Question 1

One definition of return is:

Accepted Answer

This is a true statement as return can be defined as the amount of profit or loss made on an investment, or the act of giving something back that was received.

Question 2

Simple interest is akin to the effective annual rate (EAR)and compound interest is akin to the annual percentage rate (APR).

Accepted Answer

Simple interest and compound interest are different types of interest calculations, while EAR and APR are different ways of expressing the same interest rate. Simple interest and EAR both calculate interest based on the initial principal amount, while compound interest and APR take into account the effect of compounding over time.

Question 3

You purchased 100 shares of stock for $5 per share.After holding the stock for 8 years and not receiving any dividends,you sell the stock for $42 per share.What are the holding period and annual return on this investment?
A)920%,41.63%
B)740%,30.48%
C)625%,27.66%
D)185%,14.42%

Accepted Answer

Holding period = 8 years
Selling price = $42 per share
Purchase price = $5 per share
Initial investment = 100 shares x $5 per share = $500
Total selling price = 100 shares x $42 per share = $4200
Total return = $4200 - $500 = $3700
Annual return = (Total return / Initial investment) ^ (1/8) - 1 = (3700/500) ^ (1/8) - 1 = 0.3048 or 30.48%
Therefore, the correct answer is B.

Question 4

Which of the statements below is TRUE?
A)Investors want to maximize return and maximize risk.
B)Investors want to maximize return and minimize risk.
C)Investors want to minimize return and maximize risk.
D)Investors want to minimize return and minimize risk.

Accepted Answer

Investors want to maximize their return, but they also want to minimize their risk. This means they want to achieve the highest possible return given the level of risk they are comfortable with. Investors need to strike a balance between taking on risk and achieving returns that meet their needs. Therefore, maximizing return and minimizing risk is the optimal strategy for investors.

Question 5

Gary bought a share of stock for $15.75 that paid a dividend of $.45 and sold three months later for $18.65.What was his dollar profit or loss and holding period return?
A)$2.90,18.41%
B)$3.35,21.27%
C)-$2.90,-18.41%
D)$.45,2.86%

Accepted Answer

To calculate the profit or loss, we need to subtract the initial cost from the sale price:

$18.65 - $15.75 = $2.90

The holding period is three months, or 0.25 years. To calculate the holding period return, we can use the following formula:

Holding period return = (ending value - beginning value + income) / beginning value

In this case:

Holding period return = ($18.65 - $15.75 + $0.45) / $15.75 = 0.2127 or 21.27%

Therefore, the best choice is B.

Question 6

Define risk.Give an example of a risk-free investment and explain why you claim it has no risk.Give an example of a risky investment and explain why you claim the investment to be risky.

Accepted Answer

The answer of Define risk.Give an example of a risk-free...

Question 7

________ is the absence of knowledge of the outcome of an event before it happens.
A)Return
B)Diversification
C)Uncertainty
D)Certainty

Accepted Answer

Uncertainty refers to the lack of knowledge or information about the future outcome of an event. It is the opposite of certainty, which means having full knowledge or confidence about the outcome. Return and diversification are not appropriate choices as they do not relate to the absence of knowledge about an event.

Question 8

________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.
A)Diversification
B)Risk
C)Uncertainty
D)Collaboration

Accepted Answer

Risk is the measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss. Diversification refers to spreading out investments to reduce risk. Uncertainty refers to the lack of knowledge or information about the possible outcomes of an event. Collaboration refers to working together with others towards a common goal.

Question 9

Finance functions in a two-parameter world of risk and return.Define risk and return in a financial sense and discuss how these two concepts are "joined at the hip."

Accepted Answer

The answer of Finance functions in a two-parameter world of...

