Question 1

Over the past year you earned a nominal rate of interest of 3.6 percent on your money.The inflation rate was 3.1 percent 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%. 
E) none of the above

Question 2

If a distribution has "fat tails" it exhibits

Accepted Answer

A) positive skewness 
B) negative skewness 
C) a kurtosis of zero 
D) kurtosis 
E) A and D

Question 3

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 
E) none of the above

Question 4

You purchased a share of CSCO stock for $20.One year later you received $2 as a dividend and sold the share for $31.What was your holding-period return?

Accepted Answer

A) 45% 
B) 50% 
C) 60% 
D) 40% 
E) none of the above

Question 5

You have been given this probability distribution for the holding-period return for a stock: $\begin{array}{lll}
\underline{\text { State of the Economy} } &\underline{ \text { Probability} } & \underline{\text { HPR } }\
\text { Boom } & .40 & 22\% \
\text { Normal growth } & .35 & 11\%\
\text { Recession } & .25 & -9 \%
\end{array}$

-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 above

Question 6

If the annual real rate of interest is 2.5% and the expected inflation rate is 3.7%,the nominal rate of interest would be approximately

Accepted Answer

A) 3.7%. 
B) 6.2%. 
C) 2.5%. 
D) -1.2%. 
E) none of the above.

Question 7

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%. 
E) none of the above.

Question 8

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 normality of a distribution 
D) the dividend yield of the distribution 
E) None of the above

Question 9

Historical records regarding return on stocks,Treasury bonds,and Treasury bills between 1926 and 2009 show that

Accepted Answer

A) stocks offered investors greater rates of return than bonds and bills. 
B) stock returns were less volatile than those of bonds and bills. 
C) bonds offered investors greater rates of return than stocks and bills. 
D) bills outperformed stocks and bonds. 
E) treasury bills always offered a rate of return greater than inflation.

Question 10

A year ago,you invested $2,500 in a savings account that pays an annual interest rate of 2.5%.What is your approximate annual real rate of return if the rate of inflation was 3.4% over the year?

Accepted Answer

A) 0.9%. 
B) -0.9%. 
C) 5.9%. 
D) 3.4%. 
E) none of the above.

Question 11

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 above

Question 12

Kurtosis is a measure of ____________.

Accepted Answer

A) how fat the tails of a distribution are 
B) the downside risk of a distribution 
C) the normality of a distribution 
D) the dividend yield of the distribution 
E) A and C

Question 13

If a portfolio had a return of 12%,the risk free asset return was 4%,and the standard deviation of the portfolio's excess returns was 25%,the Sharpe measure would be _____.

Accepted Answer

A) 0.12 
B) 0.04 
C) 0.32 
D) 0.16 
E) 0.25

Question 14

________ is a risk measure that indicates vulnerability to extreme negative returns.

Accepted Answer

A) Value at risk 
B) Lower partial standard deviation 
C) Standard deviation 
D) None of the above 
E) A and B

Question 15

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 above

Question 16

The historical arithmetic rate of return on U.S.small stocks over the 1926-2009 period has been _______.The standard deviation of small stocks' returns has been ________ than the standard deviation of large stocks' returns.

Accepted Answer

A) 12.43%, lower 
B) 13.11%, lower 
C) 16.24%, higher 
D) 17.43%, higher 
E) 21.53%,higher

Question 17

You purchased a share of stock for $65.One year later you received $2.37 as a dividend and sold the share for $63.What was your holding-period return?

Accepted Answer

A) 0.57% 
B) -0.2550% 
C) -0.89% 
D) 1.63% 
E) none of the above

Question 18

You have been given this probability distribution for the holding-period return for KMP stock: $\begin{array}{lll}
\underline{\text { State of the Economy }} & \underline{\text { Probability }} &\underline{ \text { HPR } }\
\text { Boom } & .30 & 18\% \
\text { Normal growth } & .50 & 12\%\
\text { Recession } & .20 & -5\%
\end{array}$

-What is the expected variance for KMP stock?

Accepted Answer

A) 66.04% 
B) 69.96% 
C) 77.04% 
D) 63.72% 
E) 78.45%

Question 19

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 above.

Question 20

A year ago,you invested $1,000 in a savings account that pays an annual interest rate of 4%.What is your approximate annual real rate of return if the rate of inflation was 2% over the year?

Accepted Answer

A) 4%. 
B) 2%. 
C) 6%. 
D) 3%. 
E) none of the above.

Exam 5: Introduction to Risk,return,and the Historical Record