Chapter 5 Review

Cost

A passive strategy is based on the premise that securities are fairly priced and it avoids the __________ involved in undertaking security analysis.

Asset Allocation

A simple strategy to control portfolio risk is to specify the fraction of the portfolio invested in broad asset classes such as stocks, bonds, and safe assets such as Treasury bills. This aspect of portfolio management is called __________ __________.

Less, Equal

Annual percentage rate (APR) is always ________ than or _________ to effective annual rate.

4. 100 shares of Google stock

For which of the following investments is the Sharpe ratio not a valid statistic? 1. A portfolio of Treasuries with different maturities 2. A balanced portfolio of stocks and bonds 3. S&P 500 Index 4. 100 shares of Google stock

2. weighted-average of returns in all possible outcomes

In scenario analysis, the HPR is calculated by computing: 1. arithmetic average return over the considered period 2. weighted-average of returns in all possible outcomes 3. dollar-weighted return 4. geomentric average return over the considered period

5.43

On August 1, 2012, the price of Walmart stock was $70.88; on March 1, 2013, it was $73.93. Over that period, the company paid $0.80/share of dividends. The holding period return for Walmart stock was ________%?

.55

Suppose a portfolio is expected to earn 15% while you expect the market to return 14%. The standard deviation of your portfolio is 20%. The current risk-free rate is 4%. The Sharpe Ratio for your portfolio is ____________ 0.05 0.50 0.55 0.75

2.5, 2.2

Supposed a mutual fund earned 10% over the first year and -5% over the second year. The arithmetic average one-year return for this fund is _________%; and the geometric average one-year return is _________%.

4. (nominal rate of return - inflation rate)/(one + inflation rate)

The real rate of return is equal to 1. (one + nominal rate of return)/(one + inflation rate) 2. (nominal rate of return + inflation rate)/(one + inflation rate) 3. (nominal rate of return - inflation)/(inflation rate) 4. (nominal rate of return - inflation rate)/(one + inflation rate)

Expected

The reward from an investment is call its _________ return.

Market

The risk aversion of the average investor is also known as the _________ price of risk

2. the risk premium of the risky asset times the fraction of the portfolio invested in the risky asset.

The risk premium of the complete portfolio equals 1. the risk premium of the risky asset divided by the fraction of the portfolio invested in the risky asset. 2. the risk premium of the risky asset times the fraction of the portfolio invested in the risky asset. 3.the total return of the risky asset times the fraction of the portfolio invested in the risky asset. 4. the total return of the risky asset divided by the fraction of the portfolio invested in the risky asset.

2. the increase in expected return per unit of additional standard deviation.

The slope of the capital allocation line equals 1. the increase in expected return times each unit of additional variance. 2. the increase in expected return per unit of additional standard deviation. 3. the increase in expected return times each unit of additional standard deviation. 4. the increase in expected return per unit of additional variance.

False

True or false: The time-weighted average return is same as internal rate of return (IRR).

7%

Which of the answers below is the correct answer to the following question; Suppose the real rate of interest is 2%, and the inflation rate is 4%, so that the nominal interest rate is about 6%. If the expected inflation rate rises to 5%, the nominal interest rate should climb to roughly what percent? 6% 4% 10% 7%

3. The only risky investment accepted over a risk-free rate is the one offering risk premium.

Which of the following statements about risk-averse investors is correct? 1. They are only concerned with the rate of return. 2. They invest in projects that are gambles. 3. The only risky investment accepted over a risk-free rate is the one offering risk premium. 4. They are willing to accept lower return and high level of risk.

3. the portfolio risk premium divided by the standard deviation of the portfolio's excess return

The Sharpe ratio of a portfolio is 1. the portfolio's return divided by the standard deviation of the portfolio's excess return 2. the portfolio return divided by the standard deviation of the market's excess return 3. the portfolio risk premium divided by the standard deviation of the portfolio's excess return 4. the market risk premium divided by the standard deviation of the portfolio's excess return

EAR (Effective Annual Rate)

The _________ (use the abbreviation) equals the rate at which invested funds actually grows and does not ignore compounding.

Market or Markets

The capital allocation line provided by one-month T-bills and a broad index of common stocks is called the capital Blank __________ line. A passive strategy using the broad stock market index as the risk portfolio generates an investment opportunity set that is represented by this line.

Real

The excess of the interest rate over the inflation rate is called the _________ interest rate.The growth rate of purchasing power derived from an investment.

Capital, Allocation

The fraction of the portfolio placed in risky assets is called the __________ __________ to risky assets and speaks directly to investor risk aversion.

Nominal

The interest rate in terms of "non adjusted for purchasing power" dollars is called a ________ interest rate.

Complete

The overall portfolio composed of the risk-free asset and the risky portfolio is called the _________ portfolio and it includes the entire investor's wealth.

Asset

The portfolio choice among broad investment classes is known as ________ allocation.

Neutral

To avoid the costs of acquiring information on any individual stock or group of stocks, we may follow a __________ diversification approach, selecting a diversified portfolio of common stocks that mirrors the corporate sector of the broad economy.

False HPR is defined as dollars earned over the investment period per dollar invested. HPR, however, assumes that the dividend is paid at the end of the holding period and so ignores reinvestment income.

True or False: If a stock pays dividends in the middle of the investment period, these dividends should not be accounted for when calculating HPR for this period.

True: available combination of risk and return is the technical part

True or false: Finding the available combinations of risk and return is the "technical" part of capital allocation; it deals only with the opportunities available to investors.

False: Both risk premium and standard deviation for the risk-free asset are zero. Moreover, Sharpe ratio is a valid statistic for ranking portfolios.

True or false: The risk-free asset has the highest Sharpe ratio of all assets.

3. risk aversion

What is a particular investor's price of risk that he demands from the complete portfolio in which his entire wealth is invested? 1. expected return 2 variance 3. risk aversion 4. expected utility

3.Inflation does not affect the purchasing power of the proceeds from treasury bonds.

Which of the following statements is NOT true about risk-free assets when it comes to treasury bonds? 1. The only risk-free asset in real terms would be a price-indexed government bond such as TIPS. 2. Money market funds as well as T-bills are the most easily accessible risk-free asset for most investors. 3.Inflation does not affect the purchasing power of the proceeds from treasury bonds. 4. The power to tax and to control the money supply lets the government issue default-free treasury bonds.

4. Inflation does not affect the purchasing power of the proceeds from treasury bonds.

Which of the following statements is NOT true about risk-free assets when it comes to treasury bonds? 1. The power to tax and to control the money supply lets the government issue default-free treasury bonds. 2. Money market funds as well as T-bills are the most easily accessible risk-free asset for most investors. 3. The only risk-free asset in real terms would be a price-indexed government bond such as TIPS. 4. Inflation does not affect the purchasing power of the proceeds from treasury bonds.

1. The standard deviation of a portfolio of assets is always equal to the sum of the individual assets standard deviations.

Which of the following statements is incorrect? 1. The standard deviation of a portfolio of assets is always equal to the sum of the individual assets standard deviations. 2. The standard deviation is the appropriate measure of risk for a portfolio of assets with normally distributed returns. 3. The normal distribution is completely described by its mean and standard deviation. 4. The return on a portfolio comprising two or more assets whose returns are normally distributed also will be normally distributed.