Deck 5: Risk, Return, and the Historical Record

Question 1

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%.What is your approximate annual real rate of return if the rate of inflation was 4% over the year?

A)5%
B)10%
C)7%
D)3%

Answer 1

A

Question 2

Which of the following statement(s) is(are) true? I) The real rate of interest is determined by the supply and demand for funds.
II) The real rate of interest is determined by the expected rate of inflation.
III) The real rate of interest can be affected by actions of the Fed.
IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.

A)I and II only
B)I and III only
C)III and IV only
D)II and III only

Answer 2

B

Question 3

If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.7%, the nominal rate of interest would be approximately

A)3.7%.
B)6.2%.
C)2.5%.
D)-1.2%.

Answer 3

B

Question 4

A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%.What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year?

A)1.5%
B)10%
C)7%
D)3%

Question 5

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

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

Question 6

The holding-period return (HPR) on a share of stock is equal to

A)the capital gain yield during the period plus the inflation rate.
B)the capital gain yield during the period plus the dividend yield.
C)the current yield plus the dividend yield.
D)the dividend yield plus the risk premium.

Question 7

You have been given this probability distribution for the holding-period return for KMP stock: What is the expected variance for KMP stock?

A)66.04%
B)69.96%
C)77.04%
D)63.72%

Question 8

If the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation,

A)borrowers gain and savers lose.
B)savers gain and borrowers lose.
C)both borrowers and savers lose.
D)neither borrowers nor savers gain nor lose.

Question 9

You purchased a share of stock for $20.One year later, you received $1 as a dividend and sold the share for $29.What was your holding-period return?

A)45%
B)50%
C)5%
D)40%

Question 10

Ceteris paribus, a decrease in the demand for loans

A)drives the interest rate down.
B)drives the interest rate up.
C)might not have any effect on interest rates.
D)results from an increase in business prospects and a decrease in the level of savings.

Question 11

If the annual real rate of interest is 5%, and the expected inflation rate is 4%, the nominal rate of interest would be approximately

A)1%.
B)9%.
C)20%.
D)15%.

Question 12

Which of the following determine(s) the level of real interest rates? I) The supply of savings by households and business firms
II) The demand for investment funds
III) The government's net supply and/or demand for funds

A)I only
B)II only
C)I and II only
D)I, II, and III

Question 13

You have been given this probability distribution for the holding-period return for KMP stock: What is the expected standard deviation for KMP stock?

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

Question 14

You have been given this probability distribution for the holding-period return for KMP stock: What is the expected holding-period return for KMP stock?

A)10.40%
B)9.32%
C)11.63%
D)11.54%

Question 15

Over the past year, you earned a nominal rate of interest of 8% on your money.The inflation rate was 4% over the same period.The exact actual growth rate of your purchasing power was

A)15.5%.
B)10.0%.
C)3.8%.
D)4.8%.

Question 16

Which of the following statement(s) is(are) true?

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 options are true.

Question 17

Other things equal, an increase in the government budget deficit

A)drives the interest rate down.
B)drives the interest rate up.
C)might not have any effect on interest rates.
D)increases business prospects.

Question 18

Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2015 show that

A)stocks offered investors greater rates of return than bonds and bills.
B)stock returns were less volatile than those of bonds and bills.
C)bonds offered investors greater rates of return than stocks and bills.
D)bills outperformed stocks and bonds.

Question 19

You purchased a share of stock for $68.One year later, you received $3.00 as a dividend and sold the share for $74.50.What was your holding-period return?

A)12.5%
B)14.0%
C)13.6%
D)11.8%

Question 20

The risk premium for common stocks

A)cannot be zero, for investors would be unwilling to invest in common stocks.
B)must always be positive, in theory.
C)is negative, as common stocks are risky.
D)cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.

Question 21

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 6%.What is your approximate annual real rate of return if the rate of inflation was 2% over the year?

A)4%
B)2%
C)6%
D)3%

Question 22

If a portfolio had a return of 18%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 34%, the risk premium would be

A)13%.
B)18%.
C)49%.
D)12%.

Question 23

In words, the real rate of interest is approximately equal to

A)the nominal rate minus the inflation rate.
B)the inflation rate minus the nominal rate.
C)the nominal rate times the inflation rate.
D)the inflation rate divided by the nominal rate.

Question 24

Over the past year, you earned a nominal rate of interest of 14% on your money.The inflation rate was 2% over the same period.The exact actual growth rate of your purchasing power was

A)11.76%.
B)16.00%.
C)15.02%.
D)14.32%.

Question 25

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

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 26

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 3.4% over the year?

A)0.9%
B)-0.9%
C)5.9%
D)3.4%

Question 27

You have been given this probability distribution for the holding-period return for Cheese, Inc.stock: Assuming that the expected return on Cheese's stock is 14.35%, what is the standard deviation of these returns?

A)4.72%
B)6.30%
C)4.38%
D)5.74%

Question 28

"Bracket Creep" happens when

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.

Question 29

You purchase a share of Boeing stock for $90.One year later, after receiving a dividend of $3, you sell the stock for $92.What was your holding-period return?

A)4.44%
B)2.22%
C)3.33%
D)5.56%

Question 30

Toyota stock has the following probability distribution of expected prices one year from now: If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding-period return on Toyota?

A)17.72%
B)18.89%
C)17.91%
D)18.18%

Question 31

A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%.What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year?

