Deck 4: Return and Risk

Question 1

For a given stated rate of interest, daily compounding results in a higher true rate of interest than monthly compounding.

Answer 1

True

Question 2

The amount an investor is willing to pay for an investment should be determined by the past performance of the investment.

Answer 2

False

Question 3

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

A) Federal Reserve actions
B) inflation
C) war
D) use of debt financing

Answer 3

D

Question 4

The financial concept of time value of money is dependent upon the opportunity to earn interest over time.

Question 5

Inflation tends to have a favorable impact on

A) real estate.
B) common stock.
C) preferred stock.
D) bonds.

Question 6

The future value is equal to the present value multiplied by the 1 plus the interest rate.

Question 7

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

Question 8

In the short term, stock prices tend to rise as inflation rises.

Question 9

Compound interest is interest paid not only on the initial investment but also on any interest accumulated in prior periods.

Question 10

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?

A) $0.25
B) $0.75
C) $1.00
D) $1.75

Question 11

Ashley purchased a stock at a price of $27 a share.She received quarterly dividends of $0.75 per share.After one year, Ashley sold the stock at a price of $29.25 a share.What is her percentage total return on this investment?

A) 10.3%
B) 11.1%
C) 17.9%
D) 19.4%

Question 12

Internal factors such as the quality of management and the level of corporate debt affect the rate of return on an individual stock.

Question 13

Stocks in which of the following industries may be impacted by government actions?

A) Health Care
B) Housing
C) Defense
D) All of the above

Question 14

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

A) real estate.
B) bonds.
C) gold.
D) crude oil.

Question 15

An ordinary annuity is defined as an annuity for which the cash flows occur at the beginning of each year or payment period.

Question 16

In response to the same external force, the return on one investment may increase while the return on another investment may decrease.

Question 17

To calculate the interest rate or growth rate using a spreadsheet or financial calculator, the present value and the future value most have opposite signs.

Question 18

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

Question 19

Over the long term, which one of the following has historically had the lowest average annual rate of return?

A) small-company stocks
B) long-term government bonds
C) large-company stocks
D) long-term corporate bonds

Question 20

A capital loss is computed by

A) subtracting the original cost of an investment from the proceeds received from the sale of that investment minus any income from the investment.
B) subtracting the original cost of an investment from the proceeds received from the sale of that investment plus any income from the investment.
C) subtracting the proceeds received from the sale of an investment from the original cost of the investment.
D) subtracting the original cost of an investment from the proceeds received from the sale of that investment.

Question 21

Which one of the following statements is correct concerning the time value of money?

A) The future value of $1 at the end of a year is equal to $1 times 1 plus the annual interest rate.
B) As the interest rate increases for any given year, the future value interest factor will decrease.
C) The future value of $1 decreases with the passage of time.
D) The future value interest factor is equal to zero if the interest rate is zero.

Question 22

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

A) An investment paying 16% compounded annually at the end of 1 year.
B) An investment paying 2% compounded semi-annually at the end of 1 year.
C) An investment paying 4% compounded annually at the end of 4 years.
D) An investment paying 1% compounded annually at the end of 4 years.

Question 23

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

A) annually.
B) daily.
C) monthly.
D) continuously.

Question 24

The stated rate of interest is equal to the true rate of interest when

A) interest is compounded annually and the period in questions is exactly 1 year.
B) interest is compounded continuously over one or more years.
C) interest is compounded annually over a period of several years.
D) interest is discounted rather than compounded.

Question 25

Roy is going to receive a payment of $5,000 one year from today.He earns an average of 6% on his investments.What is the present value of this payment?

A) $4,717
B) $4,821
C) $5,000
D) $5,300

Question 26

Which one of the following is an example of an annuity?

A) the receipt of $50 in January, March, April, June, August, September and December
B) the payment of $259 a month for three consecutive years
C) the payment of $389 in January, $200 in February, and $200 in March
D) the receipt of $100 a month for three months and then $150 a month for two months

Question 27

Christopher invests $400 today at a 4% rate of return which is compounded annually.What is the future value of this investment after four years?

