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Chapter 17: Q8. (page 369)
The interest rate on short-term U.S. government bonds is 4 percent. The risk premium for any asset with a beta = 1.0 is 6 percent. What is the average expected rate of return on the market portfolio?
0 percent
4 percent
6 percent
10 percent
The correct option is (d): 10 percent
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Identify each of the following investments as either an economic investment or a financial investment.
a. A company builds a new factory.
b. A pension plan buys some Google stock.
c. A mining company sets up a new gold mine.
d. A woman buys a 100-year-old farmhouse in the countryside.
e. A man buys a newly built home in the city.
f. A company buys an old factory.
Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?
Corporations often distribute profits to their shareholders in the form of dividends, which are quarterly payments sent to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for \(35 and that the company will pay dividends of \)2 per year on that share. What is the annual percentage rate of return? Next, suppose that you and other investors could get a 12 percent per year rate of return on the stocks of other very similar fashion companies. If investors care only about rates of return, what should happen to the share price of Rogue Designs? (Hint: This is an arbitrage situation.)
It is a fact that (1 + 0.12)3 = 1.40. Knowing that to be true, what is the present value of \(140 received in three years if the annual interest rate is 12 percent?
\)1.40
\(12
\)100
$112
Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound. Rounded to full dollars, what will be the value of your investment 4 years from now?
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