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principles of finance

Questions and Answers of Principles Of Finance

If inflation unexpectedly rises by 3%, would a corporation that had recently borrowed money by issuing fixed-rate bonds to pay for a new investment benefit or lose?
If wages on average rise at least as fast as inflation, why do people worry about how inflation affects incomes?
Identify at least one item that you use regularly whose price has changed significantly.
What has been the average annual rate of inflation between 1985 and 2020? What is the long-run average annual rate of inflation over the last century?
Between 1985 and 2020, what year had the lowest realized annual rate of inflation in the United States? Why do you think inflation was so low in this particular year?
Go to https://www.usinflationcalculator.com/ (https://openstax.org/r/usinflationcalculator). How much money would it take today to purchase what one dollar would have bought in 1950, in 1975, and in
At the end of 2020 and the beginning of 2021, coupon rates on long-term T-notes and T-bonds were near historic lows. Further, the federal government was running a historically large budget deficit in
Which group of securities earned a higher average annual return from 2000 to 2020, T-bonds or Baa bonds? Why do think this was so?
Why is standard deviation of returns a reasonable measure of risk for a portfolio of equity securities?
Over the last 120 years, few countries have achieved the realized rate of returns enjoyed by US equity markets. Does this mean investors should ignore international investments and focus only on
A data set of salaries contains an outlier salary. The best measure of center to use for this data set is the ________.a. Meanb. Medianc. Moded. Standard deviation
Explain the considerations that determine whether the mean or the median is the best measure of central tendency for a data set.
You purchased 1,000 shares of a stock for $12 per share. Then, two months later, you purchased an additional 500 shares of the same stock at $9 per share. Calculate the weighted mean of the purchase
Assume the return on stocks follows a normal distribution. Is it more likely that a stock will return between -1 and +1 standard deviations from the mean or between -2 and +2 standard deviations from
A portfolio includes shares of United Airlines stock that were purchased at different times and different prices. Which measure is best to determine the average cost of the shares of the stock?a.
Explain the difference between a mean and a weighted mean.
You score a 60 on a biology test. The mean test grade is 70, and the standard deviation is 5. Calculate and interpret your corresponding z-score.
Would an investor be likely to prefer a stock that has a smaller standard deviation for annual stock returns or one with a larger standard deviation for annual stock returns? Why?
Standard deviation is a measure of the ________.a. Center of a data setb. Position of a data value in a data setc. Area under a normal curved. Spread of a distribution
Explain why the standard deviation of a data set cannot be a negative value.
You score a 60 on a biology test. The mean test grade is 70, and the standard deviation is 5. What percentile does your grade correspond to?
What are the reasons for calculating portfolio weights? What useful information does this provide to the investor?
How are standard deviation and variance related?a. The two measures are equal to one another.b. Variance is the square root of the standard deviation.c. Standard deviation is the square root of the
Explain what a negative z-score, a positive z-score, and a z-score of zero imply.
A fast food restaurant has measured service time for customers waiting in line, and the service time follows an exponential distribution with a mean waiting time of 1.9 minutes. The restaurant has a
What are the advantages and disadvantages of the equal weighting approach and the market cap weighting approach for portfolio allocation strategy?
Which of the following is the best definition of a z-score?a. The distance of a data value from the meanb. The number of standard deviations that a data value is from the meanc. The distance of a
Explain how quartiles can be used to detect outliers in a data set.
The total value of your portfolio consists of approximately 65% stock assets, 25% bonds, and 10% cash equivalents. Historical returns have shown that stocks provide a return of 12%, bonds provide a
The results of a standardized test indicate that you are in the 85th percentile. What is the best interpretation of this result?a. You scored in the top 85% of all students taking the test.b. You
The distribution of the average annual return of the S&P 500 over a 50-year time period follows a normal distribution with a mean rate of return of 10.5% and a standard deviation of 14.3%. What
Write a short R program to find the expected return for the data set in Table 13.16. Historical Return on United Airlines Stock 12% 5% Table
The interquartile range is ________.a. The middle 50% of a data setb. The upper 50% of a data setc. The lower 50% of a data setd. Equal to the median
In a frequency distribution table, the sum of the relative frequencies must be equal to ________.a. The sample sizeb. 1, or 100%c. Zerod. The standard deviation of the distribution
A change in the standard deviation of a normal distribution will result in ________.a. A change in the location of the peak of the curveb. A change in the area under the curvec. A change in the shape
When calculating an expected value, ________.a. The result should always be 1b. The result should always be a positive valuec. The result should always be a negative valued. The result can be a
The area under a normal curve between a z-score of -2 and a z-score of +2 is ________.a. 0.68b. 0.95c. 0.997d. Dependent on the mean and standard deviation
Which of the following is NOT a benefit of using the R statistical analysis tool?a. Additional features are constantly being added by the user community.b. It can be used on many computer platforms,
Two correlation coefficients are compared: Correlation Coefficient A is 0.83. Correlation Coefficient B is -0.91.Which correlation coefficient represents the stronger linear relationship? a.
