Final

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____. A. .22 B. .60 C. .42 D. .25

C. .42 (15% - 4.5%)/25% = 42%

A loan for a new car costs the borrower 0.8% per month. What is the EAR? A. .80%B. 6.87% C. 9.6% D. 10.03%

D. 10.03% (1 + 0.008)^(12) − 1 = 0.1003 = 10.03%

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

D. 11% 4% + ($3.5/$50) = 11%

The risk-free rate of return is 5% and the market risk premium is 7%. What is the expected rate of return on a stock with a beta of 1.56? A. 10.23% B. 11.08% C. 12.00% D. 15.92% E. 16.36%

D. 15.92% E(r) = .05 + (1.56 × .07) = .1592 = 15.92%

Portfolio A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the Sharpe ratio? A. .40 B. .50 C. .75 D. .80

A. .40 (20% - 10%)/25%

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A. 20% more B. slightly more C. 20% less D. slightly less

A. 20% more Conceptually, we found that beta(j) = chg.r(j)/chg.r(m) or chg.r(j) = beta(j)*chg.r(m). Hence, if beta(A) is 1.2, then will change more by 0.2 (that is 20%).

__________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund. A. A load B. A no-load C. An index D. A specialized-sector

A. A load "Load" means a charge of fees or commissions.

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? Caution: it is about the performance on your account. A. Dollar-weighted return B. Geometric average return C. Arithmetic average return D. Index return

A. Dollar-weighted return Since the measure of return is affected by your reinvestment, the DM is only such measure.

Which one of the following measures time-weighted returns and allows for compounding? A. Geometric average return B. Arithmetic average return C. Dollar-weighted return D. Historical average return

A. Geometric average return GM is the average return over multiple periods incorporating compounding holding period returns from each period and hence is called "time-weighted average return"

The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________. A. in proportion to the market value weight of the firm's equity in the S&P 500 B. in proportion to the price weight of the stock in the S&P 500 C. by purchasing an equal number of shares of each stock in the S&P 500 D. by purchasing an equal dollar amount of shares of each stock in the S&P 500

A. in proportion to the market value weight of the firm's equity in the S&P 500

The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. A. net asset value B. average asset value C. gross asset value D. total asset value

A. net asset value

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? A. $12 B. $9 C. $10 D. $1

B. $9 NAV = ($500 - $50)/50 = $9

You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends Year Beginning of # of shares Year Price bought or sold 2008 $50.00 100 bought 2009 $55.00 50 bought 2010 $51.00 75 sold 2011 $54.00 75 sold What is the dollar-weighted return over the entire time period? A. 2.87% B. .74% C. 2.6% D. 2.21%

B. .74% DM is the same as the IRR which is determined using cash flows as follows Period Cash flow 0 -$50*100 1 -$55*50 2 +$51*75 3 +54*75 CF0 = -5000 CO1 = -2750 CO2 = 3825 CO3 = 4050 IRR = 0.74

Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________. A. 1% B. 3% C. 6% D. 9%

B. 3% Risk premium = [.4(.15) + .6(.05)] - .06 = 0.03 = 3%

Published data on past returns earned by mutual funds are required to be ______. A. dollar-weighted returns B. geometric returns C. excess returns D. index returns

B. geometric returns GM is the required measure of average return that mutual funds must report.

Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum-variance point on the efficient frontier D. that are risk-free to all other asset choices

B. located on the capital market line to those located on the efficient frontier The upper part of the investment opportunity set is efficient, meaning that the portfolios on the upper part (efficient frontier) maximize the expected returns given a certain standard deviation

Investors who want to liquidate their holdings in a unit investment trust may ___________________. A. sell their shares back to the trustee at a discount B. sell their shares back to the trustee at net asset value C. sell their shares on the open market D. sell their shares at a premium to net asset value

B. sell their shares back to the trustee at net asset value UITs are redeemable (or open). Hence, shareholders can sell the units back to the fund managing company (the trustee) at NAV.

The term excess return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

B. the difference between the rate of return earned and the risk-free rate

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up; right B. up; left C. down; right D. down; left

B. up; left Buying or shorting additional risky assets can expand the investment opportunity set. As a result, the efficient frontier part will move left and up.

Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________. A. direct operating expenses B. back-end loads C. 12b-1 charges D. front-end loads

C. 12b-1 charges

The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%

C. 9.7% [(1 + -0.12)(1 + 0.20)(1 + 0.25)]^(1/3) - 1 = 9.70%

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

C. I, III, II, IV Since the standard deviation of returns is one measure of standalone risk, riskier assets should exhibit greater estimates of risk. The riskiness is: small stock > large stock > Long term bonds > Short term debts (such as T-bills)

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier A. I and II only B. II and III only C. III and IV only D. I and IV only

C. III and IV only The item (II) is not possible since to get a greater return people need to take a greater risk. Only when the capital market line (CML) become tangent to the efficient frontier, the expected return is maximized given any certain standard deviation. Then, mathematically, the slope of the CML (the slope = Sharpe ratio) is also become steepest.

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________. A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

C. arithmetic average return GM is the average return over multiple periods incorporating compounding holding period returns from each period and hence is called "time-weighted average return."

If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. A. geometric average return B. arithmetic average return C. dollar-weighted return D. index return

C. dollar-weighted return AM and GM use only the %values (holding period returns). DM is the same as the IRR which is determined using cash flows.

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________. A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12%

C. more than 12% but less than 18% σ2p = .02592 = (.5^[2])(.24^[2]) + (.5^[2])(.12^[2]) + 2(.5)(.5)(.24)(.12).55 = .02592 = 259.2% (0.02592 × 100^[2] ); σ = 16.1% = √259.2%

Investors who want to liquidate their holdings in a closed-end fund may ___________________. A. sell their shares back to the fund at a discount if they wish B. sell their shares back to the fund at net asset value C. sell their shares on the open market D. sell their shares at a premium to net asset value if they wish

C. sell their shares on the open market "Closed" means non-redeemability, whereby shareholders cannot redeem their shares to the fund managing company. Hence the shares of closed-end funds are traded on an organized stock exchange.

A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 62% D. 73%

D. 73% Doubling in size means 100% growth. Recall if you deal with probabilities, you have the following calculations by multiplying by respective probabilities. E[rp] = (.60)(1) + (.40)(-.5) = 0.40 (40%) σ^(2) rp = (.60)(1 - .40)^[2] + (.40)(-.5 - .40)^[2] = .54 σrp = .73

Advantages of investment companies to investors include all but which one of the following? A. Record keeping and administration B. Low-cost diversification C. Professional management D. Guaranteed rates of return

D. Guaranteed rates of return No mutual funds can guarantee any fixed amount of return.

Which of the following ETFs tracks the S&P 500 Index? A. Qubes B. Diamonds C. Vipers D. Spiders

D. Spiders The ticker for ETF of S&P500 index is SPY and read "spider." Similarly, QQQ is the ticker for ETF of Nasdaq 100 and read "Qubes," and DIA is the ticker for ETF of the DJIA index and read "Diamond."

Which one of the following invests in a portfolio that is fixed for the life of the fund? A. Mutual fund B. Money market fund C. Managed investment company D. Unit investment trust

D. Unit investment trust

Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

D. all of these options Firm-specific events create the volatility in the stock return. Such volatility is unique to the firm and can be reduce by having many different stocks in a portfolio (diversification).

The type of mutual fund that primarily engages in market timing is called _______. A. a sector fund B. an index fund C. an ETF D. an asset allocation fund

D. an asset allocation fund A sector fund focuses on a specific industry sector without timing on any other assets in general. However, an asset allocation and flexible fund gives the fund manager the authority to select assets and time the market.

The dollar-weighted return is the _________. A. difference between cash inflows and cash outflows B. arithmetic average return C. geometric average return D. internal rate of return

D. internal rate of return DM is the same as the IRR which is determined using cash flows.

Net asset value is defined as ________________________. A. book value of assets divided by shares outstanding B. book value of assets minus liabilities divided by shares outstanding C. market value of assets divided by shares outstanding D. market value of assets minus liabilities divided by shares outstanding

D. market value of assets minus liabilities divided by shares outstanding NAV is the value of equity of the fund per share.