Which of the following sequences is arranged in the correct order, from highest long-term returns to lowest?

Which of the following sequences is arranged in the correct order, from highest long-term returns to lowest?

A) Small stocks, government bonds, large stocks

B) Large stocks, treasury bills, small stocks

C) Small stocks, large stocks, treasury bills

D) Government bonds, large stocks, treasury bills

Investments that have earned the highest rates of return over time also have

A) the lowest risk.

B) the highest standard deviation of returns.

C) the largest market capitalization.

D) the least sensitivity to inflation.

The difference between returns on stocks and government bonds is known as

A) the equity risk premium.

B) the risk and return tradeoff.

C) the maturity premium.

D) the risk/reward paradox.

An emerging market is

A) a market for small, but rapidly growing companies.

B)  market for companies coming out from bankruptcy proceedings.

C) market for promising, but untested technologies.

D) a market located in an economy with low to middle per capita income.

The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.

Answer:  TRUE

Riskier investments have traditionally had lower returns than less risky investments have had.

Answer:  FALSE

Less risky investments have lower standard deviations than do more risky investments.

Answer:  TRUE

Investments in emerging markets have higher volatility than do U.S. Stocks.

Answer:  TRUE

Risky investments have the potential for higher returns, but also larger losses.

Answer:  TRUE

Historically, in the United States stocks have had higher returns and greater volatility than have government bonds.

Answer:  TRUE

Treasury Bills have less default risk than do Government Bonds.

Answer:  TRUE

Investors are always rewarded for taking higher risk with higher realized returns.

Answer:  FALSE

During the financial crisis of 2007-2009, returns on real estate investment trusts (REITS) and stocks moved in opposite directions.

Answer:  FALSE

Using the following information for McDonovan, Inc.'s stock, calculate their expected return and standard deviation.

Using the following information for McDonovan, Inc.'s stock, calculate their expected return and standard deviation.

        State                               Probability                  Return

        Boom                             20%                               40%

        Normal                         60%                               15%

        Recession                     20%                               (20%)

Answer: 

Ki =     = (.20)(40%) + (.60)(15%) + (.20)(-20%)

                                = 8% + 9% - 4% = 13%

σi =    ().

σi =    ((40% - 13%)2(.2) + (15% - 13%)2 (.6) + (-20% - 13%)2 (.2)). = 19.13%

The cash return on an investment is calculated as purchase price-selling price.

Answer:  FALSE

Because returns are more certain for the least risky investments, the required return on these investments should be higher than the required returns on more risky investments.

Answer:  FALSE

Even though an investor expects a positive rate of return, it is possible that the actual return will be negative.

Answer:  TRUE

The expected rate of return is the weighted average of the possible returns for an investment.

Answer:  TRUE

The expected rate of return is the sum of each possible return times it likelihood of occurrence.

Answer:  TRUE

The higher the standard deviation, the less risk the investment has.

Answer:  FALSE

Spartan Sofas, Inc. is selling for $50.00 per share today. In one year, Spartan will be selling for $48.00 per share

Spartan Sofas, Inc. is selling for $50.00 per share today. In one year, Spartan will be selling for $48.00 per share, and the dividend for the year will be $3.00. What is the cash return on Spartan stock?

A) $51.00

B) $1.00

C) $2.00

D) $3.00

What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession, 2.0% return; 65% probability of a moderate economy, 9.5% return; 17% probability of a strong economy, 14.2% return.

A) 3.68%

B) 1.23%

C) 8.47%

D) 6.66%

You are considering investing in a firm that has the following possible outcomes:

          Economic boom: probability of 25%; return of 25%

          Economic growth: probability of 60%; return of 15%

          Economic decline: probability of 15%; return of -5%

What is the expected rate of return on the investment?

A) 15.0%

B) 11.7%

C) 14.5%

D) 25.0%

Which of the following best measures an asset's risk?

A) Expected return

B) The standard deviation

C) The probability distribution

D) The cash return

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your rate of return?

A) 35.00%

B) 12.50%

C) 17.50%

D) 25.00%

You have invested in a project that has the following payoff schedule:

                                         Probability of

              Payoff                 Occurrence

                $40                             .15

                $50                             .20

                $60                             .30

                $70                             .30

                $80                             .05

What is the expected value of the investment's payoff? (Round to the nearest $1.)

A) $60

B) $65

C) $58

D) $70

If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return?

A) 12%

B) 13%

C) 14%

D) 15%

You are considering investing in a project with the following possible outcomes:

                                                   Probability of        Investment

        States                                  Occurrence             Returns

State 1: Economic boom              15%                        16%

State 2: Economic growth           45%                        12%

State 3: Economic decline           25%                         5%

State 4: Depression                       15%                        -5%

Calculate the expected rate of return for this investment.