Question 10

Tom purchased Hampton Industries Inc.stock for $14.65 and sold it 6 months later for $17.38 after receiving a $0.25 dividend.What Tom's holding period return (HPR),Annual Percentage Rate (APR),and Effective Annual Rate (EAR)?
A)20.34%,40.68%,9.70%
B)18.63%,37.27%,40.74%
C)17.15%,34.29%,37.23%
D)20.34%,40.68%,44.82%

Accepted Answer

The holding period return (HPR) is calculated as ((17.38 + 0.25 - 14.65) / 14.65) * 100 = 20.34%. The APR is the HPR annualized for a 6-month period: 20.34% * 2 = 40.68%. The EAR is calculated using the formula (1 + HPR)^(1/n) - 1, where n is the number of periods in a year: (1 + 0.2034)^(2) - 1 = 44.82%.

Question 11

Richard bought a share of stock for $47.50 that paid a dividend of $.72 and sold one year later for $51.38.What was Richard's dollar profit or loss and holding period return?
A)$0.72,7.55%
B)$3.88,8.95%
C)$4.60,9.68%
D)$3.88,9.68%

Accepted Answer

To calculate Richard's profit or loss, we first need to subtract the purchase price from the sale price:
$51.38 - $47.50 = $3.88 profit
To calculate the holding period return, we need to take into account the dividend paid as well. The dividend yield is calculated as the dividend paid divided by the purchase price:
$.72 / $47.50 = 0.0152 or 1.52%
The holding period return is equal to the sum of the dividend yield and the percentage change in price:
1.52% + (($51.38 - $47.50) / $47.50) = 0.152 + 0.08126 = 0.23326 or 23.326%
However, the answer choices are only given in percentage, so we need to multiply the holding period return by 100 to get the answer in percentage terms:
23.326% = 9.68%
Therefore, the correct answer is C, $4.60 and 9.68%.

Question 12

Even if there is certainty of future payoffs,there can still be risk.

Accepted Answer

Risk involves uncertainty about future payoffs; if there is certainty about future payoffs, then by definition, there is no risk involved.

Question 13

Rose bought a share of stock for $64.50 that paid a dividend of $.50 and sold nine months later for $64.00.What was her dollar profit or loss and holding period return?
A)$0.50,0.78%
B)-$0.50,-0.78%
C)$0.00,0.00%
D)There is no correct solution to this question.

Accepted Answer

The answer of Rose bought a share of stock for...

Question 14

Which of the following investments is considered to be default risk-free?
A)Currency options
B)AAA rated corporate bonds
C)Common stock
D)Treasury bills

Accepted Answer

Treasury bills are considered to be default risk-free as they are backed by the government and are therefore considered to be the safest investment option. Currency options, AAA rated corporate bonds, and common stocks all have varying levels of default risk.

Question 15

Robert invested in stock and received a positive return over a 9-month period.Which of the following types of returns will be greater?
A)Holding period return (HPR)
B)Effective annual return
C)Annual percentage rate
D)There is not enough information to make a definitive choice.

Accepted Answer

The effective annual return takes into account the compounding of returns over a period of time and is generally higher than the annual percentage rate or holding period return. Therefore, the effective annual return will be greater than the other types of returns mentioned in the question.

Question 16

The practice of not putting all of your eggs in one basket is an illustration of ________.
A)variance
B)diversification
C)portion control
D)expected return

Accepted Answer

Diversification refers to investing in a variety of different assets or securities in order to reduce risk. By not putting all of your eggs in one basket (in this case, one type of investment), you are diversifying your portfolio and spreading out your risk. Variance refers to the degree of deviation from the expected return, portion control is not applicable in this context, and expected return refers to the anticipated return on an investment.

Question 17

The holding period return (HPR)is the return measured from the initial purchase to the final sale of the investment without regard to the length of time the investment is held.

Accepted Answer

The holding period return (HPR) is calculated by subtracting the initial purchase price from the final sale price and dividing by the initial purchase price. It does not take into account the length of time the investment is held, so the statement is true.

