Multiple Choice Questions
1. You put up $50 at the beginning of the year for an investment. The value of the investment
grows 4% and you earn a dividend of $3.50. Your HPR was ____.
A. 4%
B. 3.5%
C. 7%
D. 11%
Answer: D. 11%
2. The ______ measure of returns ignores compounding.
A. geometric average
B. arithmetic average
C. IRR
D. dollar-weighted
Answer: B. arithmetic average
3. If you want to measure the performance of your investment in a fund, including the timing
of your purchases and redemptions, you should calculate the __________.
A. geometric average return
B. arithmetic average return
C. dollar-weighted return
D. index return
Answer: C. dollar-weighted return
4. Which one of the following measures time-weighted returns and allows for compounding?
A. Geometric average return
B. Arithmetic average return
C. Dollar-weighted return
D. Historical average return
Answer: A. Geometric average return
5. Rank the following from highest average historical return to lowest average historical
return from 1926 to 2010.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
A. I, II, III, IV
B. III, IV, II, I
C. I, III, II, IV
D. III, I, II, IV
Answer: C. I, III, II, IV
6. Rank the following from highest average historical standard deviation to lowest average
historical standard deviation from 1926 to 2010.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
A. I, II, III, IV
B. III, IV, II, I
C. I, III, II, IV
D. III, I, II, IV
Answer: C. I, III, II, IV
7. You have calculated the historical dollar-weighted return, annual geometric average return,
and annual arithmetic average return. If you desire to forecast performance for next year, the
best forecast will be given by the ________.
A. dollar-weighted return
B. geometric average return
C. arithmetic average return
D. index return
Answer: C. arithmetic average return
8. The complete portfolio refers to the investment in _________.
A. the risk-free asset
B. the risky portfolio
C. the risk-free asset and the risky portfolio combined
D. the risky portfolio and the index
Answer: C. the risk-free asset and the risky portfolio combined
9. You have calculated the historical dollar-weighted return, annual geometric average return,
and annual arithmetic average return. You always reinvest your dividends and interest earned
on the portfolio. Which method provides the best measure of the actual average historical
performance of the investments you have chosen?
A. Dollar-weighted return
B. Geometric average return
C. Arithmetic average return
D. Index return
Answer: B. Geometric average return
10. The holding period return on a 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
Answer: B. the capital gain yield over the period plus the dividend yield
11. Your timing was good last year. You invested more in your portfolio right before prices
went up, and you sold right before prices went down. In calculating historical performance
measures, which one of the following will be the largest?
A. Dollar-weighted return
B. Geometric average return
C. Arithmetic average return
D. Mean holding-period return
Answer: A. Dollar-weighted return
12. Published data on past returns earned by mutual funds are required to be ______.
A. dollar-weighted returns
B. geometric returns
C. excess returns
D. index returns
Answer: B. geometric returns
13. The arithmetic average of -11%, 15%, and 20% is ________.
A. 15.67%
B. 8%
C. 11.22%
D. 6.45%
Answer: B. 8%
14. The geometric average of -12%, 20%, and 25% is _________.
A. 8.42%
B. 11%
C. 9.7%
D. 18.88%
Answer: C. 9.7%
[(1 + -.12)(1 + .20)(1 + .25)]1/3 - 1 = 9.70%
15. The dollar-weighted return is the _________.
A. difference between cash inflows and cash outflows
B. arithmetic average return
C. geometric average return
D. internal rate of return
Answer: D. internal rate of return
16. An investment earns 10% the first year, earns 15% the second year, and loses 12% the
third year. The total compound return over the 3 years was ______.
A. 41.68%
B. 11.32%
C. 3.64%
D. 13%
Answer: B. 11.32%
(1.10)(1.15)(1 - .12) - 1 = 11.32%
17. Annual percentage rates can be converted to effective annual rates by means of the
following formula:
A. [1 + (APR/n)]n - 1
B. (APR)(n)
C. (APR/n)
D. (periodic rate)(n)
Answer: A. [1 + (APR/n)]n - 1
18. Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the
holding-period return for this investment?
