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.

ANS: F PTS: 1

7. The variance of expected returns is equal to the square root of the expected returns.

ANS: F PTS: 1

8. The coefficient of variation is the expected return divided by the standard deviation of the expected return.

ANS: F PTS: 1

9. Nominal rates are averages of all possible real rates.

ANS: F PTS: 1

10. The risk premium is a function of the volatility of operating earnings, sales volatility and inflation.

ANS: F PTS: 1

11. An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.

ANS: T PTS: 1

12. Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest.

ANS: F PTS: 1

MULTIPLE CHOICE

1. The basic trade-off in the investment process is
|a. |between the anticipated rate of return for a given investment instrument and its degree of risk. |
|b. |between