chapter5.doc

# chapter5.doc - Chapter 05 Introduction to Risk Return and...

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Chapter 05 - Introduction to Risk, Return, and the Historical Record Chapter 05 Introduction to Risk, Return, and the Historical Record Answer Key Multiple Choice Questions 1. Over the past year you earned a nominal rate of interest of 10 percent on your money. The inflation rate was 5 percent over the same period. The exact actual growth rate of your purchasing power was A. 15.5%. B. 10.0%. C. 5.0%. D. 4.8%. E. 15.0%. r = (1 + R)/(1 + I) 1; 1.10%/1.05% 1 = 4.8%. 2. Over the past year you earned a nominal rate of interest of 8 percent on your money. The inflation rate was 4 percent over the same period. The exact actual growth rate of your purchasing power was A. 15.5%. B. 10.0%. C. 3.8%. D. 4.8%. E. 15.0%. r = (1 + R)/(1 + I) 1 ; 1.08%/1.04% 1 = 3.8%. 3. A year ago, you invested \$1,000 in a savings account that pays an annual interest rate of 7%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year? A. 4%. B. 10%. C. 7%. D. 3%. E. 6%. 7% 3% = 4%. 5-1

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Chapter 05 - Introduction to Risk, Return, and the Historical Record 4. A year ago, you invested \$10,000 in a savings account that pays an annual interest rate of 5%. What is your approximate annual real rate of return if the rate of inflation was 3.5% over the year? A. 1.5%. B. 10%. C. 7%. D. 3%. E. 1%. 5% 3.5% = 1.5%. 5. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately A. 1%. B. 9%. C. 20%. D. 15%. E. 7%. 5% + 4% = 9%. 6. If the annual real rate of interest is 2.5% and the expected inflation rate is 3.7%, the nominal rate of interest would be approximately A. 3.7%. B. 6.2%. C. 2.5%. D. -1.2%. E. 4.3%. 2.5% + 3.7% = 6.2%. 7. You purchased a share of stock for \$20. One year later you received \$1 as a dividend and sold the share for \$29. What was your holding-period return? A. 45% B. 50% C. 5% D. 40% E. 32% 5-2
Chapter 05 - Introduction to Risk, Return, and the Historical Record (\$1 + \$29 \$20)/\$20 = 0.5000, or 50%. 8. You purchased a share of stock for \$30. One year later you received \$1.50 as a dividend and sold the share for \$32.25. What was your holding-period return? A. 12.5% B. 12.0% C. 13.6% D. 11.8% E. 14.1% (\$1.5 + \$32.25 \$30)/\$30 = 0.125, or 12.5%. 9. Which of the following determine(s) the level of real interest rates? I) The supply of savings by households and business firms II) The demand for investment funds III) The government's net supply and/or demand for funds A. I only B. II only C. I and II only D. I, II, and III E. III only The value of savings by households is the major supply of funds; the demand for investment funds is a portion of the total demand for funds; the government's position can be one of either net supplier, or net demander of funds. The above factors constitute the total supply and demand for funds, which determine real interest rates. 10. Which of the following statement(s) is (are) true ? I) The real rate of interest is determined by the supply and demand for funds. II) The real rate of interest is determined by the expected rate of inflation.

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