Question 1

If the nominal return is constant, the after-tax real rate of return

Accepted Answer

A)  declines as the inflation rate increases. 
B)  increases as the inflation rate increases. 
C)  declines as the inflation rate declines. 
D)  increases as the inflation rate decreases. 
E)  declines as the inflation rate increases and increases as the inflation rate decreases. 
A)  declines as the inflation rate increases. 
B)  increases as the inflation rate increases. 
C)  declines as the inflation rate declines. 
D)  increases as the inflation rate decreases. 
E)  declines as the inflation rate increases and increases as the inflation rate decreases.

Question 2

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

Accepted Answer

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

Question 3

If the annual real rate of interest is 3.0%, and the expected inflation rate is 4.0%, the nominal rate of interest would be approximately

Accepted Answer

A)  3.7%. 
B)  7.0%. 
C)  2.5%. 
D)  −1.2%. 
A)  3.7%. 
B)  7.0%. 
C)  2.5%. 
D)  −1.2%.

Question 4

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

Accepted Answer

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

Question 5

You have been given this probability distribution for the holding-period return for GM stock: $\begin{array}{lcc}
  \text { Stock of the Economy } & \text {  Probability} & \text {HPR  } \
 \text { Boom } &0.40&30\%\
 \text { Normal growth } &0.40&11\%\
\text { Recession }&0.20&-10\%
\end{array}$

What is the expected holding-period return for GM stock?

Accepted Answer

A)  10.4% 
B)  11.4% 
C)  12.4% 
D)  13.4% 
E)  14.4% 
A)  10.4% 
B)  11.4% 
C)  12.4% 
D)  13.4% 
E)  14.4%

Question 6

Ceteris paribus, a decrease in the demand for loans

Accepted Answer

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. 
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 7

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

Accepted Answer

A)  13%. 
B)  18%. 
C)  49%. 
D)  12%. 
E)  29%. 
A)  13%. 
B)  18%. 
C)  49%. 
D)  12%. 
E)  29%.

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

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

Question 10

A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 3.5%. What is your approximate annual real rate of return if the rate of inflation was 5.5% over the year?

Accepted Answer

A)  0.9% 
B)  −2.0% 
C)  5.9% 
D)  3.4% 
A)  0.9% 
B)  −2.0% 
C)  5.9% 
D)  3.4%

Question 11

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 ___________.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease 
E)  reverse direction from their previous trends; reverse direction from their previous trends 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease 
E)  reverse direction from their previous trends; reverse direction from their previous trends

Question 12

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

Accepted Answer

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

Question 13

When a distribution is positively skewed,

Accepted Answer

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. 
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 14

When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be

Accepted Answer

A)  expected shortfall. 
B)  value at risk. 
C)  conditional tail expectation. 
D)  expected shortfall and value at risk. 
E)  expected shortfall and conditional tail expectation. 
A)  expected shortfall. 
B)  value at risk. 
C)  conditional tail expectation. 
D)  expected shortfall and value at risk. 
E)  expected shortfall and conditional tail expectation.

Question 15

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

Accepted Answer

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. 
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 16

A year ago, you invested $12,000 in an investment that produced a return of 16%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?

Accepted Answer

A)  18% 
B)  2% 
C)  12% 
D)  15% 
A)  18% 
B)  2% 
C)  12% 
D)  15%

Question 17

You purchased a share of stock for $120. One year later, you received $1.82 as a dividend and sold the share for $136. What was your holding-period return?

Accepted Answer

A)  15.67% 
B)  22.12% 
C)  18.85% 
D)  13.24% 
E)  None of the options are correct. 
A)  15.67% 
B)  22.12% 
C)  18.85% 
D)  13.24% 
E)  None of the options are correct.

Question 18

If the annual real rate of interest is 6%, and the expected inflation rate is 2%, the nominal rate of interest would be approximately

Accepted Answer

A)  1%. 
B)  8%. 
C)  20%. 
D)  15%. 
A)  1%. 
B)  8%. 
C)  20%. 
D)  15%.

Question 19

Skewness is a measure of

Accepted Answer

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. 
E)  None of the options are correct. 
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. 
E)  None of the options are correct.

Question 20

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

Accepted Answer

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. 
E)  the nominal rate plus the inflation rate. 
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. 
E)  the nominal rate plus the inflation rate.

Exam 5: Risk, Return, and the Historical Record

If the nominal return is constant, the after-tax real rate of return

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

If the annual real rate of interest is 3.0%, and the expected inflation rate is 4.0%, the nominal rate of interest would be approximately

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

You have been given this probability distribution for the holding-period return for GM stock: Stock of the Economy Probability HPR Boom 0.40 30\% Normal growth 0.40 11\% Recession 0.20 -10\% What is the expected holding-period return for GM stock?

Ceteris paribus, a decrease in the demand for loans

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

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

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 year ago, you invested $2,500 in a savings account that pays an annual interest rate of 3.5%. What is your approximate annual real rate of return if the rate of inflation was 5.5% over the year?

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 ___________.

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

When a distribution is positively skewed,

When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be

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

A year ago, you invested $12,000 in an investment that produced a return of 16%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?

You purchased a share of stock for $120. One year later, you received $1.82 as a dividend and sold the share for $136. What was your holding-period return?

If the annual real rate of interest is 6%, and the expected inflation rate is 2%, the nominal rate of interest would be approximately

Skewness is a measure of

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

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 _.