Exam 4: Return and Risk

Briefly explain the holding period return (HPR)and give several characteristics of this measure.

The maximum rate of return that can be earned for a given rate of interest occurs when interest is compounded

The markets in general are paying a 2% real rate of return.Inflation is expected to be 3%.ABC stock commands a 6% risk premium.What is the expected rate of return on ABC stock?

Jessica bought a stock at a price of $11.50.She received a $.75 dividend and sold the stock for $12.50.What is Jessica's capital gain on this investment?

The value of an investment paying 4% compounded quarterly will have a value at the end of one year equal to

David has purchased an investment that he expects to produce an annual cash flow of $3,000 for five years.He requires an 8% rate of return compounded annually.What is the maximum amount that David can pay and still earn the required rate of return?

The internal rate of return is the correct discount rate to use when computing the net present value of an investment.

Which one of the following is an internal characteristic that can affect the value of an investment?

An interest rate of 6.18% compounded daily is equivalent to 6% compounded annually.

Which of the following factors will increase the risk level of an investment? I.a firm's decision to use a high percentage of debt financing II.an economic situation in which consumer prices are rising at a rapid rate III.the ability to trade the investment in a broad market rather than in a thin market IV.unstable currency values

The required return on a risky investment includes a real rate of return, an inflation premium and a risk premium.

Explain the similarities and differences between the holding period return and the internal rate of return.

An investment produced annual rates of return of 5%, 12%, 8% and 11% respectively over the past four years.What is the standard deviation of these returns?

Investors can be confidently predict future returns on an investment by studying its past performance.

Risk can be defined as uncertainty concerning the actual return that an investment will generate.

To compute the present value of $1,000 annuity received at the end of each of the next three years and discounted at the rate of 5% per year, you should enter the following variables into a financial calculator

The risk-free rate is equal to the real rate of return plus

Identify and discuss five sources of risk.

Assume that $100 is deposited at the end of each year for five years at 10% compound interest and that no withdrawals are made over the five-year period.Based on this data, which one of the following statements is correct?

Inflation tends to have a particularly negative impact on the price of