Q&A Hero

Q: In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. A. capital allocation line B. indifference curve C. investor's utility line D. security market line

Q: Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______. A. 8.67% B. 9.84% C. 21.28% D. 14.68%

Q: One method of forecasting the risk premium is to use the _______. A. coefficient of variation of analysts' earnings forecasts B. variations in the risk-free rate over time C. average historical excess returns for the asset under consideration D. average abnormal return on the index portfolio

Q: If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with? A. 3% B. 8% C. 11% D. 11.24%

Q: If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? A. 5.48% B. 8.74% C. 9% D. 12%

Q: In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns A. I only B. I and II only C. I and III only D. I, II, and III

Q: Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data

Q: Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms. A. the same B. lower C. higher D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

Q: Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______. A. is normally risk neutral B. requires a risk premium to take on the risk C. knows he or she will not lose money D. knows the outcomes at the beginning of the holding period

Q: During the 1926-2010 period which one of the following asset classes provided the lowest real return? A. Small U.S. stocks B. Large U.S. stocks C. Long-term U.S. Treasury bonds D. Equity world portfolio in U.S. dollars

Q: During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset classes? A. Small U.S. stocks B. Large U.S. stocks C. Long-term U.S. Treasury bonds D. Equity world portfolio in U.S. dollars

Q: During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes? A. Small U.S. stocks B. Large U.S. stocks C. Long-term U.S. Treasury bonds D. Bond world portfolio return in U.S. dollars

Q: During the 1926-2010 period the geometric mean return on Treasury bonds was _________. A. 5.12% B. 5.56% C. 9.34% D. 11.43%

Q: During the 1926-2010 period the geometric mean return on small-firm stocks was ______. A. 5.31% B. 5.56% C. 9.34% D. 11.80%

Q: Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? A. 5.14% B. 7.59% C. 9.29% D. 8.43%

Q: Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment? A. 12.8% B. 11% C. 8.9% D. 9.2%

Q: The reward-to-volatility ratio is given by _________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. the portfolio's excess return

Q: The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. A. risky assets; Treasury bills B. Treasury bills; risky assets C. excess returns; risky assets D. index assets; bonds

Q: The excess return is the _________. A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury-bill rate C. rate of return to risk aversion D. index return

Q: The market risk premium is defined as __________. A. the difference between the return on an index fund and the return on Treasury bills B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

Q: You have an EAR of 9%. The equivalent APR with continuous compounding is _____. A. 8.47% B. 8.62% C. 8.88% D. 9.42%

Q: You have an APR of 7.5% with continuous compounding. The EAR is _____. A. 7.5% B. 7.65% C. 7.79 % D. 8.25%

Q: 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? A. 6.38% B. 12.77% C. 13.17% D. 14.25%

Q: Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment? A. 2.04% B. 12 % C. 12.24% D. 12.89%

Q: 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? A. 3.01% B. 3.09% C. 12.42% D. 16.71%

Q: Annual percentage rates can be converted to effective annual rates by means of the following formula: A. [1 + (APR/n)]n - 1 B. (APR)(n) C. (APR/n) D. (periodic rate)(n)

Q: An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______. A. 41.68% B. 11.32% C. 3.64% D. 13%

Q: The dollar-weighted return is the _________. A. difference between cash inflows and cash outflows B. arithmetic average return C. geometric average return D. internal rate of return

Q: The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%

Q: The arithmetic average of -11%, 15%, and 20% is ________. A. 15.67% B. 8% C. 11.22% D. 6.45%

Q: Published data on past returns earned by mutual funds are required to be ______. A. dollar-weighted returns B. geometric returns C. excess returns D. index returns

Q: 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? A. Dollar-weighted return B. Geometric average return C. Arithmetic average return D. Mean holding-period return

Q: The holding period return on a stock is equal to _________. A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium

Q: 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? A. Dollar-weighted return B. Geometric average return C. Arithmetic average return D. Index return

Q: The complete portfolio refers to the investment in _________. A. the risk-free asset B. the risky portfolio C. the risk-free asset and the risky portfolio combined D. the risky portfolio and the index

Q: You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________. A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

Q: Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

Q: Rank the following from highest average historical return to lowest average historical return from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

Q: Which one of the following measures time-weighted returns and allows for compounding? A. Geometric average return B. Arithmetic average return C. Dollar-weighted return D. Historical average return

Q: If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. A. geometric average return B. arithmetic average return C. dollar-weighted return D. index return

Q: The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted

Q: You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

Q: The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________. A. invest directly in real estate; invest in mortgage and construction loans B. invest in mortgage and construction loans; invest directly in real estate C. use extensive leverage; distribute less than 95% of income to shareholders D. distribute less than 95% of income to shareholders; use extensive leverage

Q: The NAV of which funds is fixed at $1 per share? A. Equity funds B. Money market funds C. Fixed-income funds D. Commingled funds

