Unit 4: Session 6:

Which of the following is NOT related to the variability of a portfolio's returns? A)Security selection. B)Total return. C)Market timing. D)Asset allocation.

B

Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio? A)Dollar-weighted return B)Time-weighted return C)Dollar cost averaging D)Discounted cash flow

B

Given the following information, calculate the risk-adjusted return - 90-day T-bill rate: 4% - Actual return:14% - Beta = 1.4 - CPI 3% - Standard deviation 5.0

(14-4)/5 = 2

In order to calculate an investor's holding period return, it is necessary to know: - value of the portfolio at the beginning of the period. - value of the portfolio at the end of the period. - income received during the period. - capital appreciation or depreciation over the period.

1, 2, 3

An investor is reviewing his portfolio. To compute the real rate of return on an investment, it would be necessary to know - the gain (or loss) recognized on the asset - the income received from holding the asset - the rate of inflation - the tax bracket of the investor

1,2,3

The formula for real rate of return would most likely be used when the adviser wishes to: A)measure inflation-adjusted performance. B)analyze investment returns in terms of uneven cash flows. C)measure risk-adjusted performance. D)measure after-tax investment performance.

A

The holding period return (HPR) on a share of stock is equal to: A)the capital appreciation plus the dividend yield over the period. B)the current yield plus the dividend yield. C)the dividend yield plus the risk premium. D)the capital appreciation minus the inflation rate over the period.

A

Which of the following indices or averages is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility)? A)Dow Jones Composite Average. B)Value Line. C)S&P Composite. D)Wilshire 5,000.

A

An investment advisory firm tracks its performance against the S&P 400. From this, you could determine that this firm concentrates on A)small-cap securities B)mid-cap securities C)Nasdaq securities D)large-cap securities

B

One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would be less than the bond's yield to maturity if A)the bond was called at a discount B)the coupons were reinvested at a rate below the yield to maturity C)the investor purchased a put option on the bond D)the bond was redeemed at a premium

B

If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client's real rate of return is A)7%. B)less than 7%. C)10%. D)more than 7%.

B - Real return reduces nominal return by an inflation factor. Thus, the client's real return must be less than 7%.

In order to compute an investor's real rate of return on a common stock holding, all of the following are necessary EXCEPT: A)inflation rate. B)dividends. C)appreciation. D)marginal tax bracket.

D

One of the important roles of an investment adviser representative is assisting clients in analyzing the performance of securities held in their portfolios. Which of the following is the best measurement of a security's performance? A)Beta B)Yield C)Standard deviation D)Total return

D

When an investor's original value is subtracted from the ending value, and then has the income received over that time period added to it which is then divided by the original cost, the result is: A)annualized return. B)internal rate of return. C)expected return. D)holding period return.

D

An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is: A)4%. B)5%. C)12%. D)20%.

D - Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $.50 (one quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for three months - one quarter. Multiply that by 4 to get the annual rate.

An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated his stock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, what is the investor's real rate of return? A)10%. B)14%. C)4%. D)11%.

D - Given the fact the client liquidated his shares at a price of $55, we can conclude that he attained a 10% ($5 profit ÷ $50 initial investment) return based on capital appreciation of the stock. He also received dividends of $2 per share giving him an additional return of 4% ($2 ÷ $50). By adding these two percentages together, we can conclude that his total return is 14%, less an inflation rate of 3%, which would give a real rate of return of 11%.

An investment is made of $10,000. At the end of the year, $500 in non-qualifying dividends has been received and the value of the investment is $10,500. If the investor is in the 30% tax bracket, the after-tax yield is: A)5.0% B)6.5% C)8.5% D)3.5%

D - The only return (as far as yield is concerned) is the $500 of dividends. Remember, non-qualifying dividends do not "qualify" for the 15% rate. Subtracting 30% for taxes leaves $350 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.5%. If the question had asked about total return, then the $500 unrealized profit would have been included, although there would have been no tax on it.