Part 1: State whether the following statements are true or false:

1- The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest.

2- An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed, the expected rate of inflation and the uncertainty of future payments.

3- The holding period return (HPR) is equal to the holding period yield (HPY) stated as a percentage.

4- The geometric mean of a series of returns is always larger than the arithmetic mean and the difference increases with the volatility of the series.

5- The expected return is the average of all possible returns.

Part 2: Multiple Choice Questions:

1- Which of the following is not a component of the risk premium?

a) Business risk

b) Financial risk

c) Liquidity risk

d) Exchange rate risk

e) Unsystematic market risk

2- The ability to sell an asset quickly at a fair price is associated with

a) Business risk.

b) Liquidity risk.

c) Exchange rate risk.

d) Financial risk.

e) Market risk.

3- The variability of operating earnings is associated with

a) Business risk.

b) Liquidity risk.

c) Exchange rate risk.

d) Financial risk.

e) Market risk.

4- The uncertainty of investment returns associated with how a firm finances its investments is known as

a) Business risk.

b) Liquidity risk.

c) Exchange rate risk.

d) Financial risk.

e) Market risk.

5- What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?

a) Shift up and keep the same slope

b) Shift up and have less slope

c) Shift up and have a steeper slope

d) Shift down and keep the same slope

e) Shift down and have less slope

6- Which of the following is not a life cycle phase?

a) Discovery phase

b) Accumulation phase

c) Consolidation phase

d) Spending phase

e) Gifting phase

7- Which of the following is not a step in the portfolio management process?

a) Develop a policy statement.

b) Study current financial and economic conditions.

c) Construct the portfolio.

d) Monitor investor's needs and market conditions.

e) Sell all assets and reinvestment proceeds at least once a year.

8- The first step in the investment process is the development of a(n)

a) Objective statement.

b) Policy statement.

c) Financial statement.

d) Statement of cash needs.

e) Statement of cash flows.

9- Which of the following is not considered to be an investment objective?

a) Capital preservation

b) Capital appreciation

c) Current income

d) Total return

e) None of the above (that is, all are considered investment objectives)

10-

must be stated in terms of expected returns and risk. An investor's tolerance for risk must be established before returns objectives can be stated.

a) Investment requirements

b) Investment constraints

c) Investment rewards

d) Investment objectives

e) Investment policy