# MC Chap005 - Chapter 05 - Learning about Return and Risk...

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Chapter 05 - Learning about Return and Risk from the Historical Record Chapter 05 Learning about Return and Risk from the Historical Record 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%. Difficulty: Moderate 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. none of the above. 7% - 3% = 4%. Difficulty: Easy 7. You purchased a share of stock for \$20. One year later you received \$1 as dividend and sold the share for \$29. What was your holding period return? A. 45% B. 50% C. 5% D. 40% E. none of the above 5-1

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(\$1 + \$29 - \$20)/\$20 = 0.5000, or 50%. Difficulty: Moderate 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. none of the above 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. Difficulty: Moderate 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. III) The real rate of interest can be affected by actions of the Fed. IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation. A. I and II only. B. I and III only. C. III and IV only. D. II and III only. E. I, II, III, and IV only The expected rate of inflation is a determinant of nominal, not real, interest rates. Real rates are determined by the supply and demand for funds, which can be affected by the Fed. Difficulty: Moderate
Chapter 05 - Learning about Return and Risk from the Historical Record 12. Other things equal, an increase in the government budget deficit A. drives the interest rate down. B. drives the interest rate up. C. might not have any effect on interest rates. D. increases business prospects. E. none of the above. An increase in the government budget deficit, other things equal, causes the government to increase its borrowing, which increases the demand for funds and drives interest rates up. Difficulty: Moderate

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## This note was uploaded on 12/06/2011 for the course FINANCE EF4320 taught by Professor Wuxueping during the Spring '09 term at City University of Hong Kong.

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MC Chap005 - Chapter 05 - Learning about Return and Risk...

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