EXAM 5 PART 2
Your parents have an investment portfolio of $400,000, and they wish to take out cash flows of $50,000 per year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? Use a calculator to determine your answer.
A. 8 years
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B. 9.10 years
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C. 9.60 years
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D. 10.14 years
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What is the present value of a lottery paid as an annuity due for 20 years if the cash flows are $250,000 per year and the appropriate discount rate is 7.50%?
A. $5,000,000.00
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B. $3,186,045.39
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C. $2,739,769.55
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D. $2,548,622.84
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Which is greater, the present value of a $1,000 five-year ordinary annuity discounted at 10%, or the present value of a $1,000 five-year annuity due discounted at 10%?
A. The ordinary annuity is worth more with a present value of $3,790.79.
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B. The annuity due is worth more with a present value of $4,169.87.
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C. The ordinary annuity is worth more with a present value of $4,169.87.
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D. The annuity due is worth more with a present value of $4,586.85.
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You just won the Publisher’s Clearing House Sweepstakes and the right to 20 after-tax ordinary annuity cash flows of $163,291.18. Assuming a discount rate of 7.50%, what is the present value of your lottery winnings? Use a calculator to determine your answer.
A. $3,265,823.60
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B. $1,789,520.81
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C. $1,664,670.52
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D. There is not enough information to answer this question.
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Your department at work places $10,000 every year-end into an account earning 5%. The money is used when the corporate office fails to fully finance your profitable projects. The money has not been touched since a deposit was made exactly five years ago. If the most recent deposit was made today, how much money is currently in the account?
A. $55,256.31
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B. $60,000
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C. $65,256.31
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D. $68,019.13
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Your employer has agreed to place year-end deposits of $1,000, $2,000, and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 5% per year, how much money will you have in the account at the end of Year 3 when the last deposit is made?
A. $5,357.95
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B. $6,000
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C. $6,202.50
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D. $6,727.88
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If you borrow $50,000 at an annual interest rate of 12% for six years, what is the annual payment (prior to maturity) on an interest-only type of loan?
A. $0
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B. $6,000
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C. $8,333.33
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D. $12,161.29
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When interest rates are stated or given for loan repayments, it is assumed that they are __________ unless specifically stated otherwise.
A. daily rates
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B. annual percentage rates
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C. effective annual rates
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D. APYs
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A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates:
A. the real rate, expected inflation, and a default risk premium.
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B. expected inflation, a default risk premium, and a maturity premium.
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C. the real rate, expected inflation, and a maturity premium.
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D. The real rate, a default risk premium, and expected inflation.
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Nominal interest rates are the sum of two major components. These components are:
A. the real interest rate and expected inflation.
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B. the risk-free rate and expected inflation.
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C. the real interest rate and default premium.
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D. the real interest rate and the T-bill rate.
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We can write the true relationship between the nominal interest rate and the real rate and expected inflation as which of the following?
A. (1 + r) = (1 + r) × (1 + h*)
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B. r = (1 + r*) × (1 + h) – 1
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C. r* = (1 + r) × (1 + h) -1
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D. r = (1 + r*) × (1 + h) + 1
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Assume you just bought a new home and now have a mortgage on the home. The amount of the principal is $150,000, the loan is at 5% APR, and the monthly payments are spread out over 30 years. What is the loan payment? Use a calculator to determine your answer.
A. $798.95
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B. $805.23
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C. $850.32
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D. $903.47
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The number of periods for a consumer loan (n) is equal to the:
A. number of years times compounding periods per year.
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B. number of years.
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C. number of years in a period.
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D. number of compounding periods.
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As applied to mortgage loans, which of the following statements is FALSE?
A. Advertised rates are annual percentage rates.
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B. A spreadsheet uses the periodic interest rate, not the annual percentage rate.
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C. By increasing the number of payments per year you increase your effective borrowing rate.
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D. A mortgage problem is unlike a future value problem with an annuity.
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Which of the following statements is true?
