Q&A Hero

Q: The certainty equivalent rate of a portfolio is A. the rate that a risk-free investment would need to offer with certainty to be considered equally attractive as the risky portfolio. B. the rate that the investor must earn for certain to give up the use of his money. C. the minimum rate guaranteed by institutions such as banks. D. the rate that equates "A" in the utility function with the average risk aversion coefficient for all risk-averse investors. E. represented by the scaling factor "-.005" in the utility function.

Q: The utility score an investor assigns to a particular portfolio, other things equal, A. will decrease as the rate of return increases. B. will decrease as the standard deviation decreases. C. will decrease as the variance decreases. D. will increase as the variance increases. E. will increase as the rate of return increases.

Q: The presence of risk means that A. investors will lose money. B. more than one outcome is possible. C. the standard deviation of the payoff is larger than its expected value. D. final wealth will be greater than initial wealth. E. terminal wealth will be less than initial wealth.

Q: A fair game A. will not be undertaken by a risk-averse investor. B. is a risky investment with a zero risk premium. C. is a riskless investment. D. will not be undertaken by a risk-averse investor and is a risky investment with a zero risk premium. E. will not be undertaken by a risk-averse investor and is a riskless investment.

Q: The riskiness of individual assets A. should be considered for the asset in isolation. B. should be considered in the context of the effect on overall portfolio volatility. C. should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio. D. should be considered in the context of the effect on overall portfolio volatility and should be combined with the

Q: The exact indifference curves of different investors A. cannot be known with perfect certainty. B. can be calculated precisely with the use of advanced calculus. C. are known with perfect certainty and allow the advisor to create more suitable portfolios for the client. D. although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the

Q: Use the below information to answer the following question.U = E(r ) (A/2)s2,where A = 4.0.The variable (A) in the utility function represents theA. investor's return requirement.B. investor's aversion to risk.C. certainty-equivalent rate of the portfolio.D. minimum required utility of the portfolio.

Q: Use the below information to answer the following question. U = E(r ) (A/2)s2 Which investment would you select if you were risk neutral? A. 1 B. 2 C. 3 D. 4 E. Cannot be determined from the information given.

Q: Use the below information to answer the following question. U = E(r ) (A/2)s2,where A = 4.0. Based on the utility function above, which investment would you select? A. 1 B. 2 C. 3 D. 4 E. Cannot be determined from the information given.

Q: Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve for a risk averse investor? A. E(r) = 0.15; Standard deviation = 0.20 B. E(r) = 0.15; Standard deviation = 0.10 C. E(r) = 0.10; Standard deviation = 0.10 D. E(r) = 0.20; Standard deviation = 0.15 E. E(r) = 0.10; Standard deviation = 0.20

Q: According to the mean-variance criterion, which one of the following investments dominates all others? A. E(r) = 0.15; Variance = 0.20 B. E(r) = 0.10; Variance = 0.20 C. E(r) = 0.10; Variance = 0.25 D. E(r) = 0.15; Variance = 0.25 E. None of these options dominates the other alternatives.

Q: A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) (A/2)s2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset? A. 5 B. 6 C. 7 D. 8

Q: To maximize her expected utility, which one of the following investment alternatives would she choose? Assume an investor with the following utility function: U = E(r) 3/2(s2). A. A portfolio that pays 10% with a 60% probability or 5% with 40% probability. B. A portfolio that pays 10% with 40% probability or 5% with a 60% probability. C. A portfolio that pays 12% with 60% probability or 5% with 40% probability. D. A portfolio that pays 12% with 40% probability or 5% with 60% probability.

Q: Assume an investor with the following utility function: U = E(r) 3/2(s2). To maximize her expected utility, she would choose the asset with an expected rate of return of _______ and a standard deviation of ________, respectively. A. 12%; 20% B. 10%; 15% C. 10%; 10% D. 8%; 10%

Q: When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess? A. The investor's prior investing experience B. The investor's degree of financial security C. The investor's tendency to make risky or conservative choices D. The level of return the investor prefers E. The investor's feelings about loss

Q: Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, A. for the same risk, David requires a higher rate of return than Elias. B. for the same return, Elias tolerates higher risk than David. C. for the same risk, Elias requires a lower rate of return than David. D. for the same return, David tolerates higher risk than Elias. E. Cannot be determined.

