Q&A Hero

Q: The expected return for an asset is 18.75 percent. If the return distribution for the asset is described as in the following table, what is the variance for the asset's returns? Round intermediate computations and final answer to 6 decimal places.Return Probability0.10 0.250.20 0.500.25 0.25A) 0.002969B) 0.000613C) 0.015195D) 0.054486

Q: Given the historical information in the chapter, which of the following investment classes had the greatest variability in returns? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks

Q: Given the historical information in the chapter, which of the following investment classes had the greatest average return? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks

Q: Niles is making an investment with an expected return of 12 percent. If the standard deviation of the return is 4.5 percent, and if Niles is investing $100,000, then what dollar amount is Niles 90 percent sure that he will have at the end of the year? (Do not round intermediate computations).A) $100,000.00B) $104,597.50C) $116,500.00D) $119,402.50

Q: Security Analysts that have evaluated Concordia Corporation, have determined that there is a 15% chance that the firm will generate earnings per share of $2.40; a 60% probability that the firm will generate earnings per share of $3.10; and a 25% probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round off to the nearest $0.01)A) $3.10B) $3.17C) $2.75D) $2.91

Q: Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)A) 12%B) 16%C) 32%D) 40%

Q: Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?A) $112,500B) $125,000C) $137,500D) $150,000

Q: Gwen purchased a stock one year ago for $25, and it is now worth $31. The stock paid a dividend of $1.50 during the year. What was the stock's rate of return from dividend income during the year?A) 6%B) 15%C) 24%D) 26%

Q: Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a dividend of $3 during the year. What was the stock's rate of return from capital appreciation during the year?A) 17%B) 20%C) 29%D) 35%

Q: Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends that he received for owning the stock during the year? Round your final answer to nearest whole dollar.A) $4B) $5C) $6D) $7

Q: Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to Ahmet from owning the stock?A) 5%B) 44%C) 35%D) 50%

Q: The expected return for Stock V is 24.5 percent. If we know the following information about Stock Z, then what is the probability of the Dynamite state of the world occurring? Return ProbabilityPoor 0.15 0.2Lukewarm 0.28 0.7Dynamite 0.19 ?A) 5%B) 10%C) 15%D) 20%

Q: The expected return for Stock Z is 30 percent. If we know the following information about Stock Z, then what return will it produce in the Lukewarm state of the world? Return ProbabilityPoor 0.2 0.25Lukewarm ? 0.5Dynamite 0.4 0.25A) 20%B) 30%C) 40%D) It is impossible to determine.

Q: Use the following table to calculate the expected return from an asset.Return Probability 0.05 0.10.1 0.150.15 0.50.25 0.25A) 12.50%B) 13.75%C) 15.75%D) 16.75%

Q: Use the following table to calculate the expected return from an asset.Return Probability0.1 0.250.2 0.50.25 0.25 A) 15.00%B) 17.50%C) 18.75%D) 20.00%

Q: In a game of chance, the probability of winning a $50 is 40 percent and the probability of losing a $50 prize is 60 percent. What is the expected value of the prize in the game? A) $10 B) $0 C) $10 D) $25

Q: In a game of chance, the probability of winning a $50 prize is 40 percent, and the probability of winning a $100 prize is 60 percent. What is the expected value of the prize in the game? A) $50 B) $75 C) $80 D) $100

Q: George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George's holding period return?A) 16.00%B) 14.00%C) 11.00%D) 19.00%

Q: Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers stock during the most recent year? Assume that no dividends were paid. Round your answer to the nearest percent.A) 17%B) 20%C) 23%D) 38%

Q: Barbra purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Barbra needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needs to have to reach her objective?A) $3,750B) $4,250C) $4,750D) $5,250

Q: Moshe purchased a stock for $30 last year. He found out today that he had a "100 percent return on his investment. Which of the following must be true? A) The stock is worth $30 today. B) The stock is worth $0 today. C) The stock paid no dividends during the year. D) Both B and C must be true.

Q: Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock?A) $7.00B) $7.50C) $8.00D) $8.50

Q: Which of the following statements is correct? A) The greater the risk associated with an investment, the lower the return investors expect from it. B) When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return. C) If two investments have the same expected return, investors prefer the riskiest alternative. D) When choosing between two investments that have the same level of risk, investors prefer the investment with the lower return.