A. By DECREASING the number of payments per year, you REDUCE your total cash outflow but INCREASE your effective borrowing rate.
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B. By INCREASING the number of payments per year, you BOOST your total cash outflow but INCREASE your effective borrowing rate.
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C. By INCREASING the number of payments per year, you REDUCE your total cash outflow but INCREASE your effective borrowing rate.
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D. By INCREASING the number of payments per year, you REDUCE your total cash outflow but DECREASE your effective borrowing rate.
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Assume that Don is 45 years old and has 20 years for saving until he retires. He expects an APR of 8.5% on his investments. How much does he need to save if he puts money away annually in equal end-of-the-year amounts to achieve a future value of $1 million in 20 years’ time?
A. $20,570.00
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B. $20,670.97
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C. $20,770.90
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D. $20,800.00
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The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are:
A. the default premium and the bankruptcy premium.
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B. the liquidity premium and the maturity premium.
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C. the default premium and the maturity premium.
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D. the inflation premium and the maturity premium.
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You put down 20% on a home with a purchase price of $300,000. The down payment is thus $60,000, leaving a balance owed of $240,000. The bank will loan you the remaining balance at 4.28% APR. You will make annual payments with a 20-year payment schedule. What is the annual annuity payment under this schedule?
A. $18,100.23
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B. $22,625.29
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C. $12,000.00
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D. $33,785.23
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If you take out a loan from a bank, you will be charged:
A. for principal but not interest.
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B. for interest but not principal.
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C. for both principal and interest.
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D. for interest only.
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Suppose you postpone consumption so that by investing at 8% you will have an extra $800 to spend in one year. Suppose that inflation is 4% during this time. What is the approximate real increase in your purchasing power?
A. $800
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B. $600
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C. $400
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D. $200
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The Fisher Effect involves which of the items below?
A. Nominal rate, the real rate, and inflation
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B. Nominal rate and the real rate only
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C. Nominal rate and inflation only
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D. Nominal rate, the bond rate, and inflation
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Which of the following statements is true?
A. On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the EAR rate.
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B. On many calculators the TVM key for interest is Y/I; this is Interest per Year, or the APR rate.
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C. On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate.
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D. On many calculators the TVM key for a period is I/Y.
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Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is true?
A. The bank is borrowing money from you without a promise to repay that money with interest.
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B. The bank is lending money to you with a promise to repay that money with interest.
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C. The bank is technically renting money from you with a promise to repay that money with interest.
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D. The bank is lending money to you, but not borrowing money from you.
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Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5%. What is your investment worth in one year?
A. $1,025.00
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B. $1,500.95
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C. $1,025.27
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D. $1,050.95
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Suppose that over the life of the loan, the total interest expense for a
monthly loan is $17,000, while the total interest payment for an annual
loan is $19,000. Which of the below statements is FALSE?
A. The difference reflects the reduction of the principal each month versus
the annual reduction of the principal.
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B. The more frequent the payment, the lower the total interest expense over
the life of the loan, even though the effective rate of the loan is higher.
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C. Reducing principal at a slower pace reduces the overall interest paid on
a loan.
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D. Reducing principal at a slower pace increases the overall interest paid
on a loan.
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Suppose you invest $2,000 today, compounded monthly, with an annual interest rate of 7.5%. What is your investment worth in one year?
A. $2,150
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B. $2,152.81
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C. $2,155.27
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D. $2,154.77
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The phrase “price to rent money” is sometimes used to refer to:
A. historical prices.
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B. compound rates.
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C. discount rates.
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D. interest rates.
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EXAM 8
Jarvis bought a share of stock for $15.75 that paid a dividend of $.45 and sold three months later for $18.65. What was his dollar profit or loss and holding period return?
A. $2.90, 18.41%
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B. $3.35, 21.27%
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C. -$2.90, -18.41%
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D. $.45, 2.86%
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The practice of not putting all of your eggs in one basket is an illustration of:
A. variance.
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B. diversification.
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C. portion control.
