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FINC 340- QUIZ # 1- Chapters 4 & 5 (10 points- half point each)
A- TRUE/FALSE (2.5 points- half point each)
1) Investors can be confidently predict future returns on an investment by studying its past
performance.

2) Meaningful measures of an investment's return must consider both income and capital gains.

3) An investment that has earned a high rate of return over the last 5 years will not necessarily
continue to perform well in the future.

4) An investor who requires a 7% rate of return should be willing to pay $934.58 now to receive
$1,000 at the end of one year.

5) An efficient portfolio maximizes the rate of return without consideration of risk.


B- MULTIPLE CHOICE (5 points- half point each)

1) Kelly bought a stock at a price of $22.50. She received a $1.75 dividend and sold the stock for
$24.75. What is Kelly's capital gain on this investment?
A) $4.00
B) $3.75
C) $2.25
D) $1.75

2) Inflation tends to have a particularly negative impact on the price of
A) real estate.
B) bonds.
C) gold.
D) crude oil.

3) Which of the following internal characteristics should cause investors to expect the highest
rate of return?
A) a steady record of past dividends
B) interest and principal guaranteed by the U.S. government
C) a record of excellent management and consistent dividend payments
D) poor management and excessive use of debt financing

4) The present value of $10,000 discounted at 5% per year and received at the end of 5 years is
A) $10,000/1.25.
B) $10,000(1.05)
5
.
C) $10,000/(1.05)
5
.
D) $10,000 (1.05)
1/5
.

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5) When calculating the present value of either a future single sum or a future annuity, the
applicable interest rate is usually called the
A) yield to maturity.
B) compound interest rate.
C) internal rate of return.
D) discount rate.

6) Melissa owns the following portfolio of stocks. What is the return on her portfolio?



A) 8.0%
B) 9.0%
C) 9.8%
D) 10.9%

7) The statement "A portfolio is less than the sum of its parts." means:
A) it is less expensive to buy a group of assets than to buy those assets individually.
B) portfolio returns will always be lower than the returns on individual stocks.
C) a diversified group of assets will be less volatile than the individual assets within the group.
D) for reasons that are not well understood, the value of a portfolio is less than the sum of the
values of its components.

8) In the real world, most of the assets available to investors
A) tend to be somewhat positively correlated.
B) tend to be somewhat negatively correlated.
C) tend to be uncorrelated.
D) tend to be either perfectly positively or perfectly negatively correlated.

9) Which one of the following conditions can be effectively eliminated through portfolio
diversification?
A) a general price increase nationwide
B) an interest rate reduction by the Federal Reserve
C) increased government regulation of auto emissions
D) change in the political party that controls Congress

10) Beta can be defined as the slope of the line that explains the relationship between
A) the return on a security and the return on the market.
B) the returns on a security and various points in time.
C) the return on stocks and the returns on bonds.
D) the risk free rate of return versus the market rate of return.



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C-QUESTION/ANSWERS ( 2.5 points- half point each)

1) Zachary has purchased an investment that he expects to produce income of $3,000 at the end
of the first year and $4,000 at the end of the second year. If he requires an 8% rate of return
compounded annually, what is the maximum amount that he can pay and still earn the required
rate of return?


2) Explain the relationship between correlation, diversification, and risk reduction. Provide an
example to substantiate your answer.