ECON 2560 Chapter Notes - Chapter 11: Inverse Relation, Expected Return, Squared Deviations From The Mean

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coralgnu125

2 Nov 2017

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**converting 3 month return to an annual return example**: (1+3 month rate)1/3 1: converting it to a monthly rate first (1+1 month rate)12 1. If interest rates rise, value of bond goes down. Measuring risk: you need to know how far the securities you invest in range from the average return in first 3 years you may have gain of 50, next 3 years you may have a loss of 35% Variance and standard deviation: variance, average value of squared deviations from mean, measure of volatility, standard deviation, square root of variance, another measure of volatility, expected return = probability-weighted average of possible outcomes. If you have a group of observed values, you use the formula above. Inverse relationship in portfolio helps offset any losses: adding a gold stock to an all-auto portfolio is negative risk even though gold stocks are very volatile.

Related Questions

1. Hedgers are primarily interested in

A. betting on anticipated changes in prices.
B. reducing their exposure to the risk of price fluctuations.
C. increasing market liquidity.
D. reducing the spread between the bid and ask prices on bonds.

2. Using forward transactions allows

A. holders of common stock to lock in future dividend payments.
B. the federal government to stabilize fluctuations in tax receipts.
C. corporations to reduce problems arising from future fluctuations in their dividend payments.
D. both buyers and sellers to reduce risks associated with price fluctuations.

3. The rate of return of a stock held for one-year equals

A. the change in the price of the stock.
B. the dividend yield plus the rate of capital gain.
C. the rate of capital gain minus the dividend yield.
D. the dividend yield minus the rate of capital gain.

4. Suppose you plan to hold a stock for one year. You expect that, in one year, it will sell for $30 and pay a dividend of $3 per share. If your required return on equity is 10%, what is the most you should be willing to pay for the share today? (Points: 1)

A. $3.30
B. $23
C. $30
D. $33

5. Forward transactions would be useful to

A. a government wanting to know the size of its future debt.
B. a household wanting to reduce its future tax liability.
C. a business wanting to know the cost of its funds on future loans.
D.a business wanting to expand its operations in overseas markets.

silverweasel183

QUESTION 16

Which of the following statements is true?

		The administrative costs per dollar are greater for a large loan than a small loan.
		The risk on a long-term loan is likely to be less than on a short-term loan, ceteris paribus.
		a and b
		none of the above

1 points

QUESTION 17

If the price for loanable funds is less than the return on capital, then firms will

		borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises.
		borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls.
		not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall.
		not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise.

1 points

QUESTION 18

Economic rent is

		the payment a renter pays his or her landlord.
		payment in excess of fixed costs.
		payment in excess of opportunity costs.
		the same as interest if we are discussing a capital good purchase.
		none of the above

1 points

QUESTION 19

Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual inflation rate are zero percent. Before you pay back the $1,000 principal and $50 interest, the inflation rate increases to 10 percent. Does anyone lose from this situation?

		Nobody loses, because the terms were set before the inflation rate increased, and once the terms are set, inflation does not affect the situation.
		You lose, because the dollars that you have borrowed are worth more the higher the inflation rate.
		The banker loses, because you will be paying back the loan with dollars that are worth less than the dollars you borrowed.
		Both the banker and you lose, for the reasons in answers b and c.
		There is not enough information to answer the question.

1 points

QUESTION 20

A change in the expected rate of inflation from 5 percent to 3 percent will

		decrease the real interest rate by 2 percentage points.
		decrease the real interest rate by 3 percentage points.
		increase the nominal interest rate by 2 percentage points.
		decrease the nominal interest rate by 2 percentage points.

Question 1.

a. What is the difference between interest rates and returns on a bond? Is the RET equal to the interest rate? Why or Why not?

b. What would be the rate of return on a coupon bond bought at face value of $1000 today( with a coupon rate of 15%) and sold for $1200 one year later ?

c. What is the method to calculate the rate of Capital Gain (g)? Is there a capital gain or loss in the above cae? How much?

Question 2.

Explain why you would be more or less willing to buy long-term Government bonds under the following scenarios: Use a demand and supply analysis for bonds, with a given initial equilibrium in the bonds market. ( Diagram necessary)

a.Trading in these bonds increases, making them easier to sell.

b.Relative risk of these bonds compared to other types falls

c.Suppose government has a surplus

Question 3.( Diagram nesscesary)

a. What is the distinction between Real and Nominal Interest rates?

b. Suppose we have an equilibrium in the bonds market with a given expected inflation (he). If inflation rate increases, What will happen to the demand and supply of bonds? Would you be able to say for sure (i.e. with certainty) what will happen to the price of bonds and what will be the quantity bought and sold? Why or why not?

ECON 2560 Chapter Notes - Chapter 11: Inverse Relation, Expected Return, Squared Deviations From The Mean

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