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Exam 5: Risk, Return, and the Historical Record

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Question 21

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You have the following rates of return for a risky portfolio for several recent years: 2013 35.23% 2014 18.67% 2015 −9.87% 2016 23.45% If you invested $1,000 at the beginning of 2013, your investment at the end of 2016 would be worth ________.

A) $2,176.60
B) $1,785.56
C) $1,645.53
D) $1,247.87

E) A) and C)
F) A) and D)

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Question 22

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The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

A) -3.64%
B) -6.36%
C) -6.44%
D) -11.74%

E) None of the above
F) C) and D)

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Question 23

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The normal distribution is completely described by its ________.

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was ________.

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 ________.

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the ________.

The geometric average of -12%, 20%, and 25% is ________.

You have an APR of 7.5% with continuous compounding. The EAR is ________.

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?

You have the following rates of return for a risky portfolio for several recent years: 2013 35.23% 2014 18.67% 2015 −9.87% 2016 23.45% The annualized (geometric) average return on this investment is ________.

The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been ________.

Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ________.

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 92 years later in 2017?

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor ________.

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 ________.

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment?

Rank the following from highest average historical return to lowest average historical return from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment?