Investments Final Exam Practice Questions 2025 – Complete Study Guide

Investments Final Exam Practice Questions
2025 – Complete Study Guide




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 -
ANSWER ✨✔---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 ___________. - ANSWER ✨✔---
increase; decrease



A lower discount rate would encourage banks to make more loanswer, 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% - ANSWER ✨✔---10.40%



HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4%



Which of the following statement(s) is(are) true? - ANSWER ✨✔---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? - ANSWER ✨✔---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 -
ANSWER ✨✔---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. - ANSWER ✨✔---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 - ANSWER ✨✔--
-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?
- ANSWER ✨✔---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 - ANSWER ✨✔---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. - ANSWER ✨✔---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.