A. 3.01%
B. 3.09%
C. 12.42%
D. 16.71%
Answer: B. 3.09%
19. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the
annual percentage rate of return for this investment?
A. 2.04%
B. 12 %
C. 12.24%
D. 12.89%
Answer: C. 12.24%
20. Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the
effective annual rate of return for this investment?
A. 6.38%
B. 12.77%
C. 13.17%
D. 14.25%
Answer: C. 13.17%
21. You have an APR of 7.5% with continuous compounding. The EAR is _____.
A. 7.5%
B. 7.65%
C. 7.79 %
D. 8.25%
Answer: C. 7.79 %
EAR = e.075 - 1 = 7.79%
22. You have an EAR of 9%. The equivalent APR with continuous compounding is _____.
A. 8.47%
B. 8.62%
C. 8.88%
D. 9.42%
Answer: B. 8.62%
LN[1 + .09] = 8.62%
23. The market risk premium is defined as __________.
A. the difference between the return on an index fund and the return on Treasury bills
B. the difference between the return on a small-firm mutual fund and the return on the
Standard & Poor's 500 Index
C. the difference between the return on the risky asset with the lowest returns and the return
on Treasury bills
D. the difference between the return on the highest-yielding asset and the return on the
lowest-yielding asset
Answer: A. the difference between the return on an index fund and the return on Treasury
bills
24. The excess return is the _________.
A. rate of return that can be earned with certainty
B. rate of return in excess of the Treasury-bill rate
C. rate of return to risk aversion
D. index return
Answer: B. rate of return in excess of the Treasury-bill rate
25. The rate of return on _____ is known at the beginning of the holding period, while the rate
of return on ____ is not known until the end of the holding period.
A. risky assets; Treasury bills
B. Treasury bills; risky assets
C. excess returns; risky assets
D. index assets; bonds
Answer: B. Treasury bills; risky assets
26. The reward-to-volatility ratio is given by _________.
A. the slope of the capital allocation line
B. the second derivative of the capital allocation line
C. the point at which the second derivative of the investor's indifference curve reaches zero
D. the portfolio's excess return
Answer: A. the slope of the capital allocation line
27. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of
earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on
this investment?
A. 12.8%
B. 11%
C. 8.9%
D. 9.2%
Answer: D. 9.2%
(.2)(30%) + (.5)(10%) + (.3)(-6%) = 9.2%
28. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of
earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation
of this investment?
A. 5.14%
B. 7.59%
C. 9.29%
D. 8.43%
Answer: A. 5.14%
29. During the 1926-2010 period the geometric mean return on small-firm stocks was ______.
A. 5.31%
B. 5.56%
C. 9.34%
D. 11.80%
Answer: D. 11.80%
30. During the 1926-2010 period the geometric mean return on Treasury bonds was
_________.
A. 5.12%
B. 5.56%
C. 9.34%
D. 11.43%
Answer: A. 5.12%
31. During the 1926-2010 period the Sharpe ratio was greatest for which of the following
asset classes?
A. Small U.S. stocks
B. Large U.S. stocks
C. Long-term U.S. Treasury bonds
D. Bond world portfolio return in U.S. dollars
Answer: B. Large U.S. stocks
32. During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset
classes?
A. Small U.S. stocks
B. Large U.S. stocks
C. Long-term U.S. Treasury bonds
D. Equity world portfolio in U.S. dollars
Answer: C. Long-term U.S. Treasury bonds
33. During the 1926-2010 period which one of the following asset classes provided the lowest
real return?
A. Small U.S. stocks
B. Large U.S. stocks
C. Long-term U.S. Treasury bonds
D. Equity world portfolio in U.S. dollars
Answer: C. Long-term U.S. Treasury bonds
34. Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor _______.
