Question 1

Liquidity can be measured by the ability of the investor to convert an investment into cash within a relatively long period of time, at its fair book value.

Accepted Answer

A) True 
 B)False

Question 2

In general, inflation results in a loss of purchasing power to the investor.

Accepted Answer

A) True 
 B)False

Question 3

Silver is an example of a financial asset.

Accepted Answer

A) True 
 B)False

Question 4

One of the problems that investors face in determining required rates of return is forecasting errors involving interest rates and inflation.

Accepted Answer

A) True 
 B)False

Question 5

What would be the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3 dividend?

Accepted Answer

A) 12% 
B) 11% 
C) 10% 
D) 1.5% 
E) 5% 
A) 12% 
B) 11% 
C) 10% 
D) 1.5% 
E) 5%

Question 6

Diversification is the process of determining the risk premium.

Accepted Answer

A) True 
 B)False

Question 7

Commodity futures are a form of financial asset.

Accepted Answer

A) True 
 B)False

Question 8

Assume the real rate of return for the economy is 3.75% and the expected rate of inflation is 6.75%. What is the risk-free rate? If the risk premium is 6%, calculate the required rate of return.

Accepted Answer

Risk free rate = .1075 or 10.75%
or
Rf =

Question 9

A public utility is likely to appeal to an income-oriented, conservative investor.

Accepted Answer

A) True 
 B)False

Question 10

Because most investors are risk averse,

Accepted Answer

A) the riskier the investment, the more the investor will pay for it. 
B) the riskier the investment, the less compensation the investor requires. 
C) only financial institutions invest in risky assets. 
D) they will require a higher rate of return for a riskier investment. 
A) the riskier the investment, the more the investor will pay for it. 
B) the riskier the investment, the less compensation the investor requires. 
C) only financial institutions invest in risky assets. 
D) they will require a higher rate of return for a riskier investment.

Question 11

In the financial world, risk is defined as variability of returns.

Accepted Answer

A) True 
 B)False

Question 12

Stocks and bonds are preferred during periods of:

Accepted Answer

A) higher inflation. 
B) lower inflation. 
C) rising stock prices. 
D) higher risk premiums. 
E) None of the above 
A) higher inflation. 
B) lower inflation. 
C) rising stock prices. 
D) higher risk premiums. 
E) None of the above

Question 13

Common stock dividends are now taxed at a maximum rate of:

Accepted Answer

A) 10%. 
B) 15%. 
C) 20%. 
D) 30%. 
E) 38.8%. 
A) 10%. 
B) 15%. 
C) 20%. 
D) 30%. 
E) 38.8%.

Question 14

Risk is not correlated with return in the capital markets.

Accepted Answer

A) True 
 B)False

Question 15

Investors desiring to assume low risks would probably invest in short-term securities.

Accepted Answer

A) True 
 B)False

Question 16

When comparing returns by decade, the Ibbotson study shows that small company stocks outperformed large company stocks in every decade since the 1920s.

Accepted Answer

A) True 
 B)False

Question 17

Historically, the real rate of return in the U.S. economy has been:

Accepted Answer

A) 1-2%. 
B) 2-3%. 
C) 3-4%. 
D) 4-5%. 
E) 5-6%. 
A) 1-2%. 
B) 2-3%. 
C) 3-4%. 
D) 4-5%. 
E) 5-6%.

Question 18

What factors must be considered in choosing between investment alternatives?

Accepted Answer

A) Risk and liquidity 
B) Interest or dividends versus capital gains 
C) Time frame for managing funds and evaluating performance and tax effects 
D) Safety of principal 
E) All of the above 
A) Risk and liquidity 
B) Interest or dividends versus capital gains 
C) Time frame for managing funds and evaluating performance and tax effects 
D) Safety of principal 
E) All of the above

Question 19

Which of the following investments would theoretically always carry the highest risk premium?

Accepted Answer

A) U.S. treasury bill 
B) Common stock 
C) Preferred stock 
D) Corporate bond 
E) Any one of the above 
A) U.S. treasury bill 
B) Common stock 
C) Preferred stock 
D) Corporate bond 
E) Any one of the above

Question 20

Which of the following is not a form of a financial asset?

Accepted Answer

A) Commercial paper 
B) Commodity futures 
C) Warrants 
D) Personal residence 
E) Money market fund 
A) Commercial paper 
B) Commodity futures 
C) Warrants 
D) Personal residence 
E) Money market fund

Exam 1: The Investment Setting

Liquidity can be measured by the ability of the investor to convert an investment into cash within a relatively long period of time, at its fair book value.

In general, inflation results in a loss of purchasing power to the investor.

Silver is an example of a financial asset.

One of the problems that investors face in determining required rates of return is forecasting errors involving interest rates and inflation.

What would be the rate of return for a stock that increased in value from $60 per share to $63 per share and paid a $3 dividend?

Diversification is the process of determining the risk premium.

Commodity futures are a form of financial asset.

Assume the real rate of return for the economy is 3.75% and the expected rate of inflation is 6.75%. What is the risk-free rate? If the risk premium is 6%, calculate the required rate of return.

A public utility is likely to appeal to an income-oriented, conservative investor.

Because most investors are risk averse,

In the financial world, risk is defined as variability of returns.

Stocks and bonds are preferred during periods of:

Common stock dividends are now taxed at a maximum rate of:

Risk is not correlated with return in the capital markets.

Investors desiring to assume low risks would probably invest in short-term securities.

When comparing returns by decade, the Ibbotson study shows that small company stocks outperformed large company stocks in every decade since the 1920s.

Historically, the real rate of return in the U.S. economy has been:

What factors must be considered in choosing between investment alternatives?

Which of the following investments would theoretically always carry the highest risk premium?

Which of the following is not a form of a financial asset?

Security Markets

Participating in the Market

Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Valuation of the Individual Firm

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Convertible Securities and Warrants

Put and Call Options

Commodities and Financial Futures

Stock Index Futures and Options

A Basic Look at Portfolio Management and Capital Market Theory

Duration and Bond Portfolio Management

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

Filters