1. If you deposit $1,000 into a savings account that pays you 5% interest per ye
ID: 1131799 • Letter: 1
Question
1. If you deposit $1,000 into a savings account that pays you 5% interest per year, approximately how long will it take to double your money?
2. Risk
A. can be reduced by increasing the number of stocks in a portfolio.
B. can be reduced by placing a large number of small bets rather than a small number of large bets.
C. Both A and B are correct.
D. Neither A nor B are correct.
3. If you put $1,000 in the bank today at an interest rate of 6% what is its value in two years?
A. $2,000(1.06)
B. $1,000 + $(1.06)^2
C. $1,000(1.06)^2
D. None of the above are correct.
4. Which of the following is not correct?
A. Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions.
B. The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds.
C. If you had information about a corporation that no one else had, you could earn a very high rate of return. This contradicts the efficient market hypothesis.
D. There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10, than by increasing it from 100 to 120 stocks.
A. 10 years B. 14 years C. 8 years D. 12 yearsExplanation / Answer
1) For Compound interest rate, 1000(1+5%)n = 2000
=> 1.05n = 2
=> n = 12
=> Option D is correct
2) Due to risk diversification A and B both are true. So option C is correct.
3) By Compound interest rate formula, 1000*(1+6%)2 =1000*(1+0.06)2 So option C is correct.
4) Irrespective of Sensitivity of economic condition, due to higher volatility, stocks which give cyclical returns, give high returns. So option A is not correct.
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