A. is normally risk neutral
B. requires a risk premium to take on the risk
C. knows he or she will not lose money
D. knows the outcomes at the beginning of the holding period
Answer: B. requires a risk premium to take on the risk
35. Historical returns have generally been __________ for stocks of small firms as (than) for
stocks of large firms.
A. the same
B. lower
C. higher
D. none of these options (There is no evidence of a systematic relationship between returns on
small-firm stocks and returns on large-firm stocks.)
Answer: C. higher
36. Historically, small-firm stocks have earned higher returns than large-firm stocks. When
viewed in the context of an efficient market, this suggests that ___________.
A. small firms are better run than large firms
B. government subsidies available to small firms produce effects that are discernible in stock
market statistics
C. small firms are riskier than large firms
D. small firms are not being accurately represented in the data
Answer: C. small firms are riskier than large firms
37. In calculating the variance of a portfolio's returns, squaring the deviations from the mean
results in:
I. Preventing the sum of the deviations from always equaling zero
II. Exaggerating the effects of large positive and negative deviations
III. A number for which the unit is percentage of returns
A. I only
B. I and II only
C. I and III only
D. I, II, and III
Answer: B. I and II only
38. If you are promised a nominal return of 12% on a 1-year investment, and you expect the
rate of inflation to be 3%, what real rate do you expect to earn?
A. 5.48%
B. 8.74%
C. 9%
D. 12%
Answer: B. 8.74%
Real rate = (1.12/1.03) - 1 = 8.74%
39. If you require a real growth in the purchasing power of your investment of 8%, and you
expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that
you would be satisfied with?
A. 3%
B. 8%
C. 11%
D. 11.24%
Answer: D. 11.24%
Nominal rate = (1.08)(1.03) - 1 = 11.24%
40. One method of forecasting the risk premium is to use the _______.
A. coefficient of variation of analysts' earnings forecasts
B. variations in the risk-free rate over time
C. average historical excess returns for the asset under consideration
D. average abnormal return on the index portfolio
Answer: C. average historical excess returns for the asset under consideration
41. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of
A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the
risky portfolio's expected return is at least ______.
A. 8.67%
B. 9.84%
C. 21.28%
D. 14.68%
Answer: C. 21.28%
42. In the mean standard deviation graph, the line that connects the risk-free rate and the
optimal risky portfolio, P, is called the _________.
A. capital allocation line
B. indifference curve
C. investor's utility line
D. security market line
Answer: A. capital allocation line
43. Most studies indicate that investors' risk aversion is in the range _____.
A. 1-3
B. 1.5-4
C. 3-5.2
D. 4-6
Answer: B. 1.5-4
44. Two assets have the following expected returns and standard deviations when the risk-free
rate is 5%:
An investor with a risk aversion of A = 3 would find that _________________ on a riskreturn basis.
A. only asset A is acceptable
B. only asset B is acceptable
C. neither asset A nor asset B is acceptable
D. both asset A and asset B are acceptable
Answer: C. neither asset A nor asset B is acceptable
Based on the relationship:
The minimum acceptable return is given by:
For A:
For B:
45. Historically, the best asset for the long-term investor wanting to fend off the threats of
inflation and taxes while making his money grow has been ____.
A. Stocks
B. Bonds
C. Money market funds
D. Treasury bills
Answer: A. Stocks
46. The formula
is used to calculate the _____________.
A. Sharpe ratio
B. Treynor measure
C. Coefficient of variation
D. Real rate of return
Answer: A. Sharpe ratio
47. A portfolio with a 25% standard deviation generated a return of 15% last year when Tbills were paying 4.5%. This portfolio had a Sharpe ratio of ____.
A. .22
B. .60
C. .42
D. .25
Answer: C. .42
48. Consider a Treasury bill with a rate of return of 5% and the following risky securities:
Security A: E(r) = .15; variance = .0400
Security B: E(r) = .10; variance = .0225
Security C: E(r) = .12; variance = .1000
Security D: E(r) = .13; variance = .0625
The investor must develop a complete portfolio by combining the risk-free asset with one of
the securities mentioned above. The security the investor should choose as part of her
complete portfolio to achieve the best CAL would be _________.