A Fortune 500 company is tracking revenues versus cash flow for recent years, and the data is shown in the table below. Consider cash flow to be the dependent variable. Create a scatter plot of the
A correlation coefficient is calculated as -0.92. Provide an interpretation for this correlation coefficient.
A data set containing 10 pairs of (x, y) data points is analyzed, and the correlation coefficient is calculated to be 0.58. Does this value of indicate a significant or nonsignificant correlation?a.
A Fortune 500 company is tracking revenues versus cash flow for recent years, and the data is shown in the table below. Consider cash flow to be the dependent variable. Calculate the correlation
Explain what a residual is and how this relates to the best-fit regression model.
For the linear regression model for ads versus revenue, the slope is shown as 78.075. How would this slope be interpreted (that is, provide a verbal description for the meaning of the slope of
A linear regression model is developed, and for, the corresponding predicted y-value is 22.7. The actual observed value for is . Is the residual for this data point positive, negative, or zero?a.
Explain how to interpret the slope of the best-fit line.
A chief financial officer calculates the correlation coefficient for bond prices versus interest rate as -0.71. The data set contained nine (x,y) data points. Determine if the correlation is
A linear model is developed for the relationship between salary of finance professionals and years of experience. The data was collected based on years of experience ranging from 1 to 15. Assuming
A Fortune 500 company is tracking revenues versus cash flow for recent years, and the data is shown in the table below. Consider cash flow to be the dependent variable. Determine the best-fit linear
Explain how to generate a prediction using a linear regression model.
Based on the presentation in the video, is there a correlation between stock funds and bond funds? Why is this information important to an investor trying to design a portfolio?
Which of the following is the best interpretation for the slope of the linear regression model?a. The slope is the expected mean value of y when the x-variable is equal to zero.b. The slope indicates
A Fortune 500 company is tracking revenues versus cash flow for recent years, and the data is shown in the table below. Consider cash flow to be the dependent variable. Assume the correlation is
A linear model is developed for the relationship between the annual salary of finance professionals and years of experience, and the following is the linear model . Which is the correct
A Fortune 500 company is tracking revenues versus cash flow for recent years, and the data is shown in the table below. Consider cash flow to be the dependent variable. Assume the correlation is
Which of the following is the correct sequence of steps needed to create a linear regression model?a. Create scatter plot, calculate correlation coefficient, check for significance, create linear
A Fortune 500 company is tracking revenues versus cash flow for recent years, and the data is shown in the table below. Consider cash flow to be the dependent variable. Calculate the residual for the
A linear model is developed for the relationship between the annual salary of finance professionals and years of experience, and the linear model is: The correlation is determined to be significant.
As predictions are made for x-values that are further and further away from the mean of x, which is true about the prediction intervals for these x-values?a. The prediction intervals will become
Which of the following is the R command to calculate the correlation coefficient r?a. Correlb. Corc. Sloped. lm
Which of the following is the R command to calculate the slope and y-intercept for a linear regression model?a. Corb. Slopec. Imd. Intercept
The total dollar return equals _______________.a. The EPS of a stockb. Capital gains income plus dividend incomec. The price paid for a share of stock minus the selling price of the stockd. The price
What is the difference between firm-specific risk and unsystematic risk?
You purchase 100 shares of COST (Costco) for $280 per share. Three months later, you sell the stock for $290 per share. You receive a dividend of $0.57 a share. What is your total dollar return?
According to Jim Cramer, if you invest $1,000 in the S&P 500, how much can you expect your investment to be worth in 35 years?
The dividend yield is calculated by _______________.a. Dividing the price of the stock by the EPSb. Subtracting any capital loss from the capital gainc. Dividing the annual dividend by the initial
You purchase 100 shares of COST for $280 per share. Three months later, you sell the stock for $290 per share. You receive a dividend of $0.57 a share. What are your dividend yield, capital gain
Gather data over the past 10 years for the level of the S&P 500. How many of those years did the S&P 500 have a return of at least 10%? If you had invested in $1,000 in an S&P 500 index
Which of the following is the best example of firm-specific risk?a. A global pandemic causes major disruptions in the economy.b. The Federal Reserve increases the money supply dramatically, leading
Explain what happens to the standard deviation of returns of a portfolio as the number of stocks in the portfolio increases.