Q: In a return-standard deviation space, which of the following statements is(are) true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) I) An investor's own indifference curves might intersect. II) Indifference curves have negative slopes. III) In a set of indifference curves, the highest offers the greatest utility. IV) Indifference curves of two investors might intersect. A. I and II only B. II and III only C. I and IV only D. III and IV only E. None of the options are correct.

Q: In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor? A. It is the locus of portfolios that have the same expected rates of return and different standard deviations. B. It is the locus of portfolios that have the same standard deviations and different rates of return. C. It is the locus of portfolios that offer the same utility according to returns and standard deviations. D. It connects portfolios that offer increasing utilities according to returns and standard deviations. E. None of the options are correct.

Q: In the mean-standard deviation graph, an indifference curve has a ________ slope. A. negative B. zero C. positive D. vertical E. Cannot be determined.

Q: Which of the following statements is(are) false? I) Risk-averse investors reject investments that are fair games. II) Risk-neutral investors judge risky investments only by the expected returns. III) Risk-averse investors judge investments only by their riskiness. IV) Risk-loving investors will not engage in fair games. A. I only B. II only C. I and II only D. II and III only E. III and IV only

Q: Which of the following statements is(are) true? I) Risk-averse investors reject investments that are fair games. II) Risk-neutral investors judge risky investments only by the expected returns. III) Risk-averse investors judge investments only by their riskiness. IV) Risk-loving investors will not engage in fair games. A. I only B. II only C. I and II only D. II and III only E. II, III, and IV only

Q: Which of the following statements regarding risk-averse investors is true? A. They only care about the rate of return. B. They accept investments that are fair games. C. They only accept risky investments that offer risk premiums over the risk-free rate. D. They are willing to accept lower returns and high risk. E. They only care about the rate of return, and they accept investments that are fair games.

Q: When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would be A. expected shortfall. B. value at risk. C. conditional tail expectation. D. expected shortfall and value at risk. E. expected shortfall and conditional tail expectation.

Q: When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the A. most realistic, as it is the most complete measure of risk. B. most pessimistic, as it is the most complete measure of risk. C. most optimistic, as it is the most complete measure of risk. D. most optimistic, as it takes the highest return (smallest loss) of all the cases.

Q: Practitioners often use a ________% VaR, meaning that ________% of returns will exceed the VaR, and ________% will be worse. A. 25; 75; 25 B. 75; 25; 75 C. 1; 99; 51 D. 95; 5; 95 E. 80; 80; 20

Q: The most common measure of loss associated with extremely negative returns is A. lower partial standard deviation. B. value at risk. C. expected shortfall. D. standard deviation.

Q: ________ is a risk measure that indicates vulnerability to extreme negative returns. A. Value at risk B. Lower partial standard deviation C. Expected shortfall D. None of the options E. None of the options are correct.

Q: ________ is a risk measure that indicates vulnerability to extreme negative returns. A. Value at risk B. Lower partial standard deviation C. Standard deviation D. Value at risk and lower partial standard deviation E. None of the options are correct.

Q: If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be A. 8%. B. 16%. C. 37%. D. 21%. E. 29%.

Q: If a portfolio had a return of 15%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 30%, the Sharpe measure would be A. 0.20. B. 0.35. C. 0.45. D. 0.33. E. 0.25.

Q: If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be A. 0.12. B. 0.04. C. 0.32. D. 0.16. E. 0.25.

Q: If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be A. 0.08. B. 0.03. C. 0.20. D. 0.11. E. 0.25.

Q: If a distribution has "fat tails," it exhibits A. positive skewness. B. negative skewness. C. a kurtosis of zero. D. kurtosis. E. positive skewness and kurtosis.

Q: When a distribution is negatively skewed, A. standard deviation overestimates risk. B. standard deviation correctly estimates risk. C. standard deviation underestimates risk. D. the tails are fatter than in a normal distribution.

Q: When a distribution is positively skewed, A. standard deviation overestimates risk. B. standard deviation correctly estimates risk. C. standard deviation underestimates risk. D. the tails are fatter than in a normal distribution.

Q: Kurtosis is a measure of A. how fat the tails of a distribution are. B. the downside risk of a distribution. C. the normality of a distribution. D. the dividend yield of the distribution. E. how fat the tails of a distribution are.

Q: Skewness is a measure of A. how fat the tails of a distribution are. B. the downside risk of a distribution. C. the symmetry of a distribution. D. the dividend yield of the distribution. E. None of the options are correct.

