Chapter 05 MCQs

QUESTION 1
1. Annual percentage rates (APRs) are computed using
compound interest.
best estimates of expected real costs.
either simple interest or compound interest.
simple interest.
None of the options are correct.
1 points   
QUESTION 2
1. A year ago, you invested $10,000 in a savings account that pays an annual interest rate
of 5%. What is your approximate annual real rate of return if the rate of inflation was
1.5% over the year?
None of the options are correct.
10%
4%
3.5%
7%
1 points   
QUESTION 3
1. If the annual real rate of interest is 6%, and the expected inflation rate is 2%, the
nominal rate of interest would be approximately
8%.
1%.
15%.
20%.
1 points   
QUESTION 4
1. When assessing tail risk by looking at the 5% worst-case scenario, the most realistic
view of downside exposure would be
expected shortfall and value at risk.
conditional tail expectation.
value at risk.
expected shortfall.
expected shortfall and conditional tail expectation.
1 points   

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QUESTION 5
1. Which of the following statement(s) is(are) true?
None of the options are true.
Certificates of deposit offer a guaranteed real rate of interest.
The realized nominal rate of interest is always greater than the real rate of
interest.
Inflation has no effect on the nominal rate of interest.
1 points   
QUESTION 6
1. Which of the following statement(s) is(are) true?
1. I) The real rate of interest is determined by the supply and demand for funds.
2. II) The real rate of interest is determined by the expected rate of inflation.
3. III) The real rate of interest can be affected by actions of the Fed.
4. IV) The real rate of interest is equal to the nominal interest rate plus the
expected rate of inflation.
5.I, II, III, and IV only
I and III only
III and IV only
II and III only
I and II only
1 points   
QUESTION 7
1. When comparing investments with different horizons, the ____________ provides the
more accurate comparison.
effective annual rate
average annual return
arithmetic average
historical annual average
1 points   
QUESTION 8
1. 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
9.90%.
10.52%.

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 9.15%.
9.65%.
1 points   
QUESTION 9
1. The risk premium for common stocks
cannot be zero, for investors would be unwilling to invest in common stocks.
cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as
common stocks are risky.
is negative, as common stocks are risky.
cannot be zero, for investors would be unwilling to invest in common stocks and must always
be positive, in theory.
must always be positive, in theory.
1 points   
QUESTION 10
1. 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 %
2.
What is the expected holding-period return for the stock?
12.4%
8.33%
11.67%
None of the options are correct.
9.56%
1 points   
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Chapter 06 MCQs
QUESTION 1
1. You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard
deviation of 0.15 and a T-bill with a rate of return of 0.05.

The slope of the capital allocation line formed with the risky asset and the risk-free
asset is equal to

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 0.8000.
Cannot be determined.
2.14.
0.4667.
0.41667.
1 points   
QUESTION 2
1. An investor invests 35% of his wealth in a risky asset with an expected rate of return of
0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected
return and standard deviation are __________ and __________, respectively.
0.087; 0.144
0.087; 0.063
0.096; 0.126
0.089; 0.111
1 points   
QUESTION 3
1. You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard
deviation of 0.20 and a T-bill with a rate of return of 0.03.

What percentages of your money must be invested in the risk-free asset and the risky
asset, respectively, to form a portfolio with a standard deviation of 0.08?
60% and 40%
50% and 50%
30% and 70%
Cannot be determined.
40% and 60%
1 points   
QUESTION 4
1. Use the below information to answer the following question.
Investment Expected Return E(r) Standard Deviation
1 0.12 0.13
2 0.15 0.15
3 0.21 0.16
4 0.24 0.21
2.
U = E(r)− (A/2)s2.

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 3.
Which investment would you select if you were risk neutral?
4
1
Cannot be determined from the information given.
2
3
1 points   
QUESTION 5
1. You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P,
constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and
0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01,
and Y has an expected rate of return of 0.10 and a variance of 0.0081.

If you want to form a portfolio with an expected rate of return of 0.10, what percentages
of your money must you invest in the T-bill, X, and Y, respectively, if you
keep X and Y in the same proportions to each other as in portfolio P?
0.32; 0.41; 0.27
Cannot be determined.
0.25; 0.45; 0.30
0.19; 0.49; 0.32
0.50; 0.30; 0.20
1 points   
QUESTION 6
1. Treasury bills are commonly viewed as risk-free assets because
the inflation uncertainty over their time to maturity is negligible.
their short-term nature makes their values insensitive to interest rate fluctuations, and the
inflation uncertainty over their time to maturity is negligible.
the inflation uncertainty over their time to maturity is negligible, and their term to maturity is
identical to most investors' desired holding periods.
their term to maturity is identical to most investors' desired holding periods.
their short-term nature makes their values insensitive to interest rate fluctuations.
1 points   
QUESTION 7
1. Which of the following statements is(are) true?
1. I) Risk-averse investors reject investments that are fair games.
2. II) Risk-neutral investors judge risky investments only by the expected returns.

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 3. III) Risk-averse investors judge investments only by their riskiness.
4. IV) Risk-loving investors will not engage in fair games.
5.I and II only
II only
I only
II, III, and IV only
II and III only
1 points   
QUESTION 8
1. Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky
assets (P) and T-Bills. The information below refers to these assets.
E(Rp) 12.00 %
Standard Deviation of P 7.20 %
T-Bill rate 3.60 %
Proportion of Complete Portfolio in P 80 %
Proportion of Complete Portfolio in T-Bills 20 %
Composition of P:
Stock A 40.00 %
Stock B 25.00 %
Stock C 35.00 %
Total 100.00 %
2.
What is the equation of Bo's capital allocation line?
E(rC) = 3.6 + 12.0 × Standard Deviation of P
E(rC) = 0.2 + 1.167 × Standard Deviation of P
E(rC) = 3.6 + 0.857 × Standard Deviation of P
E(rC) = 7.2 + 3.6 × Standard Deviation of P
E(rC) = 3.6 + 1.167 × Standard Deviation of P
1 points   
QUESTION 9
1. The utility score an investor assigns to a particular portfolio, other things equal,
will decrease as the variance decreases.
will decrease as the rate of return increases.
will increase as the rate of return increases.
will decrease as the standard deviation

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 decreases.
will increase as the variance increases.
1 points   
QUESTION 10
1. The riskiness of individual assets
should be considered for the asset in isolation.
should be considered in the context of the effect on overall portfolio volatility.
should be combined with the riskiness of other individual assets in the proportions these assets
constitute the entire portfolio.
should be considered in the context of the effect on overall portfolio volatility and should be
combined with the riskiness of other individual assets in the proportions these assets constitute
the entire portfolio.