A) $342
B) $416
C) $464
D) $468

Question 28

When the rate of return is equal to the discount rate

A) the present value of an investment's benefits must be greater than its cost.
B) the cost of an investment equals the sum of its benefits.
C) the cost of an investment equals the future value of its benefits.
D) the cost of an investment equals the present value of its benefits.

Question 29

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

A) return equal to the discount rate.
B) negative rate of return.
C) 0% rate of return.
D) return greater than the discount rate.

Question 30

If you invest $2,000 at the end of each year for five years and you earn 7% interest compounded annually, how much will you have accumulated at the end of the fifth year?

A) $10,700
B) $11,501
C) $12,307
D) $14,026

Question 31

To compute the present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3 years, you should enter the following variables into a financial calculator

A) N=3, i=5, PV=1000
B) N=3, i=5, FV=1000
C) N=3, i=5, PMT=1000
D) N=3, i=.05, PV=1000

Question 32

The present value of $10,000 discounted at 5% per year and received at the end of 5 years is

A) $10,000/1.25
B) $10,000(1.05)⁵
C) $10,000/(1.05)⁵
D) $10,000 (1.05)^1/5

Question 33

Justin invests $4,000 in a savings account for two years.The account pays 2% interest compounded annually.How much interest income will Justin earn on this investment?

A) $80.00
B) $81.60
C) $160.00
D) $161.60

Question 34

Which of the following statements are correct concerning present value?
I)The present value interest factor for a single sum is always equal to or less than 1.
II)The lower the discount rate for a given year, the smaller the present value interest factor.
III)The further in time, the smaller the present value interest factor.
IV)The present value is equal to the future value only when the stated interest rate is 1%.

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

Question 35

The adage "the sooner one receives a return on a given investment, the better," reflects the financial concept known as the

A) time value of money.
B) total return concept.
C) historical dividend theory.
D) expected yield factor.

Question 36

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?

A) $19,008
B) $15,000
C) $14,764
D) $12,936

Question 37

If the discount rate is appropriate for the level of risk, a satisfactory investment will have a present value of benefits equal to or greater than than the present value of costs.

Question 38

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?

A) The future value will be $550.
B) The present value can be determined by computing the present value of $500 in five years at 10%.
C) The present value can be determined by computing the present value of a $100 ordinary annuity for five years at 10%.
D) The present value will be $500.

Question 39

When calculating the present value of either a future single sum or a future annuity, the applicable interest rate is usually called the

A) yield to maturity.
B) compound interest rate.
C) internal rate of return.
D) discount rate.

Question 40

An ordinary annuity has cash flows that occur at the ________ of each time period and are ________ in amount.

A) beginning; constant
B) beginning; variable
C) end; constant
D) end; variable

Question 41

A holding period return is calculated by adding the current income to the capital gains and dividing this sum by the

A) average investment value.
B) beginning investment value.
C) total income received.
D) selling price of the investment.

Question 42

The return that fully compensates for the risk of an investment is called the risk-free rate of return.

Question 43

The holding period return is an excellent method for comparing a short-term investment to a long-term investment.

Question 44

To compute the present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3 years, you should use the following EXCEL command.

A) DISC
B) TVM
C) PV
D) RATE

Question 45

The holding period return should not be used when analyzing investments with unequal holding periods.

Question 46

Historically, the real rate of return in the United States has tended to be

A) between -1% and 0%.
B) between 0.5 and 2%.
C) between 2 and 3%.
D) between 3%. and 5%

Question 47

Christopher purchased 200 shares of ABC stock at $21.25 per share.After nine months, he sold all of his shares at a price of $19.88 a share.Jake received a total of $0.55 per share in dividends during the time he owned the shares.Jake's holding period return is

A) -6.4%.
B) -3.9%.
C) 2.6%.
D) 9.7%.

Question 48

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?

A) 2%
B) 5%
C) 8%
D) 11%

Question 49

Which of the following is(are)issue characteristics of an investment?
I)type of investment such as stocks or bonds
II)state of the economy
III)coupon or dividend payments
IV)time to maturity

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

Question 50

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?

A) 8%
B) 10%
C) 12%
D) 14%

Question 51

Brittany purchased a stock for $14 a share and sold it six months later for $15.50.While she owned the stock, Britanny received two quarterly dividends of $0.16 per share.Brittany's holding period return on this stock is

A) 13.0%.
B) 15.0%.
C) 17.4%.
D) 19.3%.

