Ch01 - The Investment Setting

Ch01 - The Investment Setting Powered by Cognero Page 1 1.Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest.

• True
• False

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

• True
• False

3.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.

• True
• False

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

• True
• False

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.

• True
• False

6.The expected return is the arithmetic average of all possible returns.

• True
• False

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

• True
• False

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

• True
• False

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

• True
• False

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

• True
• False

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

• True

Investment Analysis and Portfolio Management 12e Frank Reilly, Keith Brown, Sanford Leeds (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter 1 / 4

Name: Class: Date: Ch01 - The Investment Setting Powered by Cognero Page 2

• False

12.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.

• True
• False

13.Nominal rates are averages of all possible real rates.

• True
• False

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

• True
• False

15.The line that reflects the combination of risk and return available on alternative investments is referred to as the security market line (SML).

• True
• False

16.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.
• between understanding the nature of a particular investment and having the opportunity to purchase it.
• between the high returns available on single instruments and the diversification of instruments into a portfolio.
• between the desired level of investment and possessing the resources necessary to carry it out.
• None of these are correct.

17.The rate of exchange between future consumption and current consumption is the

• nominal risk-free rate.
• coefficient of investment exchange.
• pure rate of interest.
• consumption/investment paradigm.
• expected rate of return.

18.If a significant change is noted in the yield of a T-bill, the change is most likely attributable to a

• downturn in the economy.
• static economy.
• change in the expected rate of inflation.
• change in the real rate of interest.
• change in risk aversion.

19.The real risk-free rate is affected by two factors:

• the relative ease or tightness in capital markets and the expected rate of inflation.
• the expected rate of inflation and the set of investment opportunities available in the economy.
• the relative ease or tightness in capital markets and the set of investment opportunities available in the 2 / 4

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Ch01 - The Investment Setting

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economy.

• time preference for income consumption and the relative ease or tightness in capital markets.
• time preference for income consumption and the set of investment opportunities available in the economy.

• The ____ the variance of returns, everything else remaining constant, the ____ the dispersion of expectations and the

____ the risk.

• larger; greater; lower
• larger; smaller; higher
• larger; greater; higher
• smaller; greater; lower
• smaller; greater; greater

• The coefficient of variation is a measure of
• central tendency.
• absolute variability.
• absolute dispersion.
• relative variability.
• relative return.

• The nominal risk-free rate of interest is a function of the
• real risk-free rate and the investment’s variance.
• prime rate and the rate of inflation.
• T-bill rate plus the inflation rate.
• Tax-free rate plus the rate of inflation.
• real risk-free rate and the rate of inflation.

• Assume you bought 100 shares of NewTech common stock on January 15, 2003, at $50.00 per share and sold them on

January 15, 2004, for $40.00 per share.What was your holding period return?

• −10%
• −0.8
• 25%
• 0.8
• −20%

• Assume you bought 100 shares of NewTech common stock on January 15, 2003, at $50.00 per share and sold them on

January 15, 2004, for $40.00 per share. What was your holding period yield?

• −10%
• −0.8
• 25%
• 0.8
• −20%

• Suppose you bought a GM corporate bond on January 25, 2001, for $750 and sold it on January 25, 2004, for $650.00.

What was your annual holding period return? 3 / 4

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Ch01 - The Investment Setting

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• 0.8667
• −0.1333
• 0.0333
• 0.9534
• −0.0466

• Suppose you bought a GM corporate bond on January 25, 2001, for $750 and solid it on January 25, 2004, for

$650.00.

What was your annual holding period yield?

• −0.0466
• −0.1333
• 0.0333
• 0.3534
• 0.8667

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

• The common stock of XMen Inc. had the following historic prices.

Time Price of X-Tech

3/01/2019 50.00

3/01/2020 47.00

3/01/2021 76.00

3/01/2022 80.00

3/01/2023 85.00

3/01/2024 90.00

What was your holding period return for the time period of 3/1/2019 to 3/1/2024?

• 0.1247
• 1.8
• 0.1462
• 0.40
• 0.25

• The common stock of XMen Inc. had the following historic prices.

Time Price of X-Tech

3/01/2019 50.00

3/01/2020 47.00

3/01/2021 76.00

3/01/2022 80.00

3/01/2023 85.00

3/01/2024 90.00

What was your annual holding period yield (annual HPY)?

• 0.1462
• 0.1247
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