Question 1

Investments in emerging markets have higher volatility than do U.S.Stocks.

Accepted Answer

Emerging markets are considered to have higher risk and uncertainty compared to developed markets like the U.S. Therefore, investments in emerging markets tend to have higher volatility, meaning their prices fluctuate more dramatically.

Question 2

Michael Lynch invested $10,000 in the Rearguard Fund four years ago.All earnings were reinvested in the fund.If his compound annual rate of return was 7%,what is his investment worth today?
A)$1,310.80
B)$10,700
C)$12,800
D)$762.89

Accepted Answer

The answer of Michael Lynch invested $10,000 in the Rearguard...

Question 3

Arithmetic average rate of return takes compounding into effect.

Accepted Answer

The arithmetic average rate of return does not account for compounding; it simply averages the returns over a period.

Question 4

If an investor holds earns 10% on her investment in the first year and loses 10% the next year,she will have neither a gain nor a loss.

Accepted Answer

If an investor earns 10% in the first year, they will have a gain on their investment. When they lose 10% the next year, they will not be back to the same starting point as their investment will have decreased. Therefore, they will have a loss overall.

Question 5

An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.

Accepted Answer

Geometric average return takes into account the compounding effect over multiple periods, which is more relevant for long-term investors. Arithmetic average return is calculated by simply summing up the returns and dividing by the number of periods, which might not accurately reflect the actual returns earned over a longer time horizon.

Question 6

Less risky investments have lower standard deviations than do more risky investments.

Accepted Answer

Standard deviation is a measurement of volatility and risk. Therefore, investments with lower standard deviations are considered to be less risky than those with higher standard deviations.

Question 7

Use the following information to answer the following question(s).
Susan Bright will get returns of 18%,-20.3%,-14%,17.6%,and 8.3% in the next five years on her investment in CoffeeTown,Inc.stock,which she purchases for $73,419.66 today.
-What is the geometric average return on her stock if she sells it five years from today?
A)-2.33%
B).59%
C)3.67%
D)4.88%

Accepted Answer

To calculate the geometric average return, we use the formula: [(1+R1) x (1+R2) x (1+R3) x (1+R4) x (1+R5)]^(1/5) - 1
Plugging in the given returns, we get: [(1+.18) x (1-.203) x (1-.14) x (1+.176) x (1+.083)]^(1/5) - 1 = (.9950)^(1/5) - 1 = .0059
So the geometric average return is .59%, which corresponds to answer choice B.

Question 8

What is the arithmetic average return of Roddy Richard's investment?
A)2.42%
B)3.96%
C)5.18%
D)15.1%

Accepted Answer

To find the arithmetic average return, we need to add up all the returns and divide by the number of years. So, (4.5% + 5.2% + 4.0% + 2.8% + 2.6%) / 5 = 3.96%. Therefore, the best choice is B.

Question 9

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his geometric average return?
A)2.98%
B)3.73%
C)3.95%
D)There is insufficient information to derive an answer.

Accepted Answer

The geometric average return can be calculated using the formula: [(Ending Value/Beginning Value)^(1/n)] - 1, where n is the number of years. Plugging in the values: [(11396.22/9842.33)^(1/4)] - 1 = 0.0373 or 3.73%.

Question 10

Riskier investments have traditionally had lower returns than less risky investments have had.

Accepted Answer

This statement is false. Generally, riskier investments have higher potential returns to compensate investors for taking on additional risk. However, there is no guarantee that a high-risk investment will generate higher returns than a lower-risk investment, as a variety of factors can influence investment performance.

Question 11

Investors are always rewarded for taking higher risk with higher realized returns.

Accepted Answer

This statement is false as taking higher risk does not always guarantee higher realized returns. In fact, higher risk often comes with the potential for higher losses. Investment returns are affected by many factors beyond risk, such as market conditions, company performance, and economic events.

Question 12

How much money did Roddy Richards receive when he sold his shares of W.M.D.?
A)$12,014.88
B)$12,398.42
C)$13,663.47
D)$14,184.73

Accepted Answer

The answer of How much money did Roddy Richards receive...

Question 13

How much will Susan's stock be worth if she sells it five years from today?
A)$71,423.85
B)$73,419.66
C)$75,628.75
D)$80,333.40

Accepted Answer

To find Susan's stock value after 5 years, we need to use the formula: FV = PV x (1 + r)^n, where FV is future value, PV is present value, r is the interest rate (or rate of return), and n is the number of periods. Plugging in the given values, we get: FV = 50,000 x (1 + 0.048)^5 = $75,628.75. Therefore, the best choice is C.

Question 14

Historically,in the United States stocks have had higher returns and greater volatility than have government bonds.

Accepted Answer

This is a generally accepted fact within the finance industry. Stocks have historically provided higher returns than government bonds, but they also come with greater volatility and risk.

Question 15

During the financial crisis of 2007-2009,returns on real estate investment trusts (REITS)and stocks moved in opposite directions.

Accepted Answer

During the financial crisis of 2007-2009, returns on real estate investment trusts (REITs) and stocks both experienced negative returns and moved in the same direction, rather than opposite directions.

Question 16

Treasury Bills have less default risk than do Government Bonds.

Accepted Answer

Treasury Bills are short-term debts issued by the government and have a maturity of less than one year, whereas Government Bonds are long-term debts with a maturity of more than one year. Since Treasury Bills have a shorter maturity period, they have less default risk compared to Government Bonds.

Question 17

What is the geometric average return of Roddy's Richard's investment?
A)3.38%
B)4.63%
C)6.96%
D)8.78%

Accepted Answer

The geometric average return can be calculated using the formula: (1+0.035)(1+0.045)(1-0.03)^(1/3)-1 = 0.0338 or 3.38%. Therefore, choice A is the correct answer.

Question 18

Use the following information to answer the following question(s).
Susan Bright will get returns of 18%,-20.3%,-14%,17.6%,and 8.3% in the next five years on her investment in CoffeeTown,Inc.stock,which she purchases for $73,419.66 today.
-What is the arithmetic average return on her stock if she sells it five years from today?
A)1.92%
B)3.98%
C)6.47%
D)7.11%

Accepted Answer

The answer of Use the following information to answer the...

Question 19

If an investor holds a stock for three years,the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return)to the third power.

Accepted Answer

The value of a stock after three years will depend on the actual returns of the stock market during those years, which cannot be predicted with certainty. It is not guaranteed to be the initial cost times (1 + arithmetic average return) to the third power.

Question 20

Risky investments have the potential for higher returns,but also larger losses.

Accepted Answer

Investing in high-risk ventures usually comes with the potential for greater rewards, but there is also the possibility of experiencing significant losses.

Quiz 7: An Introduction to Risk and Return-History of Financial Market Returns

Investments in emerging markets have higher volatility than do U.S.Stocks.

Michael Lynch invested $10,000 in the Rearguard Fund four years ago.All earnings were reinvested in the fund.If his compound annual rate of return was 7%,what is his investment worth today?

Arithmetic average rate of return takes compounding into effect.

If an investor holds earns 10% on her investment in the first year and loses 10% the next year,she will have neither a gain nor a loss.

An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.

Less risky investments have lower standard deviations than do more risky investments.

What is the arithmetic average return of Roddy Richard's investment?

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his geometric average return?