Indicate the correct answer and explain why it is correct.

1. An asset with a quarterly return of 1 percent has a simple annual return

a. Less than 4 percent

b. Equal to 4 percent

c. Greater than 4 percent and not more than 6 percent

d. Greater than 6 percent

2. An asset with a monthly return of 1/2 percent has a compound annual return

a. Less than 4 percent

b. Equal to 4 percent

c. Greater than 4 percent and not more than 6 percent

d. Greater than 6 percent

3. If the quarterly standard deviation of the return on a stock is 4 percent, the annual standard deviation is

a. Less than or equal to 4 percent

b. Greater than 4 per cent and less than or equal to 8 percent

c. Greater than 8 percent and less than 16 percent

d. 16 percent or more

4. Distributions of stock returns typically

a. Have fat tails

b. Are skewed to the right

c. Are normal distributions

d. Are odd

5. The equity risk premium is

a. The return on stocks

b. The return on stocks less the riskfree rate

c. The return on stocks less the riskfree rate divided by its standard deviation

d. Measured by beta

The equity risk premium is

a. Zero

b. Around 6 to 10 percent per year

c. 100 percent per year

d. Priceless

7. If an investor holds half her assets in stocks and half in a riskfree asset and the standard deviation of the return on stocks is 20 percent per year, the standard deviation of the return on the investors assets is

a. 5 percent per year

b. 10 percent per year

c. 20 percent per year

d. 30 percent per year

8. The home bias puzzle is the puzzle that investors

a. avoid buying stocks issued by firms near their home

b. hold too many stocks issued by firms near their home

c. do not diversify as much as they could if they held more foreign stocks

d. think foreign stocks have lower returns than they really do

9. Short-term securities issued by the U.S. Treasury include

a. Treasury Bills

b. Treasury Bonds

c. Dollar bills

d. Certificates of deposit

10. The repo short-term money market is a market in which

a. A security is sold today with a promise to buy it back tomorrow

b. A market for securities backed by repossessed cars

c. A market in which the Federal Reserve is not allowed to participate

d. A market for trading reserves between banks

11. The yield on a bond is

a. The same as the internal rate of return on the bond

b. The holding period return on the bond

c. The same as the forward rate on the bond

d. Never known with precision

12. If the yield on one-year Treasury securities is 10 percent per year and the yield on two-year Treasury securities is 20 percent per year, then the spot rate for the first year is

a. 10 percent per year

b. 15 percent per year

c. 20 percent per year

d. 30 percent per year

13. If the price of a Treasury security is 100, the bond has a 10 percent coupon rate and the spot rates for years 1 and 2 are 10 percent per year, then the yield to maturity for the bond is

a. 5 percent per year

b. 10 percent per year

c. 25 percent per year

d. 20 percent per year

14. If the spot rate on one-year Treasury securities is 10 percent per year and the spot rate on two- year Treasury securities is 20 percent per year, then the forward rate for the second year is about

a. 5 percent per year

b. 10 percent per year

c. 20 percent per year

d. 30 percent per year

15. If a bond has a duration of 4 years and its yield increases by one percentage point,

a. The bonds price will decrease by about 1 percent

b. The bonds price will decrease by about 2 percent

c. The bonds price will decrease by about 4 percent

d. The bonds price will decrease by about 8 percent or more