Question 52

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

A) an expected inflation premium.
B) a risk premium.
C) both an inflation and a risk premium.
D) the prevailing prime rate.

Question 53

One reason that the holding period return should not be used to compare long-term investments is that it does not consider the time value of money.

Question 54

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

Question 55

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

Question 56

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 he following EXCEL command.

A) ANN
B) TVM
C) RATE
D) PV

Question 57

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?

Question 58

The required rate of return on the Daisy Corporation's common stock is 11%, the current real rate of return in the market is 1%, and the market's risk-free rate of return is 4%.In this case, the risk premium associated with Daisy's stock is

A) 5%.
B) 6%.
C) 7%.
D) 8%.

Question 59

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

A) N=3, i=5, PMT=1000
B) N=3, i=5, FV=3000
C) N=3, i=15, PMT=1000
D) N=1, i=5, PMT=3000

Question 60

Which one following will lower required rates of return?

A) Higher rates of inflation.
B) Higher risk premiums.
C) Lower rates of inflation .
D) Lower dividend yields.

Question 61

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?

A) 8.1%
B) 12.4%
C) 14.6%
D) 16.2%

Question 62

The holding period is a useful way to compare investments because it considers

A) the time value of money
B) only capital gains, but not income
C) both income and capital gains or losses
D) the relative size of investments being compared

Question 63

The Sorka Corp.has paid annual dividends of $0.60, $0.63, $0.65, $0.68 and $0.72, respectively, over the past five years.What is the dividend growth rate?

A) 4.7%
B) 5.2%
C) 5.4%
D) 5.9%

Question 64

If you own an investment providing periodic returns, your actual yield on the investment will depend on the reinvestment rate you are able to obtain.

Question 65

Joshua bought a stock for $17 a share two years ago.The stock does not pay any dividends.Today Izzie sold the stock for $18.50 a share.What was his internal rate of return on this investment?

A) 4.3%
B) 6.2%
C) 7.1%
D) 8.8%

Question 66

To determine the compounded annual rate of return on investments held for more than a year, investors typically use the present-value-based measure known as yield or

A) holding period return.
B) internal rate of return.
C) inflation-adjusted return.
D) simple return.

Question 67

The following investment cash flows have been entered into cells B5 through B9 of an EXCEL spreadsheet.B5 $(5,200 ), B6 $2,100, B7 $1,300, B8 $1,800, B9 $1,200, where $5,200 is the cost of the investment and the following amounts are cash flows at the end of years one through four.The correct function for computing the yield on this investment is...?

A) =irr(B6:B9)+B5
B) =irr(B6:B9)
C) =rate(4,0,-5200, 1200)
D) =ytm(B5, B6:B9)

Question 68

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

Question 69

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

A) the number of time periods
B) dividend or interest payments
C) the price at which the investment is sold
D) the initial cost of the investment

Question 70

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

Question 71

Six years ago, Miguel invested $3,500.Today his investment is worth $5659.The yield on this investment is

A) 1.4%.
B) 4.2%.
C) 8.3%.
D) 9.7%.

Question 72

When using a financial calculator or electronic spreadsheet to calculate an investment's yield, the amount invested is expressed as a negative number.

Question 73

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

Question 74

The holding period return (HPR)can appropriately be used to

A) compare the yield on investments held for any time period.
B) compare returns among investments that are held for one year or less.
C) isolate realized capital gains.
D) determine the required reinvestment rate for long-term investments.

Question 75

The yield on an investment is equal to its internal rate of return.

Question 76

The net present value of an investment is computed by discounting cash flows at the internal rate of return.

Question 77

The yield on an investment is the discount rate that produces a present value of benefits greater than the cost of the investment.

Question 78

Samantha bought a stock one year ago for $66 a share.She received a total of $2.00 in dividends.Today she sold the stock for $70 a share.Which one of the following statements is correct concerning this investment?

A) Samantha has current income of $6.00.
B) Samantha has a capital gain of $2.00.
C) Samantha has a total return of 9.1%.
D) Samantha has unrealized income of $4 a share.

Question 79

The yield is the rate of return that causes a project to have a zero net present value.

Question 80

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