Q: If you know the risk-free rate, the market risk-premium, and the beta of a stock, then using the Capital Asset Pricing Model (CAPM) you will be able to calculate the expected rate of return for the stock. A) True B) False

Q: The market risk-premium is equal to the expected return on the market less the risk-free rate of return. A) True B) False

Q: The appropriate measure of risk for a diversified portfolio is beta. A) True B) False

Q: Given the historical information in the chapter, the beta of a small stock should be greater than the beta of a corporate bond. A) True B) False

Q: Complete diversification means that the portfolio is no longer subject to market risk. A) True B) False

Q: If you were to completely diversify your portfolio by purchasing a portion of every asset in the investment universe, then the expected return of your portfolio is equal to the risk-free rate. A) True B) False

Q: If the distribution of returns on an asset has a variance of zero, then covariance of returns between that asset and the returns on any other asset must be equal to zero. A) True B) False

Q: If the covariance between the returns on two assets is equal to zero, then the correlation coefficient must also be zero. A) True B) False

Q: If two assets with return on correlation coefficients of less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits. A) True B) False

Q: The coefficient of variation is useful when deciding which individual stocks to add to your diversified portfolio. A) True B) False

Q: If you are trying to determine whether to purchase Security A or Security B as the only holding in your portfolio, then you can consider the coefficient of variation in order to understand the risk-return relationship of the individual securities. A) True B) False

Q: Utilizing the fact that values of two or more assets do not always move in the same direction at the same time in order to reduce the risk of a portfolio is called diversification. A) True B) False

Q: If the returns on two assets have a correlation coefficient of one, then there are no benefits of diversification by combining these assets in a two-asset portfolio. A) True B) False

Q: If you are building a portfolio, then you desire those assets to have a correlation coefficient of one. A) True B) False

Q: The coefficient of variation is a good measure of the amount of risk that an asset will contribute to a diversified portfolio of assets. A) True B) False

Q: The coefficient of variation divides the variance of the returns of an asset by the expected rate of return of that asset. A) True B) False

Q: If you are calculating the variance and standard deviation of returns on a stock, the variance will always be larger than the standard deviation. A) True B) False

Q: Variance is equal to the square root of standard deviation. A) True B) False

Q: The best measure of assessing a risk within an investment is its variance. A) True B) False

Q: The variance is denominated in squared units, whereas the standard deviation is denominated in the same units as the expected value. A) True B) False

Q: The normal distribution is completely described by its mean and standard deviation where 50 percent of the distribution's probability is less than the mean and 50 percent greater than the mean. A) True B) False

Q: The standard deviation of a distribution can be a negative value. A) True B) False

Q: The variance of a distribution can be a negative value. A) True B) False

Q: The expected return on the market portfolio is equal to the market risk premium. A) True B) False

Q: You have placed a wager such that you will either receive nothing if you lose the bet or you will receive $10 if you win the bet. If the expected cash receipt is $9, then there is a 100 percent probability that you will win the wager. A) True B) False

Q: Whenever the outcome of an event has a number of different possibilities that have equal probability of occurrence, then the expected value of the outcome is equal to the simple average of the individual events. A) True B) False

Q: Robert paid $100 for a stock one year ago. The total return on the stock was 10 percent. Therefore, the stock must be selling for $110 today. A) True B) False

Q: In order to keep the total return of a stock equal to 100 percent, the income component for that stock must be zero. A) True B) False

Q: If the capital appreciation return from owning a stock is positive, then the total return from owning the same stock can be negative. A) True B) False

Q: The income component of return for a common stock comes from the cash dividend a firm pays. A) True B) False

Q: If the price of an asset has not increased or decreased since the original purchase of the asset, then the total return of the asset (if no dividends were paid during the period) is equal to the capital appreciation component return. A) True B) False

Q: The capital appreciation component of a stock's return considers the change in price of a stock divided by the initial price of the stock. A) True B) False

Q: The rate of return that investors require for an investment depends on the risk associated with that investment. A) True b) False

Q: Insulor Inc. is expecting cash flows of $67,000 at the end of each year for the next five years. If the firm's discount rate is 17 percent, what is the present value of this annuity? (Round to the nearest dollar.) A) $214,356 B) $241,653 C) $278,900 D) $197,776

Q: Graciela Treadwell won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on any investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.) A) $750,000 B) $334,600 C) $212,400 D) $235,700

Q: Moore's Inc. will be making lease payments of $3,895.50 for a 10-year period, starting at the end of this year. If the firm uses a 9 percent discount rate, what is the present value of this annuity? (Round to the nearest dollar.) A) $23,250 B) $29,000 C) $25,000 D) $20,000

Q: Ryan Campbell has invested in a fund that will provide him a cash flow of $11,700 for the next 20 years. If his opportunity cost is 8.5 percent, what is the present value of this cash flow stream? (Round to the nearest dollar.) A) $234,000 B) $132,455 C) $110,721 D) $167,884

Q: Ransport Company has made an investment in another company that will guarantee it a cash flow of $37,250 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment? (Round to the nearest dollar.)A) $101,766B) $124,868C) $251,154D) $186,250

Q: Helen Ashley is expecting cash flows of $50,000, $75,000, $125,000, and $250,000 from an inheritance over the next four years. If she can earn 11 percent on any investment that she makes, what is the present value of her inheritance? (Round to the nearest dollar.)A) $361,998B) $414,454C) $412,372D) $434,599

