Please help me to answer this question thanks! If interest rates are positive, t
ID: 2642437 • Letter: P
Question
Please help me to answer this question thanks!
If interest rates are positive, the present value of a future lump sum of $100 will be
A. less than $100
B. greater than $100
C. equal to $100
D. equal to [$100 x (1 + opportunity cost rate)]
E. The answer cannot be determined from the information provided.
An investment opportunity promises a stated interest rate of 6 percent with semiannual compounding. Which of the following statements is most correct?
A. The periodic rate is greater than 3 percent.
B. The periodic rate is less than 3 percent.
C. The effective annual rate is less than 6 percent.
D. The effective annual rate is greater than 6 percent.
E. The effective annual rate is 6 percent.
Which of the following statements concerning financial risk is false?
A. Generically, financial risk is related to the probability of a return that is less than expected.
B. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will lower risk.
C. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will not affect risk.
D. In the real world, it is not possible to create a riskless portfolio because all investment returns, to a greater or lesser extent, move with the overall economy.
E. Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a negative 10 percent return is 100 percent.) Although the expected return is negative, the investment is riskless.
Assume a stock's risk and expected rate of return are plotted on a graph where the y-axis is required rate of return and the x-axis is risk. Under which of the following conditions is the stock most likely to be sold (if owned) or not purchased?
A. The stock's plot falls on the security market line.
B. The stock's plot falls below the security market line.
C. The stock's plot falls above the security market line.
D. The stock's plot falls at the risk-free rate on the y-axis.
E. The information provided is insufficient to answer the question.
If interest rates are positive, the present value of a future lump sum of $100 will be
Explanation / Answer
Q. No. 1 If Interest rates are Poitive then Present Value of Future Lump Sum amount will always be Less then Future Value.Answer will be (A)
Q. No. 2 If Stated annual rate of interest is 6 % and its compounded semi annually then effective ammual rate of interset will be Greater then 6 %. The logic behind it is you will be getting 3 % interest Half Yearly and the same interest will be reinvested and you will earn Interest on interest for next 6 Months. Hence the effective Rate of Interest will be greater then 6 %. Answer will be (D)
Q. No. 3 The Statements Concerning Financial Risk which are false are :
(B) If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will lower risk.
(E)Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a negative 10 percent return is 100 percent.) Although the expected return is negative, the investment is riskless.
Q. No. 4 The security market line (SML) is the line that reflects an investment's risk versus its return, or the return on a given investment in relation to risk. The measure of risk used for the security market line is beta. If a Stock is above SML then the stock is undervalued and hence one should purchse it and if the Stock is below SML line and it is Overvalued and hence one Should Sell it.Answer should be (B).