Question 1

In the phrase "nominal risk free rate," nominal means
A) Computed.
B) Historical.
C) Market.
D) Average.
E) Risk adverse.

Accepted Answer

Nominal in this context means the rate that is quoted in the market without adjusting for inflation. It is the actual rate that investors can observe and earn on a risk-free investment such as a government bond.

Question 2

The holding period return (HPR)is equal to the holding period yield (HPY)stated as a percentage.

Accepted Answer

False

Question 3

The arithmetic mean is a superior measure of the long-term performance because it indicates the compound annual rate of return based on the ending value of the investment versus its beginning value.

Accepted Answer

The geometric mean, not the arithmetic mean, is the superior measure for indicating the compound annual rate of return because it takes into account the effect of compounding over time, which the arithmetic mean does not.

Question 4

The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest.

Accepted Answer

The pure rate of interest is the rate at which future dollars and current dollars are exchanged, which is expressed in terms of interest rate or discount rate. Hence, the given statement is true.

Question 5

The geometric mean of a series of returns is always larger than the arithmetic mean and the difference increases with the volatility of the series.

Accepted Answer

The geometric mean of a series of returns can be smaller or larger than the arithmetic mean depending on the distribution of returns. The volatility of the series does not necessarily determine the difference between the two means.

Question 6

The coefficient of variation is a measure of
A) Central tendency.
B) Absolute variability.
C) Absolute dispersion.
D) Relative variability.
E) Relative return.

Accepted Answer

The coefficient of variation (CV) is calculated as the standard deviation divided by the mean, and it provides a measure of the relative variability or dispersion of a dataset. It is commonly used to compare the variability of datasets with different means or units of measurement. Therefore, the correct answer is that the coefficient of variation is a measure of relative variability.

Question 7

An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed,the expected rate of inflation and the uncertainty of future payments.

Accepted Answer

This definition accurately describes what an investment is and includes key factors such as time, future payments, inflation, and uncertainty.

Question 8

The risk premium is a function of the volatility of operating earnings,sales volatility and inflation.

Accepted Answer

The answer of The risk premium is a function of...

Question 9

Nominal rates are averages of all possible real rates.

Accepted Answer

Nominal rates refer to the stated or quoted interest rates, without adjusting for inflation. Real rates, on the other hand, take into account the impact of inflation on the purchasing power of money. Nominal rates are not an average of all possible real rates.

Question 10

The basic trade-off in the investment process is
A) between the anticipated rate of return for a given investment instrument and its degree of risk.
B) between understanding the nature of a particular investment and having the opportunity to purchase it.
C) between high returns available on single instruments and the diversification of instruments into a portfolio.
D) between the desired level of investment and possessing the resources necessary to carry it out.
E) None of the above.

Accepted Answer

The basic trade-off in the investment process is between the anticipated rate of return for a given investment instrument and its degree of risk. Investors need to weigh their desire for high returns against the potential risks of losing their investment. Investing in higher-risk instruments often offers the potential for higher returns, but also carries a higher risk of losing money. Lower-risk instruments, on the other hand, may offer lower returns but are less likely to result in a complete loss of investment. Finding the right balance between risk and return is essential for successful investing.

Question 11

The nominal risk free rate of interest is a function of
A) The real risk free rate and the investment's variance.
B) The prime rate and the rate of inflation.
C) The T-bill rate plus the inflation rate.
D) The tax free rate plus the rate of inflation.
E) The real risk free rate and the rate of inflation.

Accepted Answer

The nominal risk free rate of interest is influenced by two factors - the real risk free rate and the rate of inflation. The real risk free rate refers to the return investors can earn without any inflationary pressures, while inflation affects the purchasing power of money over time. Therefore, the nominal risk free rate is the sum of the real risk free rate and the expected rate of inflation. Option E is the only choice that correctly combines the two factors affecting the nominal risk free rate.

Question 12

Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest.

Accepted Answer

The answer of Investors are willing to forgo current consumption...

Question 13

The coefficient of variation is the expected return divided by the standard deviation of the expected return.

Accepted Answer

The coefficient of variation is the standard deviation of the expected return divided by the expected return.

Question 14

The variance of expected returns is equal to the square root of the expected returns.

Accepted Answer

The variance of expected returns is not equal to the square root of expected returns. The variance is a measure of the dispersion of the returns around their mean, while the square root of expected returns would give the standard deviation of expected returns, which is related to the variance but not equal to it.

Question 15

The expected return is the average of all possible returns.

Accepted Answer

The answer of The expected return is the average of...

Question 16

The rate of exchange between future consumption and current consumption is
A) The nominal risk-free rate.
B) The coefficient of investment exchange.
C) The pure rate of interest.
D) The consumption/investment paradigm.
E) The expected rate of return.

Accepted Answer

The rate of exchange between future consumption and current consumption is known as the pure rate of interest. It represents the compensation required by savers to delay their consumption or the premium that borrowers pay to obtain resources to consume or invest earlier.

Question 17

The two most common calculations investors use to measure return performance are arithmetic means and geometric means.

Accepted Answer

This is true. Arithmetic mean represents the average return over a given period of time, while geometric mean takes into account the compounding effect of returns over the same period of time. These calculations are commonly used to evaluate the performance of investments such as stocks, mutual funds, and ETFs.

Question 18

An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.

Accepted Answer

A risk averse investor prefers investments with lower risk, even if the return is lower, when compared to investments with higher risk but higher potential returns.

Question 19

Two measures of the risk premium are the standard deviation and the variance.

Accepted Answer

Standard deviation and variance measure the variability of returns, not the risk premium. The risk premium is the excess return an investor receives for holding a risky asset compared to a risk-free asset.

Question 20

The ____ the variance of returns,everything else remaining constant,the ____ the dispersion of expectations and the ____ the risk.
A) Larger, greater, lower
B) Larger, smaller, higher
C) Larger, greater, higher
D) Smaller, greater, lower
E) Smaller, greater, greater

Accepted Answer

A larger variance of returns indicates a greater dispersion of expectations and a higher level of risk.

Quiz 1: An Overview of the Investment Process

In the phrase "nominal risk free rate," nominal means