Investments - Final Exam - Practice Questions and
Answers 2023 with complete solution
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
11.76%
r = (1 + R)/(1 + I) - 1;
1.14/1.02 - 1 = 11.76%.
If the Federal Reserve lowers the discount rate, ceteris paribus, the equilibrium
levels of funds lent will __________ and the equilibrium level of real interest rates
will ___________.
increase; decrease
A lower discount rate would encourage banks to make more loans, which would
increase the money supply. The supply curve would shift to the right and the equilibrium
level of funds would increase while the equilibrium interest rate would fall.
You have been given this probability distribution for the holding-period return for
KMP stock:
Probability. HPR
Boom. .3 18%
Normal Growth .5 12%
Recession .2 -5%
10.40%
HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%
Which of the following statement(s) is(are) true?
None of the options is true
Expected inflation rates are a determinant of nominal interest rates. The realized
nominal rate of interest would be negative if the difference between actual and
anticipated inflation rates exceeded the real rate. The realized nominal rate of interest
would be less than the real rate if the unexpected inflation were greater than the real
rate of interest. Certificates of deposit contain a real rate based on an estimate of
inflation that is not guaranteed.
You purchased a share of stock for $20. One year later you received $1 as a
dividend and sold the share for $29. What was your holding-period return?
50%
($1 + $29 - $20)/$20 = 0.5000, or 50%
, Over the past year you earned a nominal rate of interest of 10% on your money.
The inflation rate was 5% over the same period. The exact actual growth rate of
your purchasing power was
4.8%
r = (1 + R)/(1 + I) -1; 1.10%/1.05% - 1 = 4.8%
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.
I and II only
Risk-averse investors consider a risky investment only if the investment offers a risk
premium. Risk-neutral investors look only at expected returns when making an
investment decision.
In the mean-standard deviation graph an indifference curve has a ________ slope
Positive
The risk-return trade-off is one in which greater risk is taken if greater returns can be
expected, resulting in a positive slope.
According to the mean-variance criterion, which one of the following investments
dominates all others?
E( r) = 0.15; Standard Deviation = 0.20
A gives the highest return with the least risk; return per unit of risk is .75, which
dominates the reward-risk ratio for the other choices.
The capital allocation line can be described as the
investment opportunity set formed with a risky asset and a risk-free asset.
The CAL has an intercept equal to the risk-free rate. It is a straight line through the point
representing the risk-free asset and the risky portfolio, in expected-return/standard
deviation space.
An investor invests 30% of his wealth in a risky asset with an expected rate of
return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His
portfolio's expected return and standard deviation are __________ and
__________, respectively.
0.087; 0.06
E( rP) = 0.3(15%) + 0.7(6%) = 8.7%; sP = 0.3(0.04) 1/2 = 6%.
You invest $100 in a risky asset with an expected rate of return of 0.12 and a
standard deviation of 0.15 and a T-bill with a rate of return of 0.05.
What percentages of your money must be invested in the risk-free asset and the
risky asset, respectively, to form a portfolio with a standard deviation of 0.06?
Answers 2023 with complete solution
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
11.76%
r = (1 + R)/(1 + I) - 1;
1.14/1.02 - 1 = 11.76%.
If the Federal Reserve lowers the discount rate, ceteris paribus, the equilibrium
levels of funds lent will __________ and the equilibrium level of real interest rates
will ___________.
increase; decrease
A lower discount rate would encourage banks to make more loans, which would
increase the money supply. The supply curve would shift to the right and the equilibrium
level of funds would increase while the equilibrium interest rate would fall.
You have been given this probability distribution for the holding-period return for
KMP stock:
Probability. HPR
Boom. .3 18%
Normal Growth .5 12%
Recession .2 -5%
10.40%
HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%
Which of the following statement(s) is(are) true?
None of the options is true
Expected inflation rates are a determinant of nominal interest rates. The realized
nominal rate of interest would be negative if the difference between actual and
anticipated inflation rates exceeded the real rate. The realized nominal rate of interest
would be less than the real rate if the unexpected inflation were greater than the real
rate of interest. Certificates of deposit contain a real rate based on an estimate of
inflation that is not guaranteed.
You purchased a share of stock for $20. One year later you received $1 as a
dividend and sold the share for $29. What was your holding-period return?
50%
($1 + $29 - $20)/$20 = 0.5000, or 50%
, Over the past year you earned a nominal rate of interest of 10% on your money.
The inflation rate was 5% over the same period. The exact actual growth rate of
your purchasing power was
4.8%
r = (1 + R)/(1 + I) -1; 1.10%/1.05% - 1 = 4.8%
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.
I and II only
Risk-averse investors consider a risky investment only if the investment offers a risk
premium. Risk-neutral investors look only at expected returns when making an
investment decision.
In the mean-standard deviation graph an indifference curve has a ________ slope
Positive
The risk-return trade-off is one in which greater risk is taken if greater returns can be
expected, resulting in a positive slope.
According to the mean-variance criterion, which one of the following investments
dominates all others?
E( r) = 0.15; Standard Deviation = 0.20
A gives the highest return with the least risk; return per unit of risk is .75, which
dominates the reward-risk ratio for the other choices.
The capital allocation line can be described as the
investment opportunity set formed with a risky asset and a risk-free asset.
The CAL has an intercept equal to the risk-free rate. It is a straight line through the point
representing the risk-free asset and the risky portfolio, in expected-return/standard
deviation space.
An investor invests 30% of his wealth in a risky asset with an expected rate of
return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His
portfolio's expected return and standard deviation are __________ and
__________, respectively.
0.087; 0.06
E( rP) = 0.3(15%) + 0.7(6%) = 8.7%; sP = 0.3(0.04) 1/2 = 6%.
You invest $100 in a risky asset with an expected rate of return of 0.12 and a
standard deviation of 0.15 and a T-bill with a rate of return of 0.05.
What percentages of your money must be invested in the risk-free asset and the
risky asset, respectively, to form a portfolio with a standard deviation of 0.06?