A. security A
B. security B
C. security C
D. security D
Answer: A. security A
A has the steepest slope, found as: Slope = (.15 - .05)/(.04).5 = .5000
49. You purchased a share of stock for $29. One year later you received $2.25 as dividend and
sold the share for $28. Your holding-period return was _________.
A. -3.57%
B. -3.45%
C. 4.31%
D. 8.03%
Answer: C. 4.31%
50. Security A has a higher standard deviation of returns than security B. We would expect
that:
I. Security A would have a higher risk premium than security B.
II. The likely range of returns for security A in any given year would be higher than the likely
range of returns for security B.
III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Answer: B. I and II only
51. The holding-period return on a stock was 25%. Its ending price was $18, and its beginning
price was $16. Its cash dividend must have been _________.
A. $.25
B. $1
C. $2
D. $4
Answer: C. $2
HPR = (P1 + DIV - P0)/P0
HPR × P0 = P1 + DIV - P0
HPR × P0 - P1 + P0 = DIV
.25 × $16 - $18 + $16 = $2
52. An investor invests 70% of her wealth in a risky asset with an expected rate of return of
15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's
expected rate of return and standard deviation are __________ and __________ respectively.
A. 10%; 6.7%
B. 12%; 22.4%
C. 12%; 15.7%
D. 10%; 35%
Answer: C. 12%; 15.7%
53. The holding-period return on a stock was 32%. Its beginning price was $25, and its cash
dividend was $1.50. Its ending price must have been _________.
A. $28.50
B. $33.20
C. $31.50
D. $29.75
Answer: C. $31.50
HPR = (P1 + DIV - P0)/P0
HPR × P0 = P1 + DIV - P0
P1 = HPR × P0 - DIV + P0
P1 =.32 × $25 - $1.50 + 25 = $31.50
54. Consider the following two investment alternatives: First, a risky portfolio that pays a
15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%.
Second, a Treasury bill that pays 6%. The risk premium on the risky investment is
_________.
A. 1%
B. 3%
C. 6%
D. 9%
Answer: B. 3%
Risk premium = [.4(.15) + .6(.05)] - .06 = .03
55. Consider the following two investment alternatives: First, a risky portfolio that pays a
20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%.
Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your
expected profit would be _________.
A. $3,000
B. $7,000
C. $7,500
D. $10,000
Answer: B. $7,000
Ending value = $50,000(1.14) = $57,000
Profit = $57,000 - 50,000 = $7,000
56. You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury
bill with a rate of return of 5%. How much money should be invested in the risky asset to
form a portfolio with an expected return of 11%?
A. $6,000
B. $4,000
C. $7,000
D. $3,000
Answer: A. $6,000
15y + 5(1 - y) = 11; y = 60%; .60(10,000) = $6,000
57. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury
bill with a rate of return of 6%. __________ of your complete portfolio should be invested in
the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.
A. 100%
B. 90%
C. 45%
D. 10%
Answer: C. 45%
σC = y × σp
9% = y × 20%
y = 9/20 = 45%
58. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury
bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100
could be formed if you _________.
A. place 40% of your money in the risky portfolio and the rest in the risk-free asset
B. place 55% of your money in the risky portfolio and the rest in the risk-free asset
C. place 60% of your money in the risky portfolio and the rest in the risk-free asset
D. place 75% of your money in the risky portfolio and the rest in the risk-free asset
Answer: A. place 40% of your money in the risky portfolio and the rest in the risk-free asset
$1,100 = y × (1,000)(1.16) + (1 - y)1,000(1.06), so y =.4
59. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury
bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky
asset and the risk-free asset is approximately _________.
