Q&A Hero

Q: Which of the following would be considered a random variable: a. expected value. b. correlation coefficient between two assets c. one-period rate of return for an asset. d. beta.

Q: -------------------is concerned with the interrelationships between security returns as well as the expected returns and variances of those returns.random diversification.correlating diversificationFriedman diversificationMarkowitz diversification

Q: The expected value is the:inverse of the standard deviationcorrelation between a security's risk and return.weighted average of all possible outcomes.same as the discrete probability distribution.

Q: With a continuous probability distribution,: a. a probability is assigned to each possible outcome. b. possible outcomes are constantly changing. c. an infinite number of possible outcomes exist. d. there is no variance.

Q: What is the present value of $20,000 to be received in 40 years if the interest rate is 9 percent?

Q: If you deposit $1,000 today at 12 percent, how much will you have in 10 years?

Q: John Crossborder buys 1 share of Telmex at 140 pesos when the value of the peso is stated in dollars at $0.35. One year later, Telmex is selling for 155 pesos and paid a dividend of 5 pesos during the year. If after 1 year the value of the pesos is $0.29, what will John's rate of return be in U. S. dollars?

Q: Calculate the future value of $100,000 at the end of 64 years given an interest rate of 10.38 percent.

Q: The S&P 500 showed the following TRs for a 6 year period: 11.1 percent, -5.2 percent, 20.3 percent, 26.7 percent, -14 percent, and 2 percent. (a) Calculate the arithmetic mean return for the 6 year period. (b) Calculate the geometric mean return for the 6 year period.

Q: A stock is purchased for $50 on January 1 and sold on December 31 for $72. A $5.00 per share dividend is paid during the year. (a) Calculate the TR. (b) Calculate the RR.

Q: What is the major drawback of the total return measure? Why is it the most common return calculation used by investors?

Q: The returns and risk measures on this chapter are calculated from historical data. Are such measures good predictors of the future? What are some circumstances that could change to change future return and risk? How can an investor use these return and risk measures to help construct a portfolio?

Q: CFt + (PE - PB) CFt + PC TR = -------------- = --------- PB PB where CFt = ______________________________________________ PE = ______________________________________________ PB = ______________________________________________ PC = ______________________________________________

Q: What was the effect on foreign investors owning U.S. stocks when the dollar fell in 2002?

Q: What is the best measure of risk for returns of a sole proprietorship?

Q: When should an investor use the arithmetic mean return? The geometric mean return?

Q: What common variable is used in the calculation of both the cumulative wealth index and the geometric mean return? How is the common variable calculated? How is it used in each?

Q: Both present value and future value are based upon the concept of the time value of money.

Q: Assume you are a U. S. citizen who purchases $20,000 worth of bonds of the Deep Shaft Mining Company in Kenya. What sources of risk can you identify with this investment?

Q: The standard deviation of returns, calculated as the square root of the variance of returns, is a measure of total risk of an asset or portfolio.

Q: The most common measure of inflation is the Producer Price Index.

Q: Holding interest rates constant, a narrowing of the equity risk premium implies a decline in the rate of return on stocks because the amount earned beyond the risk-free rate is reduced.

Q: A Chinese stock denominated in Chinese yuan will have an increase in its dollar-denominated return if the Chinese yuan strengthens against the dollar.

Q: International mutual funds offer investors global diversification without exchange rate risk.

Q: As the dollar falls, a. foreign investors owning U.S. stocks suffer. b. U.S. investors owning U.S. stocks suffer. c. U.S. investors owning foreign stocks suffer. d. foreign investors owning foreign stocks suffer.

Q: If you invest in German bonds and the Euro becomes stronger during your holding period, then: a. you will be able to buy back fewer dollars when you redeem your bond or it matures b. your dollar-denominated return will increase c. your-dollar denominated return will decrease d. your return will be the interest you receive

Q: A number of prominent observers expect the equity risk premium in the future to be:Considerably lower than that of the pastConsiderably higher than that of the pastVery similar to the historical averageNo change is expected from recent years

Q: Over the period 1926-2007, which of the following financial assets showed the greatest amount of price volatility, as measured by standard deviation?Small-cap stocksLarge-cap stocksTreasury bondsTreasury bills

Q: Present value is based on the concept of:compoundingsystematic riskdurationdiscounting

Q: The standard deviation measures:systematic risk of a security.unsystematic risk of a security.total risk of a security.the equity risk premium.

Q: Which of the following statements concerning the equity risk premium is true?Some scholars think it is too lowThere is no direct way to measure itIt predicts high future returns on stocksIt is expected to increase in the future

Q: The equity risk premium is:the difference between the expected return on stocks and bondsthe difference between the expected return on high-grade stocks and low-grade stocksthe difference between the expected return on stocks and the risk-free ratethe difference between the expected return on a stock market index and the inflation rate

Q: Which of the following statements regarding the arithmetic mean and the geometric mean is true? a. The arithmetic mean is always a better measure of average performance b. The geometric mean is always a better measure of average performance c. The arithmetic mean is a better measure of performance over single periods d. The geometric mean is the best estimate of the expected return for the next period

Q: When most people refer to mean rate of return, they are referring to the: a. holding period rate of return b. arithmetic average rate of return c. geometric average rate of return d. cumulative average rate of return

Q: A major difference between real and nominal returns is that:real returns adjust for inflation and nominal returns do notreal returns use actual cashflows and nominal returns use expected cashflowsreal returns adjust for commissions and nominal returns do notreal returns show the highest possible return and nominal returns show the lowest possible return

Q: In order to determine the compound growth rate of an investment over some period, an investor would calculate the:arithmetic meangeometric meancalculus meanarithmetic median

Q: If the Dow Jones Industrials had a price appreciation of 6 percent one year and yet total return for the year was 9 percent, the difference would be due to: a. the tax treatment of capital gains. b. the cumulative wealth effect. c. dividends. d. profits.