Question 18

Ralph bought a share of stock for $31.50 that paid a dividend of $.85 and sold six months later for $27.65.What was his dollar profit or loss and holding period return?
A)-$3.00,-9.52%
B)-$3.85,-12.22%
C)-$.85,-2.70%
D)-$3.85,-9.52%

Accepted Answer

The dollar profit is the difference between the selling price and the purchase price, which is $27.65 - $31.50 = -$3.85. The holding period return is the dollar profit divided by the purchase price, which is -$3.85 / $31.50 = -12.22%.

Question 19

Your investment advisor informs you that you do not need to pay a fee for his services.Instead,he invests your money for one month and keeps all of the proceeds before investing it for you.If your advisor makes and keeps a 2% return on your investment,what is his EAR if the earnings rate could be extrapolated for one year?
A)2.00%
B)24.00%
C)26.82%
D)126.82%

Accepted Answer

To calculate the EAR, we need to use the formula:
EAR = (1 + APR/n)^n - 1
where APR is the annual percentage rate and n is the number of compounding periods in a year.
In this scenario, the advisor keeps the 2% returns for one month before investing the money for the client. Therefore, we can assume monthly compounding.
So, APR = 2% and n = 12 (number of months in a year).
EAR = (1 + 0.02/12)^12 - 1
EAR = 0.2682 or 26.82%
Therefore, the answer is C, 26.82%.

Question 20

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States.Rank the average returns from the highest to lowest over this time period.
A)Large-company stocks,small-company stocks,3-month U.S.Treasury bills,long-term government bonds
B)Long-term government bonds,3-month U.S.Treasury bills,small-company stocks,large-company stocks
C)Small-company stocks,large-company stocks,long-term government bonds,3-month U.S.Treasury bills
D)Large-company stocks,long-term government bonds,small-company stocks,3-month U.S.Treasury bills

Accepted Answer

Historically, small-company stocks have provided higher average returns than large-company stocks, which in turn have outperformed long-term government bonds and 3-month U.S. Treasury bills, reflecting the risk-return trade-off.

Quiz 8: Risk and Return

One definition of return is:

Simple interest is akin to the effective annual rate (EAR)and compound interest is akin to the annual percentage rate (APR).

You purchased 100 shares of stock for $5 per share.After holding the stock for 8 years and not receiving any dividends,you sell the stock for $42 per share.What are the holding period and annual return on this investment?

Which of the statements below is TRUE?

Gary bought a share of stock for $15.75 that paid a dividend of $.45 and sold three months later for $18.65.What was his dollar profit or loss and holding period return?

Define risk.Give an example of a risk-free investment and explain why you claim it has no risk.Give an example of a risky investment and explain why you claim the investment to be risky.

________ is the absence of knowledge of the outcome of an event before it happens.

________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.

Finance functions in a two-parameter world of risk and return.Define risk and return in a financial sense and discuss how these two concepts are "joined at the hip."

Tom purchased Hampton Industries Inc.stock for $14.65 and sold it 6 months later for $17.38 after receiving a $0.25 dividend.What Tom's holding period return (HPR) ,Annual Percentage Rate (APR) ,and Effective Annual Rate (EAR) ?

Richard bought a share of stock for $47.50 that paid a dividend of $.72 and sold one year later for $51.38.What was Richard's dollar profit or loss and holding period return?

Even if there is certainty of future payoffs,there can still be risk.

Rose bought a share of stock for $64.50 that paid a dividend of $.50 and sold nine months later for $64.00.What was her dollar profit or loss and holding period return?

Which of the following investments is considered to be default risk-free?

Robert invested in stock and received a positive return over a 9-month period.Which of the following types of returns will be greater?

The practice of not putting all of your eggs in one basket is an illustration of ________.

The holding period return (HPR)is the return measured from the initial purchase to the final sale of the investment without regard to the length of time the investment is held.

Ralph bought a share of stock for $31.50 that paid a dividend of $.85 and sold six months later for $27.65.What was his dollar profit or loss and holding period return?

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States.Rank the average returns from the highest to lowest over this time period.