1.

If a person's required return decreases for an increase in risk, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.
2. The ________ of an asset is the change in value plus any cash distributions expressed as a
percentage of the initial price or amount invested.
A) return
B) value
C) risk
D) probability
3. If a person requires greater return when risk increases, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.

4. Ahmed purchased a summer house one year ago for $6,500. During the year it generated
$4,000 in cash flow. If Ahmed sells the summer house today, he could receive $6,100 for
it. What would be his rate of return under these conditions?

, , ,
HPR = 55%
,

5. To increase the account receivables turnover, Cairo Co. offers 2% discount if customer
pays the invoice within 146 days.
Compute APR and EAR of this discount rate.
HPR = 2%
Number of discounts period as a proportion of a year = 146 / 365 = 0.4
1/n = 1 / 0.4 = 2.5
APR = 2% / 0.4 = 5%
EAR = (1 + 2%)2.5 – 1 = 5.075%

6. Using a stated annual rate of 12%, compute the effective rates for daily, monthly,
quarterly and periods.
Daily return
HPR= 12% / 365 = 0.033%
Day as a proportion of a year = 1/365 = 0.00274
1/n = 1/0.00274 = 364.96
EAR = (1 + 0.033%)364.69 – 1 = 12.8%
Monthly return
HPR = 12% / 12 = 1%
Month as proportion of a year = 1/12 = 0.0833
1/n = 1/0.0833 = 12
EAR = (1+0.01)12 -1= 12.68%
Quarterly return
HPR = 12% / 4 = 3%
Quarter as proportion of a year = 1 / 4 = 0.25
1/ n = 1 / 0.25 = 4
EAR = (1 + 3%)4 – 1 = 12.55%

7. Stock A has the following returns for various states of the economy:

State of the Probability Stock A's Return

Economy
Recession 10% -30%
Below Average 20% -2%
Average 40% 10%
Above Average 20% 18%
Boom 10% 40%

What is Stock A's expected return?

10% 30% 20% 2% 40% 10% 20% 18% 10% 40%
8.2%

8. Stock W has the following returns for various states of the economy:

State of the Probability Stock W's Return

Economy
Recession 9% -72%
Below Average 16% -15%
Average 51% 16%
Above Average 14% 35%
Boom 10% 85%

What is Stock W's standard deviation of returns and CV?

9% 72% 16% 15% 51% 16% 14% 35% 10% 85%
12.68%
 72% 12.68% 2 .09 15% 12.68% 2 .16 16% 12.68% 2 .51
35% 12.68 . 14 85% 12.68 . 10 36.96%

CV= 36.96% / 12.68% = 2.9%

9. Adel is a risk averse investor; he is considering to buy one of the following stocks:
Stock K L M Q
Expected rate of return 35% 28% 25% 33%
Standard Deviation 12% 10% 9% 11.5%
Which stock he should buy? Why?

CVK = 12% / 35% = 0.343

CVL = 10% / 28% = 0.357
CVM = 9% / 25% = 0.36
CVQ = 11.5% / 30% = 0.348
According to the coefficient of variation he should buy stock K; because it has the lowest CV