2. Purchasing-power risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall. Answer: FALSE

3. If a person's required return does not change when risk increases, that person is said to be A) risk-seeking.

B) risk-indifferent.

C) risk-averse.

D) risk-aware.

4. If a person's required return decreases for an increase in risk, that person is said to be A) risk-seeking.

B) risk-indifferent.

C) risk-averse.

D) risk-aware.

5. ________ is the chance of loss or the variability of returns associated with a given asset. A) Return

B) Value

C) Risk

D) Probability

6. The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested A) return

B) value

C) risk

D) probability

7. Risk aversion is the behavior exhibited by managers who require a (n) ________. A)increase in return, for a given decrease in risk

B) increase in return, for a given increase in risk

C) decrease in return, for a given increase in risk

D) decrease in return, for a given decrease in risk

8. Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently selling for $30 per share. If Perry sells all of his shares of Ferro, Inc. today, what rate of return would he realize? Answer: Realized return = = 28%

9. Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in cash flow. If Time sells the bounce house today, he could receive $6,100 for it. What would be his rate of return under these conditions?

Answer: Realized return = = 55%

10. On average, during the past 75 years, the return on small-company stocks has exceeded the return on large-company stocks. Answer: TRUE

11. On average, during the past 75 years, the return on long-term government bonds has exceeded the return on long-term corporate bonds. Answer: FALSE

12. On average, during the past 75 years, the return on long-term corporate bonds has exceeded the return on long-term government bonds. Answer: TRUE

13. Which asset would the risk-averse financial manager prefer? (See below.)

A) Asset A.

B) Asset B.

C) Asset C.

D) Asset D.

14. The expected value and the standard deviation of returns for asset A is (See below.)

Asset A

A) 12 percent and 4 percent.

B) 12.7 percent and 2.3 percent.

C) 12.7 percent and 4 percent.

D) 12 percent and 2.3 percent.

15. Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return? A) -12.5%; -4.4%

B) +12.5%; +4.4%

C) -16.7%; -4.4%

D) +16.7%; +4.4%

16. Given the following information about the two assets A and B, determine which asset is preferred.

Answer: Asset A is preferred because it has a lower range for the same expected return.

17. Assuming the following returns and corresponding probabilities for asset A, compute its standard deviation and coefficient of variation.

Answer:

SD = 3.87%

CV = SD/K = 3.87/15 = 0.26

18. Akai has a portfolio of three assets. Find the expected rate of return for the portfolio assuming he invests 50 percent of its...