ________ % of returns will exceed the VaR,and ________ % will be worse.

Accepted Answer

A) 25, 75, 25 
B) 75, 25, 75 
C) 5, 95, 5 
D) 95, 5, 95 
E) 80,80,20 
A) 25, 75, 25 
B) 75, 25, 75 
C) 5, 95, 5 
D) 95, 5, 95 
E) 80,80,20

Question 16

Over the past year you earned a nominal rate of interest of 12.5 percent on your money.The inflation rate was 2.6 percent over the same period.The exact actual growth rate of your purchasing power was

Accepted Answer

A) 9.15%. 
B) 9.90%. 
C) 9.65%. 
D) 10.52%. 
E) none of the above. 
A) 9.15%. 
B) 9.90%. 
C) 9.65%. 
D) 10.52%. 
E) none of the above.

Question 17

Which of the following factors would not be expected to affect the nominal interest rate?

Accepted Answer

A) The supply of loanable funds 
B) The demand for loanable funds 
C) The coupon rate on previously issued government bonds 
D) The expected rate of inflation 
E) Government spending and borrowing 
A) The supply of loanable funds 
B) The demand for loanable funds 
C) The coupon rate on previously issued government bonds 
D) The expected rate of inflation 
E) Government spending and borrowing

Question 18

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 4.3%.What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

Accepted Answer

A) 4.3%. 
B) -1.3%. 
C) 7.3%. 
D) 3%. 
E) none of the above. 
A) 4.3%. 
B) -1.3%. 
C) 7.3%. 
D) 3%. 
E) none of the above.

Question 19

You have been given this probability distribution for the holding-period return for GM stock: $\begin{array}{lll}
\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\
\text { Boom } & .40 & 30\% \
\text { Normal growth } & .40& 11\%\
\text { Recession } & .20 & -10 \%
\end{array}$

-What is the expected holding-period return for GM stock?

Accepted Answer

A) 10.4% 
B) 11.4% 
C) 12.4% 
D) 13.4% 
E) 14.4% 
A) 10.4% 
B) 11.4% 
C) 12.4% 
D) 13.4% 
E) 14.4%

Question 20

You have been given this probability distribution for the holding-period return for KMP stock: $\begin{array}{lll}
\underline{\text { State of the Economy }} & \underline{\text { Probability }} &\underline{ \text { HPR } }\
\text { Boom } & .30 & 18\% \
\text { Normal growth } & .50 & 12\%\
\text { Recession } & .20 & -5\%
\end{array}$

-What is the expected standard deviation for KMP stock?

Accepted Answer

A) 6.91% 
B) 8.13% 
C) 7.79% 
D) 7.25% 
E) 8.85% 
A) 6.91% 
B) 8.13% 
C) 7.79% 
D) 7.25% 
E) 8.85%

Exam 5: Introduction to Risk,return,and the Historical Record

If the annual real rate of interest is 3.5% and the expected inflation rate is 3.5%,the nominal rate of interest would be approximately

If the Federal Reserve lowers the discount rate,ceteris paribus,the equilibrium levels of funds lent will __________ and the equilibrium level of real interest rates will ___________.

When assessing tail risk by looking at the 5% worst-case scenario,the VaR is the ________.

If the annual real rate of interest is 4% and the expected inflation rate is 3%,the nominal rate of interest would be approximately

A year ago,you invested $2,500 in a savings account that pays an annual interest rate of 2.5%.What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year?

An investment provides a 0.78% return monthly,its effective annual rate is

If a portfolio had a return of 8%,the risk free asset return was 3%,and the standard deviation of the portfolio's excess returns was 20%,the Sharpe measure would be _____.

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 7%.What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

"Bracket Creep" happens when

Which of the following measures of risk best highlights the potential loss from extreme negative returns?

Over the past year you earned a nominal rate of interest of 10 percent on your money.The inflation rate was 5 percent over the same period.The exact actual growth rate of your purchasing power was

When assessing tail risk by looking at the 5% worst-case scenario,the most realistic view of downside exposure would be ________.

Which of the following statements is true

You purchased a share of stock for $12.One year later you received $0.25 as a dividend and sold the share for $12.92.What was your holding-period return?

Practitioners often use a ________ % VaR,meaning that ________ % of returns will exceed the VaR,and ________ % will be worse.

Over the past year you earned a nominal rate of interest of 12.5 percent on your money.The inflation rate was 2.6 percent over the same period.The exact actual growth rate of your purchasing power was

Which of the following factors would not be expected to affect the nominal interest rate?

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 4.3%.What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

You have been given this probability distribution for the holding-period return for GM stock: Boom .40 30\% Normal growth .40 11\% Recession .20 -10\% -What is the expected holding-period return for GM stock?

You have been given this probability distribution for the holding-period return for KMP stock: Boom .30 18\% Normal growth .50 12\% Recession .20 -5\% -What is the expected standard deviation for KMP stock?

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

If the Federal Reserve lowers the discount rate,ceteris paribus,the equilibrium levels of funds lent will and the equilibrium level of real interest rates will _.

Practitioners often use a % VaR,meaning that % of returns will exceed the VaR,and % will be worse.