A. 1.040
B. .80
C. .50
D. .25
Answer: C. .50
Slope = (16 - 6)/20 = .50
60. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate,
is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should
_________.
A. invest $125,000 in the risk-free asset
B. invest $375,000 in the risk-free asset
C. borrow $125,000
D. borrow $375,000
Answer: D. borrow $375,000
y × .16 + (1 - y) × .08 = .22
.16 y - .08 y + .08 = .22
.08 y = .14
y = 1.75
Put 1.75 × $500,000 = $875,000 in the risky asset by borrowing $375,000.
61. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's
borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the
standard deviation on the complete portfolio is 25%, the expected return on the complete
portfolio is _________.
A. 6%
B. 8.75 %
C. 10%
D. 16.25%
Answer: D. 16.25%
σC = y × σp = .25
σC = y × .20 = .25
y = .25/.20 = 1.25
1 - y = -.25
E(rC) = 1.25 × 15% - .25 × 10% = 16.25%
62. You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky
securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X
has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a
complete portfolio with an expected rate of return of 11%, you should invest __________ of
your complete portfolio in Treasury bills.
A. 19%
B. 25%
C. 36%
D. 50%
Answer: A. 19%
63. You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky
securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X
has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a
complete portfolio with an expected rate of return of 8%, you should invest approximately
__________ in the risky portfolio. This will mean you will also invest approximately
__________ and __________ of your complete portfolio in security X and Y, respectively.
A. 0%; 60%; 40%
B. 25%; 45%; 30%
C. 40%; 24%; 16%
D. 50%; 30%; 20%
Answer: C. 40%; 24%; 16%
E(rp) = .6(14) + .4(10) = 12.4%
.08 = wrp(.124) + (1 - wrp)(.05)
wrp ≈ 40%
wx in complete portfolio = .40(.60) = 24%
wy in complete portfolio = .40(.40) = 16%
64. You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky
securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X
has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you
decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury
bills, then the dollar values of your positions in X and Y, respectively, would be __________
and _________.
A. $300; $450
B. $150; $100
C. $100; $150
D. $450; $300
Answer: B. $150; $100
X = 1,000(.25)(.6) = 150
Y = 1,000(.25)(.4) = 100
65. You are considering investing $1,000 in a complete portfolio. The complete portfolio is
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky
securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X
has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar
values of your positions in X, Y, and Treasury bills would be _________, __________, and
__________, respectively, if you decide to hold a complete portfolio that has an expected
return of 8%.
A. $162; $595; $243
B. $243; $162; $595
C. $595; $162; $243
D. $595; $243; $162
Answer: B. $243; $162; $595
66. You have the following rates of return for a risky portfolio for several recent years:
If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be
worth ___________.
A. $2,176.60
B. $1,785.56
C. $1,645.53
D. $1,247.87
Answer: B. $1,785.56
$1,000(1.3523)(1.1867)(1 + -.0987)(1.2345) = $1,785.56
67. You have the following rates of return for a risky portfolio for several recent years:
The annualized (geometric) average return on this investment is _____.
A. 16.15%
B. 16.87%
C. 21.32%
D. 15.60%
Answer: D. 15.60%
(1.17856)1/4 - 1 = 15.60%
68. A security with normally distributed returns has an annual expected return of 18% and
standard deviation of 23%. The probability of getting a return between -28% and 64% in any
one year is _____.
A. 68.26%
B. 95.44%
C. 99.74%
D. 100%
Answer: B. 95.44%
Note that the expected return minus 2 standard deviations is 18% - (2 × 23%) = -28% and the
expected return plus 2 standard deviations is 18% + (2 × 23%) = 64%. The probability of a
return falling within ± 2 standard deviations is 95.44%.
69. The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%.
The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?
A. .8
B. .6
C. 9
D. 1
Answer: B. .6
(16 - 4)/20 = .6
70. From 1926 to 2010 the world stock portfolio offered _____ return and _____ volatility
than the portfolio of large U.S. stocks.