Q: If an investment provides a 2.1% return quarterly, its effective annual rate is A. 2.1%. B. 8.4%. C. 8.56%. D. 8.67%.

Q: If an investment provides a 3% return semi-annually, its effective annual rate is A. 3%. B. 6%. C. 6.06%. D. 6.09%.

Q: If an investment provides a 0.78% return monthly, its effective annual rate is A. 9.36%. B. 9.63%. C. 10.02%. D. 9.77%.

Q: If an investment provides a 1.25% return quarterly, its effective annual rate is A. 5.23%. B. 5.09%. C. 4.02%. D. 4.04%.

Q: If an investment provides a 2% return semi-annually, its effective annual rate is A. 2%. B. 4%. C. 4.02%. D. 4.04%. E. None of the options are correct.

Q: Annual percentage rates (APRs) are computed using A. simple interest. B. compound interest. C. either simple interest or compound interest. D. best estimates of expected real costs. E. None of the options are correct.

Q: When comparing investments with different horizons, the ____________ provides the more accurate comparison. A. arithmetic average B. effective annual rate C. average annual return D. historical annual average

Q: You purchase a share of CAT stock for $90. One year later, after receiving a dividend of $4, you sell the stock for $97. What was your holding-period return? A. 14.44% B. 12.22% C. 13.33% D. 5.56%

Q: You have been given this probability distribution for the holding-period return for GM stock: What is the expected variance for GM stock? A. 200.00% B. 221.04% C. 246.37% D. 14.87% E. 16.13%

Q: You have been given this probability distribution for the holding-period return for GM stock: What is the expected standard deviation for GM stock? A. 16.91% B. 16.13% C. 13.79% D. 15.25% E. 14.87%

Q: You have been given this probability distribution for the holding-period return for GM stock: What is the expected holding-period return for GM stock? A. 10.4% B. 11.4% C. 12.4% D. 13.4% E. 14.4%

Q: You purchased a share of CSCO stock for $20. One year later, you received $2 as a dividend and sold the share for $31. What was your holding-period return? A. 45% B. 50% C. 60% D. 40% E. None of the options are correct.

Q: If the annual real rate of interest is 3.5%, and the expected inflation rate is 3.5%, the nominal rate of interest would be approximately A. 0%. B. 3.5%. C. 12.25%. D. 7%.

Q: A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 4.3%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year? A. 4.3% B. 1.3% C. 7.3% D. 3% E. None of the options.

Q: Over the past year, you earned a nominal rate of interest of 3.6% on your money. The inflation rate was 3.1% over the same period. The exact actual growth rate of your purchasing power was A. 3.6%. B. 3.1%. C. 0.48%. D. 6.7%.

Q: Which of the following measures of risk best highlights the potential loss from extreme negative returns? A. Standard deviation B. Variance C. Upper partial standard deviation D. Value at risk (VaR) E. None of the options are correct.

Q: You have been given this probability distribution for the holding-period return for a stock: What is the expected variance for the stock? A. 142.07% B. 189.96% C. 177.04% D. 128.17% E. None of the options are correct.

Q: You have been given this probability distribution for the holding-period return for a stock: What is the expected standard deviation for the stock? A. 2.07% B. 9.96% C. 7.04% D. 1.44% E. None of the options are correct.

Q: You have been given this probability distribution for the holding-period return for a stock: What is the expected holding-period return for the stock? A. 11.67% B. 8.33% C. 9.56% D. 12.4% E. None of the options are correct.

Q: You purchased a share of stock for $65. One year later, you received $2.37 as a dividend and sold the share for $63. What was your holding-period return? A. 0.57% B. 0.2550% C. 0.89% D. 1.63% E. None of the options are correct.

Q: You purchased a share of stock for $120. One year later, you received $1.82 as a dividend and sold the share for $136. What was your holding-period return? A. 15.67% B. 22.12% C. 18.85% D. 13.24% E. None of the options are correct.

Q: You purchased a share of stock for $12. One year later, you received $0.25 as a dividend and sold the share for $12.92. What was your holding-period return? A. 9.75% B. 10.65% C. 11.75% D. 11.25% E. None of the options are correct.

Q: If the annual real rate of interest is 4%, and the expected inflation rate is 3%, the nominal rate of interest would be approximately A. 4%. B. 3%. C. 1%. D. 5%. E. None of the options are correct.