A)4.1%
B)2.5%
C)2.9%
D)1.6%

Question 32

A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 3%.What is your approximate annual real rate of return if the rate of inflation was 4% over the year?

A)1%
B)-1%
C)7%
D)3%

Question 33

A year ago, you invested $12,000 in an investment that produced a return of 18%.What is your approximate annual real rate of return if the rate of inflation was 2% over the year?

A)18%
B)2%
C)16%
D)15%

Question 34

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

A)9.15%.
B)9.90%.
C)9.65%.
D)10.52%.

Question 35

Over the past year, you earned a nominal rate of interest of 8% on your money.The inflation rate was 3.5% over the same period.The exact actual growth rate of your purchasing power was

A)15.55%.
B)4.35%.
C)5.02%.
D)4.81%.

Question 36

An investor purchased a bond 45 days ago for $985.He received $15 in interest and sold the bond for $980.What is the holding-period return on his investment?

A)1.02%
B)0.50%
C)1.92%
D)0.01%

Question 37

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?

A)9.75%
B)10.65%
C)11.75%
D)11.25%

Question 38

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

A)The supply of loans
B)The demand for loans
C)The coupon rate on previously issued government bonds
D)The expected rate of inflation

Question 39

You purchased a share of stock for $65.One year later, you received $2.37 as a dividend and sold the share for $63.What was your holding-period return?

A)0.57%
B)-0.2550%
C)-0.89%
D)1.63%

Question 40

An investor purchased a bond 63 days ago for $980.He received $17 in interest and sold the bond for $987.What is the holding-period return on his investment?

A)1.52%
B)2.45%
C)1.92%
D)2.68%

Question 41

If a distribution has "fat tails," it exhibits

A)positive skewness.
B)negative skewness.
C)a kurtosis of zero.
D)kurtosis.

Question 42

You have been given this probability distribution for the holding-period return for GM stock: What is the expected variance for GM stock?

A)200.00%
B)221.04%
C)246.37%
D)14.87%

Question 43

If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be

A)0.12.
B)0.04.
C)0.32.
D)0.16.

Question 44

If an investment provides a 2% return semi-annually, its effective annual rate is

A)2%.
B)4%.
C)4.02%.
D)4.04%.

Question 45

You purchase a share of CAT stock for $90.One year later, after receiving a dividend of $4, you sell the stock for $97.What was your holding-period return?

A)14.44%
B)12.22%
C)13.33%
D)5.56%

Question 46

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

A)Standard deviation
B)Variance
C)Upper partial standard deviation
D)Value at risk (VaR)

Question 47

If an investment provides a 3% return semi-annually, its effective annual rate is

A)3%.
B)6%.
C)6.06%.
D)6.09%.

Question 48

Over the past year, you earned a nominal rate of interest of 3.6% on your money.The inflation rate was 3.1% over the same period.The exact actual growth rate of your purchasing power was

A)3.6%.
B)3.1%.
C)0.48%.
D)6.7%.

Question 49

If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be

A)8%.
B)16%.
C)37%.
D)21%.

Question 50

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

A)0%.
B)3.5%.
C)12.25%.
D)7%.

Question 51

When a distribution is negatively skewed,

A)standard deviation overestimates risk.
B)standard deviation correctly estimates risk.
C)standard deviation underestimates risk.
D)the tails are fatter than in a normal distribution.

Question 52

Skewness is a measure of

A)how fat the tails of a distribution are.
B)the downside risk of a distribution.
C)the symmetry of a distribution.
D)the dividend yield of the distribution.

Question 53

Kurtosis is a measure of

A)how fat the tails of a distribution are.
B)the downside risk of a distribution.
C)the normality of a distribution.
D)the dividend yield of the distribution.

Question 54

When comparing investments with different horizons, the ____________ provides the more accurate comparison.

A)arithmetic average
B)effective annual rate
C)average annual return
D)historical annual average

Question 55

Annual percentage rates (APRs) are computed using

A)simple interest.
B)compound interest.
C)either simple interest or compound interest.
D)best estimates of expected real costs.

Question 56

If an investment provides a 1.25% return quarterly, its effective annual rate is

A)5.23%.
B)5.09%.
C)4.02%.
D)4.04%.

Question 57

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

A)9.36%.
B)9.63%.
C)10.02%.
D)9.77%.

Question 58

If an investment provides a 2.1% return quarterly, its effective annual rate is

A)2.1%.
B)8.4%.
C)8.56%.
D)8.67%.

Question 59

If a portfolio had a return of 15%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 30%, the Sharpe measure would be

A)0.20.
B)0.35.
C)0.45.
D)0.33.

Question 60

When a distribution is positively skewed,

A)standard deviation overestimates risk.
B)standard deviation correctly estimates risk.
C)standard deviation underestimates risk.
D)the tails are fatter than in a normal distribution.

Question 61

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

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.

Question 62

________ is a risk measure that indicates vulnerability to extreme negative returns.

A)Value at risk
B)Lower partial standard deviation
C)Standard deviation
D)Value at risk and lower partial standard deviation

Question 63

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

A)25; 75; 25
B)75; 25; 75
C)1; 99; 51
D)95; 5; 95

Question 64

The most common measure of loss associated with extremely negative returns is

A)lower partial standard deviation.
B)value at risk.
C)expected shortfall.
D)standard deviation.