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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Concepts and Issues: Return, Risk and Risk Aversion

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	A year ago, you invested $2,000 in a savings account that pays an annual interest rate of 6%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?
		A)	4%.
		B)	10%.
		C)	7%.
		D)	3%.
		E)	none of the above.


2	You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $29. What was your holding period return?
		A)	45%
		B)	5%
		C)	50%
		D)	40%
		E)	none of the above


3	What has been the relationship between T-Bill rates and inflation rates throughout the 1980s and 1990s?
		A)	The T-Bill rate has equaled the inflation rate.
		B)	The T-Bill rate was sometimes higher than and sometimes lower than the inflation rate plus a constant percentage.
		C)	The inflation rate has equaled the T-Bill rate plus a constant percentage.
		D)	The T-Bill rate has been lower than the inflation rate.
		E)	The T-Bill rate has been higher than the inflation rate.


4	The holding-period return (HPR) for a stock is equal to
		A)	the real yield minus the inflation rate.
		B)	the dividend yield plus the capital gains yield.
		C)	the capital gains yield minus the tax rate.
		D)	the capital gains yield minus the dividend yield.
		E)	the nominal yield minus the real yield.


5	Which of the following statements regarding risk-averse investors is true?
		A)	They only accept risky investments that offer risk premiums over the risk-free rate.
		B)	They accept investments that are fair games.
		C)	They only care about rate of return.
		D)	They are willing to accept lower returns and high risk.
		E)	All of the above.


6	Olivia is a risk-averse investor. Alex is a less risk-averse investor than Olivia. Therefore,
		A)	for the same risk, Alex requires a higher rate of return than Olivia.
		B)	for the same return, Alex tolerates higher risk than Olivia.
		C)	for the same risk, Olivia requires a lower rate of return than Alex.
		D)	for the same return, Olivia tolerates higher risk than Alex.
		E)	cannot be determined.


7	If a T-bill pays 5 percent, which of the following investments would not be chosen by a risk-averse investor?
		A)	An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40.
		B)	An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60.
		C)	An asset that pays 10 percent with a probability of 0.30 or 3.75 percent with a probability of 0.70.
		D)	An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80
		E)	All of the above would be chosen.


8	Which one of the following statements regarding hedging is true?
		A)	Hedging is adding securities to an existing portfolio to increase the overall return.
		B)	Hedging is a strategy used by investors to reduce the risk of a portfolio.
		C)	Hedging is a strategy used by investors to increase both the risk and return of a portfolio
		D)	Hedging is a strategy used to increase portfolio volatility.
		E)	None of the above is true.


9	The presence of risk means that
		A)	More than one outcome is possible
		B)	Investors will lose money.
		C)	The standard deviation of the payoff is larger than its expected value.
		D)	Final wealth will be greater than initial wealth.
		E)	Terminal wealth will be less than initial wealth.


10	The certainty equivalent rate of a portfolio is
		A)	the rate that the investor must earn for certain to give up the use of his money.
		B)	the minimum rate guaranteed by institutions such as banks.
		C)	the rate that equates "A" in the utility function with the average risk aversion coefficient for all risk-averse investors.
		D)	the rate that a risk-free investment would need to offer with certainty to be considered equally attractive as the risky portfolio.
		E)	represented by the scaling factor "-.005" in the utility function.

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