Which of the following properly describes the present value of an ordinary annui
ID: 2613611 • Letter: W
Question
Which of the following properly describes the present value of an ordinary annuity?
The best definition of risk averse is
Given a two-year loan of $50,000 and an annual interest rate of 8 percent, how much interest will accrue during the life of the loan? (Assume no principal payments during the term.)
If asset x has a standard deviation of 10 percent, and the market portfolio has a standard deviation of 20 percent, and the correlation of their returns is .5, what is the beta?
The variance is the square root of standard deviation.
Stock prices are based upon the future value of cash flows.
False
The first payment is one period after the present value.Explanation / Answer
Answer for question no.1:
Option a is the answer. Annuity is generally paid one year after the first payment. Because, amount deposited earns interest only when the amount is held in for a while, generally atleaset a year.
Answer for question no.2:
Risk averse means taking informed risks. though earning low returns.
In the given options the option closest to the above is second option i.e., taking small risks.
Answer for question no.3:
Loan amount =$50,000
Term of the loan =2 years.
Annual interest rate =8%.
interest amount per annum =$50,000 *8%
=$4,000.
Therefore, interest that would accrue over the term of the loan i.e., two years =$4,000 *2 =$8,000.
Answer is option b.
Answer for question no.4:
Answer is 0.5 it is option b.
Corelation between two stocks = Co variance betweeen stock and market portfolio/variance of stock * variance of market portfolio.
Given correlation = 0.5
Therefore 0.5 =Co variance betweeen stock and market portfolio/(0.10)2 * (0.20)2
Co variance betweeen stock and market portfolio =0.5 * 0.01*0.04
=0.0002.
Beta = Co variance betweeen stock and market portfolio/variance of market portfolio
=0.0002/0.04
=0.005 *100
=0.5
Answer for question no.5:
Answer is false.
Because formula for calculation of standard deviation =square root of Variance. This means Variance = (Standard deviation)2
Answer for question no.6:
Stock prices are nothing but the present value of future cash flows. So the answer is True. Answer is option a.
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