Unit 23 - Portfolio Performance Measures

A customer purchases stock for $40 per share and holds it for 1 year, selling it for $50 per share exactly 12 months after the date of purchase. Four quarterly qualifying dividends of $.50 were paid during the year. If the customer's tax bracket is 30%, what is the after-tax rate of return? A) 21.75% B) 18.40% C) 17.5% D) 21%

A) 21.75% The customer's return on the stock includes the $10 per share short-term capital gain ($50 − $40) plus the $2 qualifying dividend (quarterly dividend of $0.50 × 4). Remember, an asset must be held for more than 12 months for the gain to be long-term. After-tax rate of return is found by computing the total after-tax earnings. Short-term gains are taxed at the same rate as ordinary income, and qualifying dividends are taxed at a maximum rate of 15% (except for very high income earners—not tested). The tax on the $10 gain is $3 ($10 × 30%), and the tax on the $2 qualifying dividend is $0.30 ($2 × 15%). The investor's total return is the $12 total minus the $3.30 in taxes, or $8.70; $8.70 divided by the original investment of $40 results in an after-tax return of 21.75%.

An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 32% B) 27% C) 30% D) 25%

A) 32% Total return is all distributions plus/minus appreciation/depreciation. In this question, the $1,300 includes the $250 capital gain so all we add is the $20 dividend. $320 divided by $1,000 equals 32% total return.

What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 950? A) 5.26% B) 5.26% plus the implied coupon rate C) The return cannot be determined without knowing current interest rates D) 5.00%

A) 5.26% To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond.

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) Dow Jones Composite Average The most widely quoted and oldest measures of changes in stock prices are the Dow Jones averages. They are also the smallest in terms of the number of stocks included in the averages with only 65 stocks.

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

A) Total return

When, as per the Sharpe ratio, a stock exhibits superior performance, it implies A) a positive alpha. B) a negative alpha. C) a high beta. D) a low beta.

A) a positive alpha. The higher the Sharpe ratio, the higher the risk-adjusted return. In other words, the stock is returning significantly more than the risk-free rate. That will result in a positive alpha. Beta is not part of the Sharpe ratio.

In order to compute the real rate of return for a security, it would be necessary to know all the following EXCEPT A) the beta of the security B) the CPI C) the purchase price D) the annual dividend

A) the beta of the security The real rate of return is the actual return less the inflation rate as measured by the CPI.

The true rate of return on a bond is the nominal rate minus A) the inflation rate B) the margin rate C) the discount rate D) the prime rate

A) the inflation rate

If you knew a given stock had a 40% chance of earning a 10% return, a 40% chance of earning −20%, and a 20% chance of earning −10%, the expected return would be equal to A) −6% B) 14% C) 10% D) −10%

A) −6%

If an agent recommends that a client invest a portion of his portfolio in an international stock fund and is asked whether she should compare the performance of the fund against the S&P 500 Index, how should the agent respond? A) No, it is preferable to compare the fund against the Russell 2,000 Index because it covers smaller corporation stocks. B) No, it is preferable to compare the fund against the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index because it covers international securities. C) There is no appropriate benchmark against which an investor can compare a portfolio of foreign securities. D) Yes, the S&P 500 is an appropriate benchmark against which to compare the performance of all equity funds.

B) No, it is preferable to compare the fund against the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index because it covers international securities.

An analyst computing a stock's Sharpe ratio would need to know the stock's A) correlation coefficient. B) standard deviation. C) beta coefficient. D) alpha.

B) standard deviation.

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $0.25 per share and capital gains of $0.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50, and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be A) 3.85% B) 83% C) 3.33% D) 27.20%

C) 3.33% The current yield on mutual funds is calculated by dividing the annualized yield ($0.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = 0.0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.

GHI currently has earnings of $4 and pays a $0.50 quarterly dividend. If GHI's market price is $40, the current yield is A) 15% B) 1.25% C) 5% D) 10%

C) 5% The quarterly dividend is $0.50, so the annual dividend is $2; $2 ÷ $40 market price = 5% current yield.

An investor purchases a 5% callable convertible subordinated debenture at par. Exactly one year later, the bond is called at $104. The investor's total return is A) 4%. B) 5%. C) 9%. D) 7.5%.

C) 9%.

Which two of the following statements are CORRECT? I. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate portfolio manager performance. II. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate individual investor performance. III. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate portfolio manager performance. IV. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate individual investor performance. A) I and II B) III and IV C) I and IV D) II and III

C) I and IV

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

C) marginal tax bracket

The total return on a bond that cost an investor $950, was sold for $1,000, and paid $50 in interest payments is nearest to A) 5.26% B) 10.00% C) The return cannot be determined from the information supplied D) 10.53%

D) 10.53%

Expressed as a percentage, what is the total return on a 1-year, newly issued (365 days to maturity) zero coupon debt obligation priced at 95? A) 5% B) The return cannot be determined without knowing current interest rates. C) 5.26% plus the implied coupon rate D) 5.26%

D) 5.26%

Your client is considering the purchase of a small-cap fund. Which of the following benchmarks would be most appropriate for comparing the fund's performance? A) Wilshire 5,000 B) DJIA C) S&P 500 D) Russell 2,000

D) Russell 2,000

If an investor buys a utility stock with a stable 5% dividend, and after a year the investor's total return in the stock is 10%, the most likely reason for this is A) the investor reinvested the quarterly dividends B) the company doubled its dividend payment C) the stock price declined D) the stock appreciated by 5%

D) the stock appreciated by 5%