You purchase 100 shares of COST for $280 per share. Three months later, you sell the stock for $290 per share. You receive a dividend of $0.57 a share. What is the EAR of your investment?
When discussing following a buy-and-hold strategy, in which an investor makes a purchase and holds the same investment for the long term, Bogle says that the success of such a strategy depends on
Investors diversify their portfolio in order to _______________.a. Reduce riskb. Increase risk 15 • CFA Institute 473c. Increase returnd. Increase the standard deviation
Enrique owns five stocks: Alaska Airlines, American Airlines, Delta Airlines, Southwest Airlines, and Ford. Radha also owns five stocks: Apple, McDonald’s, Tesla, Facebook, and Disney. Does Enrique
You invest in a stock for four years. The returns for the four years are 20%, -10%, 15%, and -5%. Calculate the arithmetic average return and the geometric average return.
Which of the following would be the best example of systematic risk?a. An error in the company’s computer system miscalculates the amount of inventory that Monique’s Boutique is holding.b.
You are considering purchasing shares in a company that has a beta of 0.8. Explain what this beta means.
You are considering purchasing shares in a company that has a beta of 0.9. The average return for the S&P 500 is 11%, and the average return for US Treasury bills has been 2%. Based on the CAPM,
As the number of stocks in a portfolio increases, _______________.a. Firm-specific risk increasesb. Systematic risk becomes zeroc. Systematic risk decreases and returns increased. Firm-specific risk
Explain how the Sharpe ratio and the Treynor ratio can be considered reward-to-risk measures.
Your portfolio has had a 15% rate of return with a standard deviation of 18% and a beta of 1.1. The average return for the S&P 500 has been 11%, and the average return for US Treasury bills has
The monthly returns for Visa (V) and Pfizer (PFE) for 2018–2020 are provided in the chart below. In addition, the monthly return for the SPDR S&P 500 ETF Trust (SPY) is provided; SPY is often
Beta is a measure of _______________.a. Systematic riskb. Firm-specific riskc. A firm’s profitabilityd. A stock’s dividend yield
Which of the following would be the best estimate of the risk-free rate?a. The rate of inflationb. The average return on the S&P 500c. The average return on Amazon’s stockd. The average return
The Sharpe ratio can be considered a measure of _______________.a. The reward of an investment in relation to the riskb. The systematic risk of a stockc. The total return of a stock investmentd. The
A positive Jensen’s alpha indicates that a portfolio has _______________.a. A negative betab. An abnormal returnc. More total risk than the average portfoliod. More systematic risk than the average
If an equally weighted portfolio contains 10 stocks, then _______________.a. The stocks in the portfolio will each have a weight of 0.10b. The return of the portfolio must be multiplied by 10 to get
What is a junk bond?
Tony owns a small business that he is attempting to sell. A potential buyer offers him $500,000 today, plus $1,500,000 two years from now and a balance of $1,700,000 three years from now. Tony always
You wish to draw from a fund you’re creating today with a 3% guaranteed compounded annual rate. You hope to withdraw $40,000 one year from now, $35,000 two years from now, and $25,000 three years
You hire Susan for a three-year term. She has no retirement plan, so you agree to invest money immediately to allow her a stream of three payments beginning one year after her employment term ends.
Abby owns a business that projects two years of strong cash flow, followed by a two-year hiatus while she pursues a graduate degree. She then plans to resume her business and is confident about the
When solving bond problems relating to a bond that pays interest on a quarterly basis, the ________ before being applied.a. Quoted annual yield to maturity should be multiplied by 4b. Quoted number
A $1,000 Expo Corp. bond has a coupon rate of 5%, pays interest semiannually, and matures in six years. If the yield to maturity is 7%, what is the bond’s value today?
If you are provided with annual information in a bond problem, which bond variables must be adjusted to accommodate semiannual compounding periods, and how must they be adjusted? Review the video to
Following the instructions laid out in the video, practice using a calculator to find the price of a bond under two scenarios. The first scenario should be when compounding periods are annual, or
Which of the following is NOT an adjustment that must be made when interest is paid semiannually instead of annually?a. Dividing the annual coupon payment by 2b. Dividing the annual interest rate by
Briefly describe interest income within the context of bond investments.
A $1,000 Omega Corp. bond has an 8% coupon rate that is paid semiannually. The bond matures in three years. If the current price of the bond is $1,125, what is the yield to maturity?

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