Chapter 5- final
During the 1986-2013 period, the Sharpe ratio was lowest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. equity world portfolio in U.S. dollars
long-term US treasury bonds
From 1926 to 2013 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. A. lower; higher B. lower; lower C. higher; lower D. higher; higher
lower; lower
The market risk premium is defined as __________. A. the difference between the return on an index fund and the return on Treasury bills B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset
the difference between the return on an index fund and the return on Treasury bills
The complete portfolio refers to the investment in _________. A. the risk-free asset B. the risky portfolio C. the risk-free asset and the risky portfolio combined D. the risky portfolio and the index
the risk-free asset and the risky portfolio combined
An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______. A. 41.68% B. 11.32% C. 3.64% D. 13%
11.32%
61. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________. A. 6% B. 8.75 % C. 10% D. 16.25%
16.25%
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in Treasury bills. A. 19% B. 25% C. 36% D. 50%
19%
Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______. A. 8.67% B. 9.84% C. 21.28% D. 14.68%
21.28%
63.You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. A. 0%; 60%; 40% B. 25%; 45%; 30% C. 40%; 24%; 16% D. 50%; 30%; 20%
40, 24, 16
57.You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%. A. 100% B. 90% C. 45% D. 10%
45%
28.Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? A. 5.14% B. 7.59% C. 9.29% D. 8.43%
5.14%
59.You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________. A. 1.040 B. .80 C. .50 D. .25
50
85.If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A. 5% B. 15% C. 54.5% D. 114.5%
54.5%
56.You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? A. $6,000 B. $4,000 C. $7,000 D. $3,000
6,000
The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______. A. SML B. CAPM C. CML D. total return line
CML
In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns A. I only B. I and II only C. I and III only D. I, II, and III
I and II only
Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B. A. I only B. I and II only C. II and III only D. I, II, and III
I and II only
Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons. A. I only B. I and II only C. II and III only D. I, II, and III
I and II only
You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero. A. I only B. I and III only C. II only D. I, II, and III
I and III only
Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. 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
I, III, II, IV
Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013. 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
I, III, II, IV
Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? A. money market fund B. U.S. T-bill C. short-term corporate bonds D. U.S. T-bill whose return was indexed to inflation
US T-bill whose return was indexed to inflation
During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. bond world portfolio return in U.S. dollars
large US stocks
During the 1926-2013 period which one of the following asset classes provided the lowest real return? A. Small U.S. stocks B. Large U.S. stocks C. Long-term U.S. Treasury bonds D. Equity world portfolio in U.S. dollars
long-term US treasury bonds
The normal distribution is completely described by its _______. A. mean and standard deviation B. mean and variance C. mode and standard deviation D. median and variance
mean and standard deviation
Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(rA) = 10% σA = 20% Asset B E(rB) = 15% σB = 27% An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis. A. only asset A is acceptable B. only asset B is acceptable C. neither asset A nor asset B is acceptable D. both asset A and asset B are acceptable
neither asset A nor asset B is acceptable
Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________. A. security A B. security B C. security C D. security D
security A
Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data
small firms are riskier than large firms
The reward-to-volatility ratio is given by _________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. the portfolio's excess return
the slope of the capital allocation line
The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. A. risky assets; Treasury bills B. Treasury bills; risky assets C. excess returns; risky assets D. index assets; bonds
treasury bills; risky assets
Which measure of downside risk predicts the worst loss that will be suffered with a given probablility? A. standard deviation B. variance C. value at risk D. Sharpe ratio
value at risk
Your great aunt Zella invested $100 in 1925 in a portfolio of large U.S. stocks that earned a compound return of 10% annually.If she left that money to you, how much would be in the account 90 years later in 2015? A. $1,000 B. $9,900 C. $531,302 D. $5,843,325
$531,302
Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________. A. $3,000 B. $7,000 C. $7,500 D. $10,000
$7,000
88.What is the VaR of a $10 million portfolio with normally distributed returns at the 5% VaR? Assume the expected return is 13% and the standard deviation is 20%. A. 13% B. -13% C. 19.90% D. -19.90
-19.90%
The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to- volatility ratio for the Manhawkin Fund? A. .8 B. .6 C. 9 D. 1
.6
You have the following rates of return for a risky portfolio for several recent years: 2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45% If you invested $1,000 at the beginning of 2011, your investment at the end of 2014 would be worth ___________. A. $2,176.60 B. $1,785.56 C. $1,645.53 D. $1,247.87
1,785.56
Most studies indicate that investors' risk aversion is in the range _____. A. 1-3 B. 1.5-4 C. 3-5.2 D. 4-6
1.5-4
An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. A. 10%; 6.7% B. 12%; 22.4% C. 12%; 15.7% D. 10%; 35%
12%; 15.7%
You have the following rates of return for a risky portfolio for several recent years: 2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45% The annualized (geometric) average return on this investment is _____. A. 16.15% B. 16.87% C. 21.32% D. 15.60%
15.60%
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________. A. $300; $450 B. $150; $100 C. $100; $150 D. $450; $300
150, 100
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. A. $162; $595; $243 B. $243; $162; $595 C. $595; $162; $243 D. $595; $243; $162
243, 162, 595
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%
3%
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
42
If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? A. 5.48% B. 8.74% C. 9% D. 12%
8.74%
27.Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment? A. 12.8% B. 11% C. 8.9% D. 9.2%
9.2%
68.A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____. A. 68.26% B. 95.44% C. 99.74% D. 100%
95.44%
The formula E(rp)-rf/sigma is used to calculate the _____________. A. Sharpe ratio B. Treynor measure C. coefficient of variation D. real rate of return
Sharpe ratio
One method of forecasting the risk premium is to use the _______. A. coefficient of variation of analysts' earnings forecasts B. variations in the risk-free rate over time C. average historical excess returns for the asset under consideration D. average abnormal return on the index portfolio
average historical excess returns for the asset under consideration
60.You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________. A. invest $125,000 in the risk-free asset B. invest $375,000 in the risk-free asset C. borrow $125,000 D. borrow $375,000
borrow $375,000
In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. A. capital allocation line B. indifference curve C. investor's utility line D. security market line
capital allocation line
78.According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return? A. long-term Treasury bonds B. corporate bonds C. common stocks D. preferred stocks
common stocks
35. Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms. A. the same B. lower C. higher D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)
higher
58.You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you _________. A. place 40% of your money in the risky portfolio and the rest in the risk-free asset B. place 55% of your money in the risky portfolio and the rest in the risk-free asset C. place 60% of your money in the risky portfolio and the rest in the risk-free asset D. place 75% of your money in the risky portfolio and the rest in the risk-free asset
place 40% of your money in the risky portfolio and the rest in the risk free asset
The excess return is the _________. A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury-bill rate C. rate of return to risk aversion D. index return
rate of return in excess of the Treasury-bill rate
Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______. A. is normally risk neutral B. requires a risk premium to take on the risk C. knows he or she will not lose money D. knows the outcomes at the beginning of the holding period
requires a risk premium to take on the risk
45. Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____. A. stocks B. bonds C. money market funds D. Treasury bills
stocks