A. lower; higher
B. lower; lower
C. higher; lower
D. higher; higher
Answer: B. lower; lower
71. The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If
the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for
the year?
A. -3.64%
B. -6.36%
C. -6.44%
D. -11.74%
Answer: C. -6.44%
Nominal return on stock: (50 + 3)/55 - 1 = -3.64%
Real return: (1 + R) = (1 + r)(1 + i)
1 + r = (1 - .0364)/(1.03) = .935
R = .935 - 1 = -.0644
72. The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If
the stock paid a $2.50 dividend, what is the holding-period return for the year?
A. 6.58%
B. 8.86%
C. 14.47%
D. 18.66%
Answer: C. 14.47%
HPR = (41 - 38 + 2.50)/38 = .1447
73. You invest all of your money in 1-year T-bills. Which of the following statements is (are)
correct?
I. Your nominal return on the T-bills is riskless.
II. Your real return on the T-bills is riskless.
III. Your nominal Sharpe ratio is zero.
A. I only
B. I and III only
C. II only
D. I, II, and III
Answer: B. I and III only
74. Which one of the following would be considered a risk-free asset in real terms as opposed
to nominal?
A. Money market fund
B. U.S. T-bill
C. Short-term corporate bonds
D. U.S. T-bill whose return was indexed to inflation
Answer: D. U.S. T-bill whose return was indexed to inflation
75. What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and
7%?
A. 3.72%
B. 4.23%
C. 4.74%
D. 4.90%
Answer: C. 4.74%
Return = (1.03 × 1.04 × 1.05 × 1.07).25 - 1 = .0474
76. What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%,
and 12%?
A. 8%
B. 8.33 %
C. 8.47%
D. 8.5 %
Answer: C. 8.47%
Return = (1.05 × 1.08 × 1.09 × 1.12).25 - 1 = .0847
77. If the nominal rate of return on investment is 6% and inflation is 2% over a holding
period, what is the real rate of return on this investment?
A. 3.92%
B. 4%
C. 4.12%
D. 6%
Answer: A. 3.92%
1 + r = (1 + R)/(1 + i) - 1
1 + r = 1.06/1.02 - 1 = .0392
78. According to historical data, over the long run which of the following assets has the best
chance to provide the best after-inflation, after-tax rate of return?
A. Long-term Treasury bonds
B. Corporate bonds
C. Common stocks
D. Preferred stocks
Answer: C. Common stocks
79. The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR
on the loan?
A. .50%
B. 5%
C. 6%
D. 6.5%
Answer: C. 6%
APR = .5% × 12 = 6%
80. A loan for a new car costs the borrower .8% per month. What is the EAR?
A. .80%
B. 6.87%
C. 9.6%
D. 10.03%
Answer: D. 10.03%
1.00812 - 1 = 10.03%
81. The CAL provided by combinations of 1-month T-bills and a broad index of common
stocks is called the ______.
A. SML
B. CAPM
C. CML
D. total return line
Answer: C. CML
82. Which of the following arguments supporting passive investment strategies is (are)
correct?
I. Active trading strategies may not guarantee higher returns but guarantee higher costs.
II. Passive investors can free-ride on the activity of knowledge investors whose trades force
prices to reflect currently available information.
III. Passive investors are guaranteed to earn higher rates of return than active investors over
sufficiently long time horizons.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Answer: B. I and II only
83. You have the following rates of return for a risky portfolio for several recent years.
Assume that the stock pays no dividends.
What is the geometric average return for the period?
A. 2.87%
B. .74%
C. 2.6%
D. 2.21%
Answer: C. 2.6%
[(1.10)(1 + -.0727)(1.0588)]⅓ - 1 = 2.60%
84. You have the following rates of return for a risky portfolio for several recent years.
Assume that the stock pays no dividends.
What is the dollar-weighted return over the entire time period?
A. 2.87%
B. .74%
C. 2.6%
D. 2.21%
Answer: B. .74%
IRR = .744%
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
