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Multiple Choice Quiz
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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

Which of the following measures of risk best highlights the potential loss from extreme negative returns?
A)Standard deviation
B)Variance
C)Upper partial standard deviation
D)Value at Risk (VaR)
E)none of the above
4

Which of the following statements is true:
A)Inflation has no effect on the nominal rate of interest.
B)The realized nominal rate of interest is always positive.
C)The realized nominal rate of interest is always greater than the real rate of interest.
D)Certificates of deposit offer a guaranteed real rate of interest.
E)None of the above is true.
5

The holding period return (HPR) on a share of stock is equal to
A)the capital gain yield over the period, plus the dividend yield.
B)the capital gain yield over the period, plus the inflation rate.
C)the current yield plus the dividend yield.
D)the dividend yield plus the risk premium.
E)the change in stock price.
6

A risk-free intermediate or long-term investment
A)is free of all types of risk.
B)does guarantee the future purchasing power of its cash flows.
C)does not guarantee the future purchasing power of its cash flows as it is insured by the U.S. Treasury.
D)A and B.
E)B and C.
7

In words, the real rate of interest is approximately equal to
A)the nominal rate times the inflation rate.
B)the inflation rate minus the nominal rate.
C)the nominal rate minus the inflation rate.
D)the inflation rate divided by the nominal rate.
E)the nominal rate plus the inflation rate.
8

An investor purchased a bond 45 days ago for $895. He received $12 in interest and sold the bond for $893. What is the holding period return on his investment?
A)1.52%
B)0.50%
C)1.12%
D)0.08%
E)0.01%
9

LJP, Inc. has the following probability distribution of holding period returns on its stock.
State of EconomyProbabilityHPR
Boom.2525%
Normal Growth.4515%
Recession.309%

The expected return on LJP's stock is
A)15.7%.
B)12.4%.
C)16.5%.
D)17.8%.
E)11.6%.
10

LJP, Inc. has the following probability distribution of holding period returns on its stock.

State of EconomyProbabilityHPR
Boom.2525%
Normal Growth.4515%
Recession.309%

The expected variance of these returns is
A)66.6.
B)35.3.
C)29.4.
D)40.5.
E)none of the above





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