Economics 133 3

You bought a stock for $80.22 and sold it for $84.06 after 5 months. The stock did not pay any dividends.

=(84.06/80.22)−1=0.04787 EAR =(1+0.04787)^(12/5)−1= 0.1188

You bought a share of stock for $100. It is now worth $116 and has just paid an annual dividend of $5 per share. What was the capital gains yield?

Capital gains yield = (P1 - P0) / P0 = (116 - 100) / 100= 0.16

An investment earned a return of 3.9% over a 105-day holding period. What was the effective annual return?

EAR=(1+0.039)^(365/105)−1= 0.1422

Annual return

1+r = (1+r1) (1+r2) (1+r3) (1+r4)⇔ r = (1+r1) (1+r2) (1+r3) (1+r4) - 1= (1+0.061) (1+-0.0692) (1+0.1969) (1+0.062) - 1= 0.2554

A security delivered a return of 1.2% over a holding period of 59 days.

= (1+0.012)^(1/59) - 1 = 0.0002022

The geometric average return for Global Equity fund was 6.1% over the last 15 years. If you had invested $1 in the fund at the beginning of the period, what would be the value of your investment after 15 years?

= 1 * (1+0.061)^15= 2.431

The expected inflation rate is 1%. What is the real interest rate if the nominal rate of interest is 6.6%?

According to the Fisher equation: (1+r) = (1+R) (1+i) r: nominal interest rate R: real interest rate i: expected inflation rate R=(1+r)/(1+i)−1=(1.066/1.01)−1=0.0554

The expected inflation rate is 1%. What is the nominal interest rate if the real rate of interest is 1.7%?

According to the Fisher equation: (1+r) = (1+R) (1+i) r: nominal interest rate R: real interest rate i: expected inflation rate r = (1+R) (1+i) - 1= (1.017)(1.01) - 1= 0.02717

What is the risk premium for corporate bonds?

Corporate bonds expec return - T-bills expect return

You bought a share of stock for $100. It is now worth $116 and has just paid an annual dividend of $5 per share. What was the dividend yield?

Dividend yield = D1 / P0= 5 / 100= 0.05

Historically, which asset class had the highest variability of returns in the U.S.A.?

Historically, small-company stock returns had the greatest variance (and standard deviation), indicating the high risk of this asset class.

Historically, which asset class had the highest return in the U.S.A.?

Historically, small-company stocks have delivered the highest rate of return.

You're evaluating the performance of your pension fund. You invested $100 initially, which grew to $106 after 4 months, and then to $107 after another 6 months.

Holding period return:HPR = (P1 - P0 + D1) / P0= (106 - 100 + 0) / 100= 0.06 * 100 = 6%

What is the risk premium for large company stocks?

Large company stocks ER - T-bills ER

What is the risk premium for small company stock

Small company stocks ER - T-bills ER

The nominal interest rate is also called the _____.

The nominal interest rate is also called the quoted interest rate. Listed, or quoted, interest rates are always nominal (as opposed to real) rates, unless explicitely noted otherwise.

We measure the risk of a single asset or portfolio by measuring the _____.

The risk of a single asset, i.e., one not held as part of a portfolio, is measured by the standard deviation of returns. We use standard deviation because the risk is to earn a lower return than the expected return, asset returns roughly follow a normal distribution, the normal distribution is symmetrical, standard deviation tells us how dispersed the distribution of returns is around its mean, allowing us to calculate the probability with which a return will be significantly lower (or higher) than the expected return.

In general, an asset with higher expected return _____.

The risk-return trade-off implies that a higher expected return goes hand-in-hand with higher risk.

what was your geometric average monthly return?

rg = (1+HPR)^(1/N) - 1

Which statements are correct? The geometric average return _____.

takes into account compounding is better for forecasting returns over many periods is usually less than the arithmetic mean

The risk premium is _____.

the reward for bearing risk normally positive for risky assets the difference between the expected rate of return on an asset and the risk-free rate

You bought a share of stock for $100. It is now worth $116 and has just paid an annual dividend of $5 per share. What was the total rate of return?

total return = capital gains yield + dividend yield= 0.16 + 0.05= 0.21