1. If interest rates are positive, the present value of a future lump sum of $100 will be
A. less than $100
B. greater than $100
C. equal to $100
D. equal to [$100 x (1 + opportunity cost rate)]
E. The answer cannot be determined from the information provided.
2. An investment opportunity promises a stated interest rate of 6 percent with semi-annual compounding. Which of the following statements is most correct?
A. The periodic rate is greater than 3 percent.
B. The periodic rate is less than 3 percent.
C. The effective annual rate is less than 6 percent.
D. The effective annual rate is greater than 6 percent.
E. The effective annual rate is 6 percent.
3. Which of the following statements concerning financial risk is false?
A. Generically, financial risk is related to the probability of a return that is less than expected.
B. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will lower risk.
C. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will not affect risk.
D. In the real world, it is not possible to create a riskless portfolio because all investment returns, to a greater or lesser extent, move with the overall economy.
E. Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a negative 10 percent return is 100 percent.) Although the expected return is negative, the investment is riskless.
4. Assume a stock's risk and expected rate of return are plotted on a graph where the y-axis is required rate of return and the x-axis is risk. Under which of the following conditions is the stock most likely to be sold (if owned) or not purchased?
A. The stock's plot falls on the security market line.
B. The stock's plot falls below the security market line.
C. The stock's plot falls above the security market line.
D. The stock's plot falls at the risk-free rate on the y-axis.
E. The information provided is insufficient to answer the question.