1. Under which of the following circumstances is it most likely that the nominal return of an investment will be less than its real return?

1. During periods of deflation.
2. During periods of low inflation
3. During periods of high inflation.
4. Under no circumstances is it possible for the nominal return to be less than its real return.

Please use the following information for Questions #2 & #3.

You have been provided this information about four securities. You are considering adding one or more to a portfolio that has an expected return of 11% and a variance of 85.

Return Variance Correlation

Security One 8% 81 .25

Security Two 10% 110 +.75

Security Three 12% 150 .70

Security Four 14% 220 +.55

2. Which of the following security or securities is or are most likely to increase the portfolios expected return while providing diversification benefits?

1. Security One only
2. Security Three only
3. Security One and Security Three only
4. Security Three and Security Four only

3. If the portfolio managers only mandate were to maximize the expected return of the portfolio, which of the following security or securities would you recommend that she add to the portfolio?

1. Security Three only
2. Security Four only
3. Security One and Security Three
4. Security Three and Security Four