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D. expected return.
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The __________ is the intercept on the security market line.
A. prime rate
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B. risk-free rate
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C. market rate of return
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D. beta
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Which of the following investments is considered to be default risk-free?
A. Currency options
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B. AAA-rated corporate bonds
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C. Common stock
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D. Treasury bills
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For purposes of maximum portfolio diversification, which of the following would provide the greatest diversification?
A. Security A with a correlation coefficient of -0.0
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B. Security B with a correlation coefficient of 0.0
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C. Security C with a correlation coefficient of -0.50
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D. Security D with a correlation coefficient of 0.50
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States of the Economy
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Probability of the State
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3-Month T-Bill
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Large-Company Stock
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Small-Company Stock
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Boom
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0.3
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4
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10
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30
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Steady
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0.5
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4
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5
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20
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Recession
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0.2
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4
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0
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10
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What is the difference between the variances for large- and small-company stocks?
A. 40.25%
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B. 36.75%
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C. 27.30%
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D. 14.90%
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Which of the statements below is true?
A. Investors want to maximize return and maximize risk.
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B. Investors want to maximize return and minimize risk.
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C. Investors want to minimize return and maximize risk.
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D. Investors want to minimize return and minimize risk.
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Correlation, a standardized measure of how stocks perform relative to one another in different states of the economy, has a range from:
A. 0.0 to +10.0.
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B. 0.0 to +1.0.
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C. -1.0 to +1.0.
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D. There is no range; correlation is a calculated number that can take on any value.
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The type of risk that can be diversified away is called:
A. unsystematic risk.
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B. systematic risk.
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C. nondiversifiable risk.
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D. system-wide risk.
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__________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.
A. Diversification
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B. Risk
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C. Uncertainty
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D. Collaboration
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Which of the following statements is true about variance?
A. Variance describes how spread out a set of numbers or values are around its mean or average.
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B. Variance is essentially the variability from the average.
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C. The larger the variance, the greater the dispersion.
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D. All of the above statements are true.
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__________ is risk that cannot be diversified away.
A. Unsystematic risk
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B. Systematic risk
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C. Firm-specific risk
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D. Diversifiable risk
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Unsystematic risk:
A. is also known as nondiversifiable risk.
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B. can be diversified away.
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C. is system-wide risk.
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D. is equal to 2 times the systematic risk.
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The correlation coefficient, a measurement of the comovement between two variables, has what range?
A. From 0.0 to +10.0
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B. From 0.0 to +1.0
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C. From -1.0 to +10.0
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D. From +1.0 to -1.0
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Stocks A, B, C, and D have returns of 10%, 20%, 30%, and 40%, respectively. What is their variance?
A. 66.67%
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B. 166.67%
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C. 4.08%
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D. 2.15%
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Joe bought a share of stock for $47.50 that paid a dividend of $.72 and sold one year later for $51.38. What was Joe’s dollar profit or loss and holding period return?
A. $0.72, 7.55%
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B. $3.88, 8.95%
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C. $4.60, 9.68%
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D. $3.88, 9.68%
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Find the variance for a security that has three one-year returns of 5%, 10%, and 15%.
A. 10%
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B. 16.67%
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C. 25%
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D. 30%
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The terms __________ and __________ mean the same thing.
A. nondiversifiable risk; unsystematic risk
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B. diversifiable risk; systematic risk
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C. diversifiable risk; unsystematic risk
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D. total risk; unique risk
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Stocks A, B, C, and D have standard deviations, respectively, of 20%, 5%, 10%, and 15%. Which one is the riskiest?
A. Stock A
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B. Stock B
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C. Stock C
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D. Stock D
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Stock
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A
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B
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C
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D
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Expected Return
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5%
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5%
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7%
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6%
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Standard Deviation
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10%
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12%
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12%
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11%
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Which of the following statements is true?
A. A is a better investment than B.
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B. B is a better investment than C.
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C. C is a better investment than D.
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D. D is a better investment than C.
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