Q: The return relative solves the problem of: a. inflation b negative returns c. interest rates d. tax differences

Q: The ----------- is 1 plus the total return.arithmetic meanreturn relativecumulative wealth indexgeometric mean

Q: Total return as defined in the text is:the difference between the sale price and the purchase price of an investment.measured by dividing the sum of all cash flows received by the amount invested.the reciprocal of a return relative.measured by dividing all cash flows received by its selling price.

Q: Which of the following is true regarding the cumulative wealth index? It:is measured by adding up the total returns over the holding period and dividing by the investmentuses a beginning index value (often set to $1 but it can be set to any amount)is the present value of the future cash flows expected from the investmentuses the arithmetic mean as the rate of growth of one's wealth

Q: The best return measure to use if you are trying to measure the total effect of returns over time given some stated beginning amount is the:total returnreturn relativecumulative wealth indextotal yield

Q: If interest rates rose, you would expect ------------ to also rise.business riskfinancial riskliquidity riskinflation risk

Q: New financial disclosure regulations affecting the brokerage industry are a type of:market riskfinancial riskbusiness riskliquidity risk

Q: If a U.S. investor buys foreign stock, his dollar-denominated return will increase if the dollar:appreciates in value.depreciates in value.remains unchanged.moves to a net gain position.

Q: The recent housing bubble and resulting credit crisis of 2008 is a perfect example of: a. nonsystematic risk b. systematic risk c. inflation risk d. political risk

Q: Liquidity risk:is the risk that investment bankers normally faceis lower for small OTC stocks than for large NYSE stocksis a risk associated with secondary market transactionsincreases whenever interest rates increase

Q: Political stability is the major factor concerning:exchange-rate risksystematic risknonsystematic riskcountry risk

Q: Financial risk is most associated with:the use of equity financing by corporationsthe use of debt financing by corporationsequity investments held by corporationsdebt investments held by corporations

Q: An impending recession is an example of:interest rate riskinflation riskmarket riskfinancial risk

Q: If interest rates are expected to rise, you would expect:bond prices to fall more than stock pricesbond prices to rise more than stock pricesstock prices to fall more than bond pricesstock prices to rise and bond prices to fall

Q: Investors should be willing to invest in riskier investments only:if the term is shortif there are no safe alternatives except for holding cashif the expected return is adequate for the risk levelif they are true speculators

Q: All of the following represent the yield component of total return EXCEPT:a. Dividend payment on common stockb. Coupon interest payment on bondsc. Capital gain upon sale of stockd. Dividend payment on preferred stock

Q: Total return is equal to: a. capital gain + price change. b. yield + income. c. capital gain - loss. d. yield + price change.

Q: An investor who short sold 120 shares of stock at $150 per share wishes to realize a gross profit of $2400. At what price must the investor cover the short sale?

Q: Joe Edwards purchased 150 shares of XYZ at $100 per share. Currently the stock is selling at $120. If he wants to be assured of a profit of at least $4050, what type of order should he place and at what price per share?

Q: An investor sells 100 shares of stock short at $40. (a) Ignoring commissions, at what price will the investor earn $700? (b) Ignoring commissions, what is the gain or loss if the stock price goes to $53 and the investor closes out the position?

Q: An investor purchases 100 shares of a $60 stock when the initial margin requirement is 50 percent and the maintenance margin is 30 percent. (a) How much must the investor put up initially in order to purchase the stock? (b) Calculate the actual margin if the price of the stock drops to $55. (c) At what stock price will a margin call occur? (d) If the stock price falls to $58, is the account restricted?

Q: What is the difference between the potential gains and losses on long positions versus the potential gains and losses on short sales?

Q: Compare and contrast the functions and responsibilities of a NYSE specialist with those of an OTC dealer.

Q: What are some of the functions of the NASD?

Q: Small investors often pay brokerage commissions according to the firm's chart of fees. How can this be when rates are negotiable?

Q: What are two methods of investing in stocks without a broker?

Q: Does the expression 'you get what you pay for' apply to full-service brokers and discount brokers?

Q: Mr. Whiner bought 1,000 shares of Sure-Fire, Inc., common stock at 85 and sold three months later at 73. He lost $12,000 plus commissions on this ill-fated stock purchase. He then contacted the SIPC saying that he wanted to file a claim for his investment losses. Is this loss covered by SIPC? What losses are covered?

Q: What is insider trading? Does it only affect large investors?

Q: What is the rationale for different margin requirements on different types of securities? (For example, 50 percent on common stock, and 30 percent on bonds corporate bonds)

Q: What costs and risks are incurred in using a margin account that are not present in a cash account?

Q: What are the advantages to investors' of keeping their securities in street name?

Q: What is the chief advantage of a market order?

Q: The short interest ratio indicates the number of days it would take for short sellers to cover all the shares sold short.

Q: Specialists often sell short to meet public buy orders.

Q: Most short sales are executed by the broker acting as the 'lender' of the security sold.

Q: Investors who sell short are expecting the price of the security to fall.

Q: A margin call occurs anytime the equity position of the margin account falls below the initial margin.

Q: Under margin accounts, investors can purchase more stock without putting up additional cash by leveraging the value of the eligible shares.

Q: Under SIPC, customer accounts with brokerage firms are insured for up to $1 million.

Q: "Circuit breakers" are program traders that attempt to bypass the exchange regulations.

Q: Sidecars, trading halts and Rule 80A are all types of circuit breakers employed by the NYSE.

Q: If a security issue is registered with the SEC, there is less chance the investor will lose money on the investment.