Question 1

Both present value and future value are based upon the concept of the time value of money.

Accepted Answer

A) True 
 B)False

Question 2

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. 
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 3

A stock is purchased for $50 on January 1 and sold on December 31 for $72. A $5.00 per share dividend is paid at the end of the year.
(a) Calculate return (R).

Accepted Answer

(a) R = (Dividend +

Question 4

Since 1926, there has never been a 20-year period where bonds have outperformed stocks in the U.S. security markets?

Accepted Answer

A) True 
 B)False

Question 5

Bond prices and interest rates are inversely related.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not part of the yield component of total return?

Accepted Answer

A)  Dividend payment on common stock 
B)  Coupon interest payment on bonds 
C)  Capital gain upon sale of stock 
D)  Dividend payment on preferred stock 
A)  Dividend payment on common stock 
B)  Coupon interest payment on bonds 
C)  Capital gain upon sale of stock 
D)  Dividend payment on preferred stock

Question 7

The equity risk premium is the difference between the expected return:

Accepted Answer

A)  on stocks and bonds. 
B)  on high-grade stocks and low-grade stocks. 
C)  on stocks and the risk-free rate. 
D)  on a stock market index and the inflation rate. 
A)  on stocks and bonds. 
B)  on high-grade stocks and low-grade stocks. 
C)  on stocks and the risk-free rate. 
D)  on a stock market index and the inflation rate.

Question 8

Liquidity risk:

Accepted Answer

A)  is the risk that investment bankers normally face. 
B)  is lower for small OTC stocks than for large NYSE stocks. 
C)  is a risk associated with secondary market transactions. 
D)  increases whenever interest rates increase. 
A)  is the risk that investment bankers normally face. 
B)  is lower for small OTC stocks than for large NYSE stocks. 
C)  is a risk associated with secondary market transactions. 
D)  increases whenever interest rates increase.

Question 9

A Chinese stock denominated in Chinese yuan will have an increase in its dollar-denominated return if the Chinese yuan strengthens against the dollar.

Accepted Answer

A) True 
 B)False

Question 10

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

Question 11

Over a long period of time, common stocks have returned approximately twice as much as bonds; therefore, the amount accumulated in a stock fund relative to a bond fund over time would be:

Accepted Answer

A)  twice as much. 
B)  less than twice as much. 
C)  more than twice as much. 
D)  less (more) than twice as much if volatility is lower (higher) than average. 
A)  twice as much. 
B)  less than twice as much. 
C)  more than twice as much. 
D)  less (more) than twice as much if volatility is lower (higher) than average.

Question 12

What is the present value of $20,000 to be received in 40 years if the interest rate is 9 percent?

Accepted Answer

Using a financial ca

Question 13

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

Question 14

New regulations concerning auto emissions would be a type of market risk for the auto industry.

Accepted Answer

A) True 
 B)False

Question 15

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

Question 16

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

Question 17

A number of prominent observers expect the future equity risk premium 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)  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.

Question 18

The most common measure of inflation is the Producer Price Index.

Accepted Answer

A) True 
 B)False

Question 19

An impending recession is an example of:

Accepted Answer

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

Question 20

A U.S. investor purchased Sony bonds that were denominated in yen, had a 6.9% yield to maturity, and had one year to maturity. At the time of purchase, the exchange rate was 139 yen/$. At maturity, the exchange rate was 122 yen/$. What was the investor's annual return on the bonds?

Accepted Answer

First convert the indirect exchange rate

Exam 6: The Risk and Return From Investing

Both present value and future value are based upon the concept of the time value of money.

A major difference between real and nominal returns is that:

A stock is purchased for $50 on January 1 and sold on December 31 for $72. A $5.00 per share dividend is paid at the end of the year. (a) Calculate return (R).

Since 1926, there has never been a 20-year period where bonds have outperformed stocks in the U.S. security markets?

Bond prices and interest rates are inversely related.

Which of the following is not part of the yield component of total return?

The equity risk premium is the difference between the expected return:

Liquidity risk:

A Chinese stock denominated in Chinese yuan will have an increase in its dollar-denominated return if the Chinese yuan strengthens against the dollar.

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:

Over a long period of time, common stocks have returned approximately twice as much as bonds; therefore, the amount accumulated in a stock fund relative to a bond fund over time would be:

What is the present value of $20,000 to be received in 40 years if the interest rate is 9 percent?

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

New regulations concerning auto emissions would be a type of market risk for the auto industry.

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

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

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

The most common measure of inflation is the Producer Price Index.

An impending recession is an example of:

A U.S. investor purchased Sony bonds that were denominated in yen, had a 6.9% yield to maturity, and had one year to maturity. At the time of purchase, the exchange rate was 139 yen/$. At maturity, the exchange rate was 122 yen/$. What was the investor's annual return on the bonds?

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

Portfolio Theory

Portfolio Selection and Asset Allocation

Capital Market Theory and Asset Pricing Models

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

Filters