CHAPTER 1—APPENDIX
MULTIPLE CHOICE
NARRBEGIN: Exhibit 01-01A
Exhibit 1-1A
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Your expectations from a one year investment in Wang Computers is as follows:
Probability Rate of Return
.15 −.10
.15 −.20
.35 .00
.25 .15
.10 .15
NARREND
1. Refer to Exhibit 1-1A. The expected return from this investment is
a. −0.0752
b. −0.0040
c. 0.00
d. 0.0075
, e. 0.4545
ANS: D
E(R) = (−0.10)(0.15) + (−0.20)(0.15) + (0.00)(0.35) + (0.15)(0.25) + (0.15)(0.10) = 0.0075
PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 01-01A
2. Refer to Exhibit 1-1A. The standard deviation of your expected return from this investment is
a. 0.001
b. 0.004
c. 0.124
d. 1.240
e. None of the above
ANS: C
2 = (0.15)(−0.1 − 0.0075)2 + (0.15)(−0.2 − 0.0075)2 + (0.35)(.00 − 0.0075)2
+ (0.25)(0.15 − 0.0075)2 + (0.10)(0.15 − 0.0075)2
= 0.015319
= 0.0153191/2 = 0.124
PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 01-01A
3. Refer to Exhibit 1-1A. The coefficient of variation of this investment is
a. −0.06
b. −0.65
,c. 6.60
d. 16.53
e. 165.10
ANS: D
The coefficient of variation (CV) equals 0..0075 = 16.53
PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 01-01A
, CHAPTER 1—THE INVESTMENT SETTING
TRUE/FALSE
1. The rate of exchange between certain future dollars and certain current dollars is known as the
pure rate of interest.
ANS: T PTS: 1
2. An investment is the current commitment of dollars over time to derive future payments to
compensate the investor for the time funds are committed, the expected rate of inflation and the
uncertainty of future payments.
ANS: T PTS: 1
3. The holding period return (HPR) is equal to the holding period yield (HPY) stated as a
percentage.
ANS: F PTS: 1
4. The geometric mean of a series of returns is always larger than the arithmetic mean and the
difference increases with the volatility of the series.
ANS: F PTS: 1
5. The expected return is the average of all possible returns.
ANS: F PTS: 1
6. Two measures of the risk premium are the standard deviation and the variance.
MULTIPLE CHOICE
NARRBEGIN: Exhibit 01-01A
Exhibit 1-1A
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Your expectations from a one year investment in Wang Computers is as follows:
Probability Rate of Return
.15 −.10
.15 −.20
.35 .00
.25 .15
.10 .15
NARREND
1. Refer to Exhibit 1-1A. The expected return from this investment is
a. −0.0752
b. −0.0040
c. 0.00
d. 0.0075
, e. 0.4545
ANS: D
E(R) = (−0.10)(0.15) + (−0.20)(0.15) + (0.00)(0.35) + (0.15)(0.25) + (0.15)(0.10) = 0.0075
PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 01-01A
2. Refer to Exhibit 1-1A. The standard deviation of your expected return from this investment is
a. 0.001
b. 0.004
c. 0.124
d. 1.240
e. None of the above
ANS: C
2 = (0.15)(−0.1 − 0.0075)2 + (0.15)(−0.2 − 0.0075)2 + (0.35)(.00 − 0.0075)2
+ (0.25)(0.15 − 0.0075)2 + (0.10)(0.15 − 0.0075)2
= 0.015319
= 0.0153191/2 = 0.124
PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 01-01A
3. Refer to Exhibit 1-1A. The coefficient of variation of this investment is
a. −0.06
b. −0.65
,c. 6.60
d. 16.53
e. 165.10
ANS: D
The coefficient of variation (CV) equals 0..0075 = 16.53
PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 01-01A
, CHAPTER 1—THE INVESTMENT SETTING
TRUE/FALSE
1. The rate of exchange between certain future dollars and certain current dollars is known as the
pure rate of interest.
ANS: T PTS: 1
2. An investment is the current commitment of dollars over time to derive future payments to
compensate the investor for the time funds are committed, the expected rate of inflation and the
uncertainty of future payments.
ANS: T PTS: 1
3. The holding period return (HPR) is equal to the holding period yield (HPY) stated as a
percentage.
ANS: F PTS: 1
4. The geometric mean of a series of returns is always larger than the arithmetic mean and the
difference increases with the volatility of the series.
ANS: F PTS: 1
5. The expected return is the average of all possible returns.
ANS: F PTS: 1
6. Two measures of the risk premium are the standard deviation and the variance.