A) 9.8%

B) 7.0%

C) 8.3%

D) 6.3%

An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%

An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%, what is the present value of this investment?

Answer: 

PV = $500(1/(1.06)3) + $700(1/1.06)5) + $1000(1/(1.06)9)

PV = $500(.840) + $700(.747) + $1000(.592)

       = $420.00 + $522.90 + $592.00

       = $1,534.90

What is the value (price) of a bond that pays $400 semiannually for 10 years and returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.

Answer:  Using a financial calculator N=20, i=5, PMT=400, FV=10000, solve for PV=-5361.77 or $5,361.77

The expected after-tax cash flow from an investment property that you are considering is

Year 1   $25,000

Year 2   $27,500

Year 3   $30,250

At the end of year 3 you expect to sell the property for $400,000.  If the appropriate discount rate is 12%, what is the most you should pay for this property?

Answer:  [25000/(1.12)1 + 27500/(1.12)2 + 302500/(1.12)3 + 400000/(1.12)3] = $350,487.71

In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if:

a. you want to deposit an amount annually at the end of each year?

b. you want to deposit one large lump sum today?

Answer: 

a. PMT = $1,294.26

b. PMT = $14,013.75

You are considering purchasing common stock in AMZ Corporation. You anticipate that the company will pay dividends

You are considering purchasing common stock in AMZ Corporation. You anticipate that the company will pay dividends of $5.00 per share next year and $7.50 per share in the following year. You also believe that you can sell the common stock two years from now for $30.00 per share. If you require a 14% rate of return on this investment, what is the maximum price that you would be willing to pay for a share of AMZ common stock?

Answer: 

PV  = $5.00 /(1.14)1 + ($7.50 + $30.00)/(1.14)2

        = $33.24

To evaluate and compare investment proposals, we must adjust all cash flows to a common date.

Answer:  TRUE

Consider an investment that has cash flows of $500 the first year and $400 for the next four years. If your opportunity cost is 10%, you should be willing to pay $1,607.22 for this investment.

Answer:  TRUE

You believe WSU stock will pay dividends of $1.00, $1.25, and $1.50 at the end of each of the next 3 years.  Immediately after receiving the third dividend, you will sell the stock for $28.50.  If the appropriate discount rate is 12%, you should be willing to pay $20.75 for this stock.

Answer:  FALSE

The present value of a complex cash flow stream is equal to the sum of the present values of each of the cash flows.

Answer:  TRUE

You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years. Assuming an opportunity cost of 12%, what do you estimate that you will have in this account at retirement?

Answer: 

Calculator steps:

-500               PV

-500               PMT

    40               N

    12               I/yr or I

FV = $430,071

You are planning to deposit $10,000 today into a bank account. Five years from today you expect to withdraw $7,500. If the account pays 5% interest per year, how much will remain in the account eight years from today? Round to the nearest dollar.

Answer: 

FV  = $10,000(1.05)5 

         = $12,760

             Amount to invest in remaining three years = $12,760 - $7,500 = $5,260

FV  = $5,260 (1.05)3 

         = $6,089

Suppose you are 40 years old and plan to retire in exactly 20 years. 21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments. You expect to live to the age of 85. How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?

Answer:  Using a financial calculator N=25, i=12, PMT=5000, PV=39,215.70=s the amount in fund at age 60.

To find the annual contribution, n=20, i=12,PV=0, FV=39215.70, solve for PMT=-544.27, so 

Annual contribution = $544.27

Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000

Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000, but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years. To buy a house upon retirement, what must they save each year in equal annual end-of-year deposits if they can earn 10% annually?

A) $21,910.00

B) $7,650.94

C) $10,000.00

D) $14,715.52

You intend to purchase a new car upon graduation in two years. It will have a cost of $29,371, including all extra features and sales tax. You just received a $3,000 pre-graduation gift from your rich uncle that you intend to deposit in a money market account that pays 6% interest, compounded monthly.  If you use the amount in the money market account for a down payment, and take out an auto loan for the remainder, how much will you need to borrow? (Round to the nearest dollar.)

A) $29,371

B) $25,880

C) $26,371

D) $26,000

 Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer?

       Year                  Investment A         Investment B

           1                            $5,000                       $8,000

           2                            $5,000                       $5,000

           3                            $5,000                       $2,000

A) Investment A, since it has the most even cash flows

B) Investment B, since it gives you the largest cash flows in earlier years

C) Neither, since they both have equal lives

D) Both investments are equally attractive

You have just purchased an investment that generates the cash flows that are shown below. You are able to invest your money at 5.75%, compounded annually. How much is this investment worth today?

       Year                       Amount

           0                                $0

           1                            $1,250

           2                            $1,585

           3                            $1,750

           4                            $2,225

           5                            $3,450

A) $7,758

B) $4,521

C) $10,260

D) $8,467