Question 1

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.

Question 2

You have been given this probability distribution for the holding-period return for KMP stock: $$\begin{array} { l c r } 
\text { Stock of the Economy } & \text { Probability } & \text { HPR } \
\text { Boom } & 0.30 & 18 \% \
\text { Normal growth } & 0.50 & 12 \% \
\text { Recession } & 0.20 & - 5 \% \
\hline
\end{array}$$ What is the expected standard deviation for KMP stock?

Accepted Answer

A)  6.91% 
B)  8.13% 
C)  7.79% 
D)  7.25% 
E)  8.85% 
A)  6.91% 
B)  8.13% 
C)  7.79% 
D)  7.25% 
E)  8.85%

Question 3

The risk premium for common stocks

Accepted Answer

A)  cannot be zero, for investors would be unwilling to invest in common stocks. 
B)  must always be positive, in theory. 
C)  is negative, as common stocks are risky. 
D)  cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in 
E)  cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common 
A)  cannot be zero, for investors would be unwilling to invest in common stocks. 
B)  must always be positive, in theory. 
C)  is negative, as common stocks are risky. 
D)  cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in 
E)  cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common

Question 4

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 5

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 6

You purchased a share of stock for $12. One year later, you received $0.25 as a dividend and sold the share for $12.92. What was your holding-period return?

Accepted Answer

A)  9.75% 
B)  10.65% 
C)  11.75% 
D)  11.25% 
E)  None of the options are correct. 
A)  9.75% 
B)  10.65% 
C)  11.75% 
D)  11.25% 
E)  None of the options are correct.

Question 7

You have been given this probability distribution for the holding-period return for a stock: $$\begin{array} { l c c } 
\text { Stock of the Economy } & \text { Probability } & \text { HPR } \
\text { Boom } & 0.40 & 22 \% \
\text { Normal growth } & 0.35 & 11 \% \
\text { Recession } & 0.25 & - \quad 9 \% \
\hline
\end{array}$$ What is the expected holding-period return for the stock?

Accepted Answer

A)  11.67% 
B)  8.33% 
C)  9.56% 
D)  12.4% 
E)  None of the options are correct. 
A)  11.67% 
B)  8.33% 
C)  9.56% 
D)  12.4% 
E)  None of the options are correct.

Question 8

Over the past year, you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was

Accepted Answer

A)  11.76%. 
B)  16.00%. 
C)  15.02%. 
D)  14.32%. 
A)  11.76%. 
B)  16.00%. 
C)  15.02%. 
D)  14.32%.

Question 9

You purchased a share of stock for $20. One year later, you received $1 as a dividend and sold the share for $29. What was your holding-period return?

Accepted Answer

A)  45% 
B)  50% 
C)  5% 
D)  40% 
E)  None of the options are correct. 
A)  45% 
B)  50% 
C)  5% 
D)  40% 
E)  None of the options are correct.

Question 10

If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately

Accepted Answer

A)  4.9%. 
B)  0.9%. 
C)  -0.9%. 
D)  7%. 
E)  None of the options are correct. 
A)  4.9%. 
B)  0.9%. 
C)  -0.9%. 
D)  7%. 
E)  None of the options are correct.

Question 11

A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%. What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year?

Accepted Answer

A)  4.1% 
B)  2.5% 
C)  2.9% 
D)  1.6% 
A)  4.1% 
B)  2.5% 
C)  2.9% 
D)  1.6%

Question 12

If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be

Accepted Answer

A)  0.08. 
B)  0.03. 
C)  0.20. 
D)  0.11. 
E)  0.25. 
A)  0.08. 
B)  0.03. 
C)  0.20. 
D)  0.11. 
E)  0.25.

Question 13

You have been given this probability distribution for the holding-period return for KMP stock: $$\begin{array} { l c r } 
\text { Stock of the Economy } & \text { Probability } & \text { HPR } \
\text { Boom } & 0.30 & 18 \% \
\text { Normal growth } & 0.50 & 12 \% \
\text { Recession } & 0.20 & - 5 \% \
\hline
\end{array}$$ What is the expected holding-period return for KMP stock?

Accepted Answer

A)  10.40% 
B)  9.32% 
C)  11.63% 
D)  11.54% 
E)  10.88% 
A)  10.40% 
B)  9.32% 
C)  11.63% 
D)  11.54% 
E)  10.88%

Question 14

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 15

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 16

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 4.3%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

Accepted Answer

A)  4.3% 
B)  -1.3% 
C)  7.3% 
D)  3% 
E)  None of the options. 
A)  4.3% 
B)  -1.3% 
C)  7.3% 
D)  3% 
E)  None of the options.

Question 17

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 18

Over the past year, you earned a nominal rate of interest of 3.6% on your money. The inflation rate was 3.1% over the same period. The exact actual growth rate of your purchasing power was

Accepted Answer

A)  3.6%. 
B)  3.1%. 
C)  0.48%. 
D)  6.7%. 
A)  3.6%. 
B)  3.1%. 
C)  0.48%. 
D)  6.7%.

Question 19

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?

Accepted Answer

A)  5% 
B)  10% 
C)  7% 
D)  3% 
A)  5% 
B)  10% 
C)  7% 
D)  3%

Question 20

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

Exam 5: Risk, Return, and the Historical Record

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

You have been given this probability distribution for the holding-period return for KMP stock: Stock of the Economy Probability HPR Boom 0.30 18\% Normal growth 0.50 12\% Recession 0.20 -5\% What is the expected standard deviation for KMP stock?

The risk premium for common stocks

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

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

You purchased a share of stock for $12. One year later, you received $0.25 as a dividend and sold the share for $12.92. What was your holding-period return?

You have been given this probability distribution for the holding-period return for a stock: Stock of the Economy Probability HPR Boom 0.40 22\% Normal growth 0.35 11\% Recession 0.25 -9\% What is the expected holding-period return for the stock?

Over the past year, you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was

You purchased a share of stock for $20. One year later, you received $1 as a dividend and sold the share for $29. What was your holding-period return?

If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately

A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%. What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year?

If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be

You have been given this probability distribution for the holding-period return for KMP stock: Stock of the Economy Probability HPR Boom 0.30 18\% Normal growth 0.50 12\% Recession 0.20 -5\% What is the expected holding-period return for KMP stock?

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 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 ___________.

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 4.3%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?

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

Over the past year, you earned a nominal rate of interest of 3.6% on your money. The inflation rate was 3.1% over the same period. The exact actual growth rate of your purchasing power was

A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 9%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?

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?

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Capital Allocation to Risky Assets

Optimal Risky Portfolios

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 _.