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Unformatted text preview: CHAPTER 1 THE INVESTMENT SETTING TRUE/FALSE QUESTIONS (t) 1 The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest. (t) 2 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. (f) 3 The holding period return (HPR) is equal to the holding period yield (HPY) stated as a percentage. (f) 4 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. (f) 5 The expected return is the average of all possible returns. (f) 6 Two measures of the risk premium are the standard deviation and the variance. (f) 7 The variance of expected returns is equal to the square root of the expected returns. (f) 8 The coefficient of variation is the expected return divided by the standard deviation of the expected return. (f) 9 Nominal rates are averages of all possible real rates. (f) 10 The risk premium is a function of the volatility of operating earnings, sales volatility and inflation. MULTIPLE CHOICE QUESTIONS (a) 1 The basic tradeoff 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. (c) 2 The rate of exchange between future consumption and current consumption is a) The nominal riskfree rate. b) The coefficient of investment exchange. c) The pure rate of interest. d) The consumption/investment paradigm. e) The expected rate of return. (c) 3 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 (d) 4 The coefficient of variation is a measure of a) Central tendency. b) Absolute variability. c) Absolute dispersion. d) Relative variability. e) Relative return. (e) 5 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 Tbill 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....
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 Fall '11
 lee
 Interest

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