Q: Which of the following typically employ significant amounts of leverage? I. Hedge funds II. REITs III. Money market funds IV. Equity mutual funds A. I and II only B. II and III only C. III and IV only D. I, II, and III only

Q: Advantages of investment companies to investors include all but which one of the following? A. Record keeping and administration B. Low-cost diversification C. Professional management D. Guaranteed rates of return

Q: A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds. A. commingled pool B. unit trust C. hedge fund D. money market fund

Q: ______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis. A. Commingled funds B. Closed-end funds C. REITs D. Mutual funds

Q: Which one of the following invests in a portfolio that is fixed for the life of the fund? A. Mutual fund B. Money market fund C. Managed investment company D. Unit investment trust

Q: You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? A. 7.1% B. 7.45% C. 7.25% D. 7.85%

Q: The top Morningstar mutual fund performance rating is ________. A. five stars B. four stars C. three stars D. two stars

Q: Which one of the following statements about returns reported by mutual funds is not correct? A. Reported returns are net of management expenses. B. Reported returns are net of 12b-1 fees. C. Reported returns are net of brokerage fees paid on the fund's trading activity. D. None of these options. (All of the items are included in reported returns.)

Q: You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? A. 4.35% B. 4.23% C. 6.45% D. 5.63%

Q: You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you redeem shares with no growth in value? A. $596 B. $794 C. $885 D. $902

Q: You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value? A. $658 B. $794 C. $885 D. $902

Q: You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain? A. $103 B. $219 C. $553 D. $635

Q: Which of the following funds are usually most tax-efficient? A. Equity funds B. Bond Funds C. ETFs D. Specialized-sector funds

Q: The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield? A. 5% B. 10% C. 15% D. 20%

Q: A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund? A. $50 B. $55.44 C. $56.12 D. $54.55

Q: The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV? A. $18.74 B. $17.10 C. $15.40 D. $16.57

Q: An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price? A. $14.57 B. $15.95 C. $17.55 D. $16.49

Q: From 1971 to 2010 the average return on the Wilshire 5000 Index was _________ the return of the average mutual fund. A. identical to B. .8% higher than C. .8% lower than D. 1.3% higher than

Q: _______ have become the main way for investors to speculate in precious metals. A. Strategic income funds B. Balanced funds C. Specialized-sector funds D. Exchange-traded funds

Q: Which of the following funds is most likely to have a debt ratio of 70% or higher? A. Bond fund B. Commingled fund C. Mortgage-backed securities D. REIT

Q: Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings? A. Commingled funds B. Hedge funds C. ETF D. REITs

Q: Advantages of ETFs over mutual funds include all but which one of the following? A. ETFs trade continuously, so investors can trade throughout the day. B. ETFs can be sold short or purchased on margin, unlike fund shares. C. ETF providers do not have to sell holdings to fund redemptions. D. ETF values can diverge from NAV.

Q: Which type of investment fund is commonly known to invest in options and futures in large scale? A. Commingled funds B. Hedge funds C. ETFs D. REITs

Q: A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _____. A. 25% B. 28.5% C. 18.63% D. 33.4%

Q: The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied. A. Class A. B. Class B. C. There is no difference. D. The answer cannot be determined from the information given.

Q: The difference between balanced funds and asset allocation funds is that _____. A. balanced funds invest in bonds while asset allocation funds do not B. asset allocation funds invest in bonds while balanced funds do not C. balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds D. balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions

Q: The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV? A. 9.26% premium B. 8.47% premium C. 9.26% discount D. 8.47% discount

Q: Which of the following ETFs tracks the S&P 500 Index? A. Qubes B. Diamonds C. Vipers D. Spiders

Q: The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________. A. reinvestment ratio B. trading rate C. portfolio turnover D. tax yield

Q: In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s. A. grew stronger B. remained about the same C. became slightly weaker D. virtually disappeared

Q: In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period. A. 33% B. 52% C. 65% D. 85%

Q: According to the 2011 Mutual Fund Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money market funds. A. 35%; 14% B. 12.3%; 75% C. 22%; 3.9% D. 5%; 47%

Q: If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____. A. the NAV calculated at the market close at 4 pm New York time B. the real time NAV C. the NAV delayed 15 minutes D. the NAV calculated at the opening of the next day's trading

Q: _____ is an example of an exchange-traded fund. A. An SPDR or spider B. A samurai C. A Vanguard D. An open-end fund

Q: Mutual fund returns may be granted pass-through status if _________________. A. virtually all income is distributed to shareholders B. the fund qualifies for pass-through status according to the U.S. tax code C. the fund is sufficiently diversified D. All of these options (All of the answers must be true for pass-through status to be granted.)

Q: Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per share. If the total expense ratio is .75%, what is the rate of return on the fund? A. 12.09% B. 12.99% C. 8.25% D. The answer cannot be determined from the information given.