Exam 4: Return and Risk

If the present value of an investment's benefits equals the present value of the investment's costs, then the investor would earn a

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

The required return on Beta stock is 14%.The risk-free rate of return is 4% and the real rate of return is 2%.How much are investors requiring as compensation for risk?

Most investors are risk averse, meaning they will always be willing to sacrifice higher return if they can avoid risk.

There is no limit to the increase in the true rate of interest as compounding becomes more frequent.

If the risk-free rate of return is less than the inflation rate, the real rate of return is negative.

The holding period return is especially useful comparing investments with unequal holding periods.

Camille purchased a bond 5 years ago for $1,050.The bond paid $50 in annual interest and returned the $1,000 principal at the end of the fifth year.Camille used the interest payment to pay for college textbooks.

Table 1 -Given a spreadsheet similar to the one shown in Table 1, the command to compute the internal rate of return would be

An investment that has earned a high rate of return over the last 5 years will not necessarily continue to perform well in the future.

When the rate of return is equal to the discount rate

Which of the following statements are correct concerning the present value of $1.00 five years from today discounted at 5%? I.The present value is equal to $1.00 divided by 1.05 to the 5th power. II.If the discount rate were less than 5%, the present value would be smaller. III.If the discount rate were more than 5%, the present value would be smaller. IV.If the $1.00 were to be received 6 years from today, the present value would be larger.

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 use which of the following EXCEL commands?

An investment costs $3,500 today.This investment is expected to produce annual cash flows of $1,200, $1,400, $1,300 and $1,100, respectively, over the next four years.What is the internal rate of return on this investment?

In which of the following circumstances would it be most appropriate to use the holding period return?

When computing an investment's internal rate of return using a financial calculator or spreadsheet such as Excel, which of the following should be entered as a negative number?

The closest approximation to the real, risk-free rate of interest is

An investor who requires a 7% rate of return should be willing to pay $934.58 now to receive $1,000 at the end of one year.

Josh purchased 100 shares of XOM at the beginning of 2011.He received dividends per share of $1.37 (2011), $1.55 (2012), $1.66 (2013), $1.74 (2014), $1.85 (2015).At the end of 2015, just after receiving the last dividend, he sold the stock for $84.76.At what rate did the dividends grow from the end of 2011 to the end of 2015? Assume that all dividends were received at the end of the year.

A business has strong sales and profits, but its stock price falls anyway because stock prices in general are declining.This is an example of