Q: If the annual real rate of interest is 2.5%, and the expected inflation rate is 3.4%, the nominal rate of interest would be approximately A. 4.9%. B. 0.9%. C. 0.9%. D. 7%. E. None of the options are correct.

Q: If the annual real rate of interest is 3.5%, and the expected inflation rate is 2.5%, the nominal rate of interest would be approximately A. 3.5%. B. 2.5%. C. 1%. D. 6.8%. E. None of the options are correct.

Q: A year ago, you invested $12,000 in an investment that produced a return of 18%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year? A. 18% B. 2% C. 16% D. 15%

Q: A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 2.5%. What is your approximate annual real rate of return if the rate of inflation was 3.4% over the year? A. 0.9% B. 0.9% C. 5.9% D. 3.4%

Q: A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 5.7%. What is your approximate annual real rate of return if the rate of inflation was 1.6% over the year? A. 4.1% B. 2.5% C. 2.9% D. 1.6%

Q: A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 3%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year? A. 1% B. 1% C. 7% D. 3%

Q: A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 6%. What is your approximate annual real rate of return if the rate of inflation was 2% over the year? A. 4% B. 2% C. 6% D. 3%

Q: Over the past year, you earned a nominal rate of interest of 12.5% on your money. The inflation rate was 2.6% over the same period. The exact actual growth rate of your purchasing power was A. 9.15%. B. 9.90%. C. 9.65%. D. 10.52%.

Q: Over the past year, you earned a nominal rate of interest of 14% on your money. The inflation rate was 2% over the same period. The exact actual growth rate of your purchasing power was A. 11.76%. B. 16.00%. C. 15.02%. D. 14.32%.

Q: Over the past year, you earned a nominal rate of interest of 8% on your money. The inflation rate was 3.5% over the same period. The exact actual growth rate of your purchasing power was A. 15.55%. B. 4.35%. C. 5.02%. D. 4.81%. E. 15.04%.

Q: An investor purchased a bond 63 days ago for $980. He received $17 in interest and sold the bond for $987. What is the holding-period return on his investment? A. 1.52% B. 2.45% C. 1.92% D. 2.68%

Q: An investor purchased a bond 45 days ago for $985. He received $15 in interest and sold the bond for $980. What is the holding-period return on his investment? A. 1.02% B. 0.50% C. 1.92% D. 0.01%

Q: You have been given this probability distribution for the holding-period return for Cheese, Inc. stock: Assuming that the expected return on Cheese's stock is 14.35%, what is the standard deviation of these returns? A. 4.72% B. 6.30% C. 4.38% D. 5.74% E. None of the options are correct.

Q: The holding-period return (HPR) for a stock is equal to A. the real yield minus the inflation rate. B. the nominal yield minus the real yield. C. the capital gains yield minus the tax rate. D. the capital gains yield minus the dividend yield. E. the dividend yield plus the capital gains yield.

Q: "Bracket Creep" happens when A. tax liabilities are based on real income and there is a negative inflation rate. B. tax liabilities are based on real income and there is a positive inflation rate. C. tax liabilities are based on nominal income and there is a negative inflation rate. D. tax liabilities are based on nominal income and there is a positive inflation rate. E. too many peculiar people make their way into the highest tax bracket.

Q: If the Federal Reserve lowers the Fed Funds rate, ceteris paribus, the equilibrium levels of funds lent will __________, and the equilibrium level of real interest rates will ___________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease E. reverse direction from their previous trends; reverse direction from their previous trends

Q: In words, the real rate of interest is approximately equal to A. the nominal rate minus the inflation rate. B. the inflation rate minus the nominal rate. C. the nominal rate times the inflation rate. D. the inflation rate divided by the nominal rate. E. the nominal rate plus the inflation rate.

Q: If a portfolio had a return of 11%, the risk-free asset return was 6%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be A. 14%. B. 6%. C. 35%. D. 21%. E. 5%.

Q: Which of the following factors would not be expected to affect the nominal interest rate? A. The supply of loans B. The demand for loans C. The coupon rate on previously issued government bonds D. The expected rate of inflation E. Government spending and borrowing

Q: Toyota stock has the following probability distribution of expected prices one year from now: If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding-period return on Toyota? A. 17.72% B. 18.89% C. 17.91% D. 18.18%