Question 1

Assume you are a U.S.citizen who purchases $20,000 worth of bonds of the Deep Shaft Mining Company in Kenya.What sources of risk can you identify with this investment?

Accepted Answer

Business risk,country risk,political risk,exchange-rate risk.

Question 2

A number of prominent observers expect the equity risk premium in the future to be:

Accepted Answer

A)  considerably lower than that of the past.
B)  considerably higher than that of the past.
C)  very similar to the historical average.
D)  very similar to the recent value. A

Question 3

The standard deviation of a security measures the:

Accepted Answer

A)  systematic risk of the security.
B)  unsystematic risk of the security.
C)  total risk of the security.
D)  risk per unit of return for the security. C

Question 4

When most people refer to mean rate of return,they are referring to the:

Accepted Answer

A)  holding period rate of return.
B)  arithmetic average rate of return.
C)  geometric average rate of return.
D)  cumulative average rate of return.

Question 5

In order to determine the compound growth rate of an investment over some period,an investor would calculate the:

Accepted Answer

A)  arithmetic mean.
B)  geometric mean.
C)  calculus mean.
D)  arithmetic median.

Question 6

If interest rates are expected to rise,you would expect:

Accepted Answer

A)  bond prices to fall more than stock prices.
B)  bond prices to rise more than stock prices.
C)  stock prices to fall more than bond prices.
D)  stock prices to rise and bond prices to fall.

Question 7

If the Dow Jones Industrials had a price appreciation of 6 percent one year and yet total return for the year was 9 percent,the difference would be due to:

Accepted Answer

A)  the tax treatment of capital gains.
B)  the cumulative wealth effect.
C)  dividends.
D)  inflation.

Question 8

What is the best measure of risk for a sole proprietorship?

Accepted Answer

The answer of What is the best measure of risk...

Question 9

An impending recession is an example of:

Accepted Answer

A)  interest rate risk.
B)  inflation risk.
C)  market risk.
D)  financial risk.

Question 10

Return and risk are inversely related.

Accepted Answer

A) True 
 B)False

Question 11

The housing bubble and resulting credit crisis of 2008 is an example of:

Accepted Answer

A)  nonsystematic risk.
B)  systematic risk.
C)  inflation risk.
D)  political risk

Question 12

Investors should be willing to invest in riskier investments only:

Accepted Answer

A)  if the expected holding period is short term.
B)  if there are no safe alternatives except for holding cash.
C)  if the expected return is adequate for the risk level.
D)  if they are speculators.

Question 13

What was the effect on foreign investors owning U.S.stocks when the dollar fell in 2008?

Accepted Answer

The answer of What was the effect on foreign investors...

Question 14

If you invest in German bonds and the Euro becomes stronger during your holding period,then:

Accepted Answer

A)  you will be able to buy back fewer dollars when you redeem your bond.
B)  your dollar-denominated return will increase.
C)  your-dollar denominated return will decrease.
D)  your return will be the interest you receive.

Question 15

Financial risk is most closely associated with:

Accepted Answer

A)  the use of equity financing by corporations.
B)  the use of debt financing by corporations.
C)  equity investments held by corporations.
D)  debt investments held by corporations.

Question 16

The returns and risk measures in this chapter are calculated from historical data.Are such measures good predictors of the future?What are some circumstances that could change to impact future return and risk?How can an investor use these return and risk measures to help construct a portfolio?

Accepted Answer

The answer of The returns and risk measures in this...

Question 17

A major difference between real and nominal returns is that:

Accepted Answer

A)  real returns adjust for inflation,and nominal returns do not.
B)  real returns use actual cash flows,and nominal returns use expected cash flows.
C)  real returns adjust for commissions,and nominal returns do not.
D)  real returns show after-tax returns,and nominal returns show before-tax returns.

Question 18

New financial disclosure regulations affecting the brokerage industry are a type of:

Accepted Answer

A)  market risk.
B)  financial risk.
C)  business risk.
D)  liquidity risk.

Question 19

Which of the following corresponds most closely with an increase in interest rates?

Accepted Answer

A)  Business risk
B)  Financial risk
C)  Liquidity risk
D)  Inflation risk

Question 20

What is the major drawback of a return measure?Why is it the most common return calculation used by investors?

Accepted Answer

The answer of What is the major drawback of a...

Exam 6: The Risks and Returns From Investing