Investments 8th Canadian Edition Test Bank

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Student: ___________________________________________________________________________

1.    Over the past year you earned a nominal rate of interest of 10 percent on your money. The inflation rate was 5 percent over the same period. The exact actual growth rate of your purchasing power was
A. 15.5%.
B. 10.0%.
C. 5.0%.
D. 4.8%.
E. 15.0%

2.    Over the past year you earned a nominal rate of interest of 8 percent on your money. The inflation rate was 4 percent over the same period. The exact actual growth rate of your purchasing power was
A. 15.5%.
B. 10.0%.
C. 3.8%.
D. 4.8%.
E. 15.0%.

3.    A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 7%. 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 these.

4.    If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately
A. 1%.
B. 9%.
C. 20%.
D. 15%.
E. none of these.

5.    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. 50%
C. 5%
D. 40%
E. none of these

6.    You purchased a share of stock for $30. One year later you received $1.50 as a dividend and sold the share for $32.25. What was your holding-period return?
A. 12.5%
B. 12.0%
C. 13.6%
D. 11.8%
E. 14.1%

7.    Which of the following determine(s) the level of real interest rates?

I) The supply of savings by households and business firms.
II) The demand for investment funds.
III) The government’s net supply and/or demand for funds.
A. I only.
B. II only.
C. I and II only.
D. I, II, and III (all of these).
E. None of these.

8.    Which of the following statement(s) is (are) true?

I) The real rate of interest is determined by the supply and demand for funds.
II) The real rate of interest is determined by the expected rate of inflation.
III) The real rate of interest can be affected by actions of the Bank of Canada.
IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation.
A. I and II only.
B. I and III only.
C. III and IV only.
D. II and III only.
E. I, II, III, and IV only.

9.    Which of the following statement(s) is (are) 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 these is true.

10.  Other things equal, an increase in the government budget deficit
A. drives the interest rate down.
B. drives the interest rate up.
C. might not have any effect on interest rates.
D. increases business prospects.
E. none of these.

11.  Ceteris paribus, a decrease in the demand for loanable funds
A. drives the interest rate down.
B. drives the interest rate up.
C. might not have any effect on interest rate.
D. results from an increase in business prospects and a decrease in the level of savings.
E. none of these.

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

13.  Historical records regarding return on stocks, bonds, and Treasury bills between 1957 and 2012 show that
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

14.  If both the interest rate paid by borrowers and the interest rate received by savers accurately reflect the realized rate of inflation:
A. borrowers gain and savers lose.
B. savers gain and borrowers lose.
C. both borrowers and savers lose.
D. neither borrowers nor savers gain or lose.
E. both borrowers and savers gain.

15.  You have been given this probability distribution for the holding period return for XYZ stock:

What is the expected holding period return for XYZ stock?
A. 11.67%
B. 8.33%
C. 10.4%
D. 12.4%
E. 7.88%

16.  You have been given this probability distribution for the holding period return for XYZ stock:

What is the expected standard deviation for XYZ stock?
A. 2.07%
B. 9.96%
C. 7.04%
D. 1.44%
E. 8.13%

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

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

18.  If the nominal return is constant, the after-tax real rate of return
A. declines as the inflation rate increases.
B. increases as the inflation rate increases.
C. increases as the inflation rate decreases.
D. a and b.
E. a and c.

19.  The risk premium for common stocks
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.  a and b.
E.  a and c.

20.  A risk-free intermediate or long-term investment
A.  is free of all types of risk.
B.  does not guarantee the future purchasing power of its cash flows.
C.  does guarantee the future purchasing power of its cash flows as it is insured by the Canadian government.
D.  a and b.
E.  b and c.

21.  If a portfolio had a return of 15%, the risk free asset return was 3%, and the standard deviation of the portfolio’s excess returns was 34%, the risk premium would be _____.
A. 31%
B. 18%
C. 49%
D. 12%
E. 29%

22.  You purchase a share of Yestel stock for $90. One year later, after receiving a dividend of $3, you sell the stock for $92. What was your holding period return?
A. 5.56%
B. 2.22%
C. 3.33%
D. 1.11%
E. 40%

23.  Toyco stock has the following probability distribution of expected prices one year from now:

If you buy Toyco today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding period return on Toyco?
A. 7.27%
B. 18.18%
C. 10.91%
D. 16.36%
E. 9.09%

24.  Which of the following factors would not be expected to affect the nominal interest rate?
A. the supply of loanable funds
B. the demand for loanable funds
C. the coupon rate on previously issued government bonds
D. the expected rate of inflation
E. government spending and borrowing

25.  If a portfolio had a return of 10%, the risk free asset return was 4%, and the standard deviation of the portfolio’s excess returns was 25%, the risk premium would be _____.
A. 14%
B. 6%
C. 35%
D. 21%
E. 29%

26.  Your Certificate of Deposit will mature in one week and you are considering how to invest the proceeds. If you invest in a 30-day CD the bank will pay you 4%. If you invest in a 2-year CD the bank will pay you 6% interest. Which option would you choose?
A. the 30-day CD, no matter what you expect interest rates to do in the future
B. the 2-year CD, no matter what you expect interest rates to do in the future
C. the 30-day CD if you expect that interest rates will fall in the future
D. the 2-year CD if you expect that interest rates will fall in the future
E. You would be indifferent between the 30-day and the 2-year CDs.

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

28.  If the Bank of Canada lowers the discount rate, ceteris paribus, the equilibrium levels of funds lent will __________ and the equilibrium level of real interest rates will ___________
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
E. reverse direction from their previous trends

29.  What has been the relationship between T-Bill rates and inflation rates throughout the 1980s and 1990s?
A. The T-Bill rate was sometimes higher than and sometimes lower than the inflation rate.
B. The T-Bill rate has equaled 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 higher than the inflation rate.
E. The T-Bill rate has been lower than the inflation rate.

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

31.  An investor purchased a bond 45 days ago for $985. He received $15 in interest and sold the bond for $980. What is the holding period return on his investment?
A. 1.52%
B. 0.50%
C. 1.02%
D. 0.01%
E. 0.10%

32.  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 these

33.  An investor purchased a bond 63 days ago for $980. He received $17 in interest and sold the bond for $987. What is the holding-period return on his investment?
A. 1.52%
B. 2.45%
C. 1.92%
D. 2.68%
E. 3.28%

34.  Over the past year you earned a nominal rate of interest of 8 percent on your money. The inflation rate was 3.5 percent over the same period. The exact actual growth rate of your purchasing power was
A. 15.55%.
B. 4.35%.
C. 5.02%.
D. 4.81%.
E. 15.04%.