Chapter 5 Learning Abou t Risk and Retu rn From the Historical Record 8 8 Mu ltiple Choice Qu estions 1. Over the past year you earned a nominal rate of interest of 10 percent on your money. The inflation rate was 5 percent over the same period. The exact actual growth rate of your purchasing power was A) 15.5%. B) 10.0%. C) 5.0%. D) 4.8%. E) 15.0% Answer: D Difficulty: Moderate Rationale: r = (1+R) / (1+I) - 1; 1.10% / 1.5% - 1 = 4.8%. 2. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 7%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year? A) 4%. B) 10%. C) 7%. D) 3%. E) none of the above. Answer: A Difficulty: Easy Rationale: 7% - 3% = 4%. 3. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately A) 1%. B) 9%. C) 20%. D) 15%. E) none of the above. Answer: B Difficulty: Easy Rationale: 5% + 4% = 9%. Chapter 5 Learning Abou t Risk and Retu rn From the Historical Record 8 9 4. You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $29. What was your holding period return? A) 45% B) 50% C) 5% D) 40% E) none of the above Answer: B Difficulty: Moderate Rationale: ($1 + $29 - $20)/$20 = 0.5000, or 50%. 5. Which of the following determine(s) the level of real interest rates? I) the supply of savings by households and business firms II) the demand for investment funds III) the government's net supply and/or demand for funds A) I only B) II only C) I and II only D) I, II, and III E) none of the above Answer: D Difficulty: Moderate Ra...
