Consider the Following Two Investment Alternatives for an Investor Who

question 9

Multiple Choice

Consider the following two investment alternatives for an investor who has a one-year investment horizon. For Alternative 1, the investor buys a one-year instrument. For alternative 2, the investor buys a six-month instrument and when it matures in six months the investor buys another six-month instrument. Which of the below statements is FALSE?

• A) Given the one-year spot rate, there is some rate on a six-month instrument one year from now that will make the investor indifferent between the two alternatives.
• B) With Alternative 1, the investor will realize the one-year spot rate and that rate is known with certainty.
• C) With Alternative 2, the investor will realize the six-month spot rate, but the six-month rate six months from now is unknown.
• D) For Alternative 2, the rate that will be earned over one year is not known with certainty.

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Definitions:

Expected Return

The predicted average return on an investment calculated by adding together all possible returns weighted by the likelihood of each occurring.

Asset Allocation Strategy

A method of investment where an individual divides their investment portfolio among various asset categories, such as stocks, bonds, and cash, to optimize risk and return.

Go Global

A strategy or approach aimed at expanding business operations internationally to access larger markets and opportunities.

U.S. Equity

Shares that represent ownership in U.S.-based companies and can be traded on American stock exchanges.