unit 23 portfolio measures series 65

One of your clients is viewing a stock held in her portfolio and wishes to know how to calculate the holding period return for that security. In order to do that, she must know all of the following EXCEPT A) the date the stock was purchased and the date it was sold. B) the current market price C) the dividends received during the holding period D) the purchase price

A

The total return of a mutual fund is equal to A) the return attained by reinvestment of all dividend and capital gains distributions plus unrealized gains or minus unrealized losses B) the reinvestment of all unrealized dividend and capital gain income C) all realized and unrealized capital appreciation D) annualized fund dividends divided by the current POP

A

A client approaches the IAR handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The IAR suggests a stock paying a $.28 quarterly dividend. That stock will meet the income objective if it has a current market price of A) $18.67 B) $11.91 C) $6.72 D) $4.67

A The first thing to do is annualize the dividend by multiplying the $0.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666 or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the 4 choices by 6% to see which one is closest to $1.12.

KapCo Balance Fund has a NAV of $9.50 and POP of $10. Over the past 12 months, it distributed dividends totaling $.75 and capital gains totaling $1.00. What is NavCo's current yield? A) 7.5% B) 7.9% C) 10% D) 17.5%

A This question gives you excess information. The first point is that capital gains are not included in calculation of a mutual fund's current yield. You must also remember that the NAV is not involved. The calculation is: $0.75 (annual dividend) = 7.5%/$10.00 (POP)

An investor purchases 100 shares of RIF common stock. In the year following the purchase, the RIF shares appreciated by 12% and paid a 2% dividend. If inflation, as measured by the CPI, was at a 4% rate, the investor's total return on the RIF shares is closest to A) 14% B) 12% C) 8% D) 10%

A his question is asking for the total return, which is 14% (12% appreciation + 2% dividend). Had the question asked for the inflation-adjusted return, (which it doesn't), that is 14% minus the 4% CPI.

Bill will put money into stocks only if he expects that stock returns, over time, will outpace bond returns by some amount that compensates him for the added volatility of owning stocks. This reflects A) premium priced bonds B) risk premium C) time premium D) option premium

B

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) expected return B) holding period return C) annualized return D) internal rate of return

B

In order to compute yield to maturity, all of the following are necessary EXCEPT A) the current market price B) the nominal yield C) the call price D) the maturity date

C

An investor purchases a 6% callable senior lien mortgage bond at par. Exactly two years later, the bond is called at $102½. The investor's total return is A) 9.5%. B) 8.5%. C) 14.5%. D) 7.25%.

C Total return consists of income plus gain. Buying this bond at par and having it called at $102½ results in a $25 gain. With a 6% coupon, there will be four semiannual interest payments of $30 in a two-year holding period. Adding the $25 + $120 = $145 total return on an investment of $1,000 which = 14.5%. Please note that the question didn't ask for the annualized rate of return. That would be approximately 7.25% per year.

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 exceed the bond's yield to maturity if A) the bond was called at a premium B) the bond was redeemed at a discount C) the investor purchased a put option on the bond D) the coupons were reinvested at a rate exceeding the yield to maturity

D

Given the following information, calculate the risk-adjusted return. 91-day T-bill rate: 4% Actual return: 14% Beta = 1.4 CPI: 3% Standard deviation: 5.0 A) 5 B) 11 C) 10 D) 2

D Any question asking about the risk-adjusted return is going to be referring to the Sharpe ratio. This is shown as a simple number and is calculated by subtracting the risk-free rate (91-day T-bill) from the actual return and dividing that remainder by the standard deviation. In this example, 14% − 4% = 10% divided by 5 = 2.

Using the following information, compute the inflation-adjusted rate of return for an investor holding the ABC Corporation's 20-year bond: Coupon rate 5%, paid semi-annually Rating Aa Maturity date December 1, 2046 CPI 2% Par value $1,000 Purchase price 90 Call date December 1, 2033 Call price 101 A) 2.50% B) 5.00% C) 4.50% D) 3.56%

D The inflation-adjusted rate of return is the actual return (income received divided by the purchase price) less the inflation rate as measured by the CPI. In this example, the bond pays $50 per year on an investment of $900. That is an actual return of 5.56%. Subtracting the CPI of 2% gives us an inflation-adjusted, or real, rate of return of 3.56%.

An investor purchases $10,000 of A-rated debentures in early January. At the end of the year, $500 in interest has been received and the value of the investment is $9,500. If the investor is in the 25% tax bracket, the after-tax yield is A) 5.0%. B) -1.25%. C) 0.0%. D) 3.75%.

D The only return (as far as yield is concerned) is the $500 of interest. Subtracting 25% for taxes leaves $375 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.75%. If the question had asked about total return, then the $500 unrealized loss would have been included, although there would have been no tax benefit to it because it is only a "paper" loss.

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) 20% B) 5% C) 12% D) 4%

A* because it annualized held for 3 months for 5% * 4 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 $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for 3 months − 1 quarter. Multiply that by 4 to get the annual rate.

Which of the following statements regarding the Sharpe ratio is TRUE? A) Portfolios with lower Sharpe ratios provided higher excess returns per unit of risk assumed than those with higher Sharpe ratios. B) The Sharpe ratio uses beta in its formula. C) The Sharpe ratio is often used to measure risk-adjusted return of an entire portfolio. D) The Sharpe ratio cannot be used to measure risk-adjusted performance for a single security.

C

A client purchased a security for $60 and sold it 1 year later for $59. If he received 4 quarterly dividends of $0.50 each during the period, his total percentage return would be A) 2% B) 0% C) 3.30% D) 1.67%

D The total return on an investment is the sum of the capital gains/losses plus any income distribution such as dividends or interest. In this case, the client had a capital loss of $1 ($60 − $59 = $1), which was offset by $2 (4 × $0.50 = $2) in dividend distributions for a total dollar return of $1. In percentage terms, the return is calculated by dividing the dollar return amount by the total invested or $1 divided by $60 = 1.67%.

When a bond is selling at a premium, a bond callable at par will A) have a YTC that is less than the YTM B) have a YTC that is more than the coupon C) have a YTM that is more than the coupon D) have a current yield that is less than the YTM

A

Which of the following indexes represents the largest portion of the domestic stock markets? A) Wilshire 5000 B) Russell 2000 C) Standard & Poor's 500 D) MSCI EAFE

A

On June 20, 2016, an investor in the 30% marginal federal tax bracket acquired a growth stock paying no dividend for $10 per share. On June 22, 2017, the investor sold the stock for $20 per share. Presuming capital gains rates are 15%, the investor's after-tax rate of return is closest to A) 100% B) 85% C) 70% D) 200%

B Although the stock grew at a 100% rate of return (by doubling), the investor must pay capital gains tax on the investment at 15%, and the investor realizes an after-tax rate of return of approximately 85%. Because the investor held the stock for more than 1 year, the sale is taxed at a favorable capital gains rate rather than at the investor's ordinary income tax rate.

ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state A) the yield to maturity is higher than the current yield. B) the yield to maturity is higher than the yield to call. C) the current yield is higher than the nominal yield. D) the yield to call is higher than the current yield.

B henever a bond is selling at a premium, the return, in descending order is: nominal yield, current yield, YTM, and YTC. It is the reverse order when the bond is selling at a discount. When the bond is at par, all are the same (if the call is at par).

Question ID: 1180478 When an analyst takes a stock's actual return minus the risk-free return and divides that remainder by the stock's standard deviation, the result is A) the expected return. B) the alpha. C) the Sharpe ratio. D) the beta.

C

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

C