Q: Nutech Corp. is expecting the following cash flows$79,000, $112,000, $164,000, $84,000, and $242,000over the next five years. If the company's opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)A) $429,560B) $485,097C) $480,906D) $477,235

Q: David Stephens has made an investment that will pay him $11,455, $16,376, and $19,812 at the end of the next three years. His investment was to fetch him a return of 14 percent. What is the present value of these cash flows? (Round to the nearest dollar.)A) $37,712B) $36,022C) $41,675D) $39,208

Q: Newship Inc. has borrowed from its bank at a rate of 8 percent and will repay the loan with interest over the next five years. Its scheduled payments, starting at the end of the year are as follows$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.) A) $2,735,200 B) $2,989,351 C) $2,431,224 D) $2,815,885

Q: Damien McCoy has loaned money to his brother at an interest rate of 5.85 percent. He expects to receive $987, $1,012, $1,062, and $1,162 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.) A) $3,785 B) $3,757 C) $3,657 D) $3,685

Q: GlobalShippers Inc. has forecast earnings of $1,233,600, $1,345,900, and $1,455,650 for the next three years. What is the future value of these earnings if the firm's opportunity cost is 13 percent? (Round to the nearest dollar.) A) $4,214,360 B) 4,551,701 C) $3,900,865 D) $4,362,428

Q: Scottie Barnes has invested in an investment that will pay him $6,400, $6,450, $7,225, and $7,500 over the next four years. If his opportunity cost is 10 percent, what is the future value of the cash flows he will receive? (Round to the nearest dollar.) A) $27,150 B) $32,020 C) $30,455 D) $31,770

Q: Robert White will receive from his investment cash flows of $4,450, $4,775, and $5,125. If he can earn 7 percent on any investment that he makes, what is the future value of his investment cash flows at the end of three years? (Round to the nearest dollar.) A) $15,329 B) $15,427 C) $16,427 D) $14,427

Q: Phosfranc Inc., is expecting the following cash flows starting at the end of the year$133,245, $152,709, $161,554, and $200,760. If their opportunity cost is 9.4 percent, find the future value of these cash flows. (Round to the nearest dollar.)A) $734,731B) $756,525C) $734,231D) $776,252

Q: Krysel Inc. is expecting a new project to start producing cash flows, beginning at the end of this year. They expect cash flows to be as follows:1 2 3 4 5$663,547 $698,214 $795,908 $798,326 $755,444If they can reinvest these cash flows to earn a return of 9.2 percent, what is the future value of this cash flow stream at the end of five years? (Round to the nearest dollar.)A)$4,368,692B) $4,429,046C) $4,468,692D) $4,529,046

Q: What is the appropriate interest rate to use when making future or present value calculations? A) The effective annual interest rate (EAR) B) The annual percentage rate (APR) C) The quoted interest rate D) The simple interest

Q: Which of the following statements is true of annual percentage rate (APR)? A) The Truth-in-Savings Act was passed by Congress to ensure that the true cost of credit was disclosed to consumers. B) The Truth-in-Lending Act was passed to provide consumers an accurate estimate of the return they would earn on an investment. C) The Truth-in-Savings Act and Truth-in-Lending Act require by law that the APR be disclosed on all consumer loans and savings plans. D) The annual percentage rate (APR), and not the effective annual interest rate (EAR), represents the true economic interest rate.

Q: Which of the following statements is true of annual percentage rate (APR)? A) The APR is similar to quoted interest rate which is a simple annual rate. B) The APR calculation adjusts for the effects of compounding and, hence, the time value of money. C) The APR is the true cost of borrowing and lending. D) The APR takes compounding into account.

Q: The true cost of lending is the: A) annual percentage rate. B) effective annual rate. C) quoted interest rate. D) interest rate per period.

Q: The true cost of borrowing is the: A) annual percentage rate. B) effective annual rate. C) quoted interest rate. D) periodic rate.

Q: Which of the following statements is true about the effective annual rate (EAR)? A) The effective annual interest rate (EAR) is defined as the annual growth rates that do not take compounding into account. B) The EAR is the annualized interest rate using simple interest. It ignores the interest earned on interest associated with compounding periods of less than one year. C) The EAR is the simple interest charged per period multiplied by the number of periods per year. D) The EAR is the interest rate actually paid (or earned) after accounting for compounding.

Q: Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called: A) an annuity due. B) a growing perpetuity. C) an ordinary annuity. D) a growing annuity.

Q: A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called: A) an annuity due. B) a growing perpetuity. C) an ordinary annuity. D) a growing annuity.

Q: The annuity transformation method is used to transform: A) a present value annuity to a future value annuity. B) a present value annuity to an annuity due. C) an ordinary annuity to an annuity due. D) a perpetuity to an annuity.