Question 1

Which of the following should be considered when deciding among alternative investments?
I. time value of money
II. risks associated with each investment
III. risk free rate of return
IV. personal risk tolerance level

Accepted Answer

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

Question 2

Business risk is the risk associated with the amount of debt financing used by a firm.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

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 4

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?

Accepted Answer

A)  2.7% 
B)  3.2% 
C)  3.6% 
D)  3.8%

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

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

Question 7

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.

Accepted Answer

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 8

Business risk resulting from uncertainty over a firm's earnings is a concern for stockholders, but not for debt holders.

Accepted Answer

A) True 
 B)False

Question 9

The present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3 years is equal to

Accepted Answer

A)  $1,000/(1.03)5. 
B)  $1,000/(1.05)3. 
C)  $1,000 x (1.05)3. 
D)  $1,000-($1,000) x .03 x 5.

Question 10

Zachary has purchased an investment that he expects to produce income of $3,000 at the end of the first year and $4,000 at the end of the second year. If he requires an 8% rate of return compounded annually, what is the maximum amount that he can pay and still earn the required rate of return?

Accepted Answer

The answer of Zachary has purchased an investment that he...

Question 11

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

Accepted Answer

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

Question 12

A petroleum refinery in the Gulf region is forced to shut down for several months because of hurricane damage. This is an example of

Accepted Answer

A)  market risk. 
B)  speculation. 
C)  event risk. 
D)  business risk.

Question 13

Which one following will lower required rates of return?

Accepted Answer

A)  higher rates of inflation 
B)  higher risk premiums 
C)  lower rates of inflation 
D)  lower dividend yields

Question 14

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 holding period return on this investment?

Accepted Answer

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

Question 15

The risk that the rate of return on an investment will be less than expected due to factors that are independent of the investment, such as political, social or economic events, is called

Accepted Answer

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

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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?

Accepted Answer

A)  2.7% 
B)  3.2% 
C)  3.6% 
D)  3.8%

Question 18

Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. What was his average annual rate of return form both dividends and capital gains? (Hint: compute the IRR, assume that all dividends were received at the end of the year.)

Accepted Answer

The answer of Josh purchased 100 shares of XOM for...

Question 19

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

Accepted Answer

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 20

Over the past 4 years, the annual rates of return on stock of Brown & Warren Inc. have been -2%, 4%, 14% and 6%, respectively, over the past four years. Compute the standard deviation of these returns.

Accepted Answer

The answer of Over the past 4 years, the annual...

Exam 4: Return and Risk

Which of the following should be considered when deciding among alternative investments? I. time value of money II. risks associated with each investment III. risk free rate of return IV. personal risk tolerance level

Business risk is the risk associated with the amount of debt financing used by a firm.

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

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?

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

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

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.

Business risk resulting from uncertainty over a firm's earnings is a concern for stockholders, but not for debt holders.

The present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3 years is equal to

Zachary has purchased an investment that he expects to produce income of $3,000 at the end of the first year and $4,000 at the end of the second year. If he requires an 8% rate of return compounded annually, what is the maximum amount that he can pay and still earn the required rate of return?

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 petroleum refinery in the Gulf region is forced to shut down for several months because of hurricane damage. This is an example of

Which one following will lower required rates of return?

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 holding period return on this investment?

The risk that the rate of return on an investment will be less than expected due to factors that are independent of the investment, such as political, social or economic events, is called

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

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?

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

Over the past 4 years, the annual rates of return on stock of Brown & Warren Inc. have been -2%, 4%, 14% and 6%, respectively, over the past four years. Compute the standard deviation of these returns.