1.Which of the following statements is TRUE?

A)Ceteris paribus, the EAR is positively related to the frequency of compounding.

B)As bond ratings go from A to AA to AAA, the return that investors require goes up.

C)The reward for postponing consumption describes the interest rate from the point of view of the debtor.

D)The Fisher Effect illustrates the inverse relationship between real and nominal interest rates.

2.Which of the following statements is TRUE?

A)Preferred stockholders have the right to vote for U.S. Senators while common stockholders do not.

B)We use the present value of an annuity to solve for the price of a share of preferred stock.

C)Ceteris paribus, according to CAPM, a higher market risk premium would result in a higher stock price.

3.Which of the following statements is TRUE?

A)Based on our author's analysis, you would have less confidence about an expected return on long-term government bonds than you would for small company stocks.

B)According to CAPM, stocks with greater than average market risk would have an expected return higher than the expected return on the market

C)For holding periods of more than a year, the annualized holding period return would be higher than the HPR.

D)If the risk-free rate is 2% and the MRP is 7 percentage points, then the expected return on the market would be 5%.

4.Albert purchased Southern Industries stock for $37.53 per share and sold it 8months later for $39.75 after receiving a dividend of $1.75 at the end of the 8months. What was Albert's holding period return (HPR), Simple Annualized Return, and Compound Annualized Return, respectively?

A) 10.58%, 15.87% 16.28%

B) 10.58%, 16.28%; 15.87%

C) 16.28%, 15.87%, 10.58%

D) 15.87%, 10.58%, 16.28%

5.Consider two well-diversified portfolios: Portfolio 1 has an expected return of 7% and average market risk while Portfolio 2 has an expected return of 10% and a beta of 1.20. If the risk-free rate is 2%, which portfolio would a rational risk-averse investor prefer and why?

A)Portfolio 2 because it has the higher reward.

B)Portfolio 1 because it has the higher reward-to-risk ratio.

C)Portfolio 1 because it has the lower risk.

D)Portfolio 2 because it has the higher reward-to-risk ratio.