Q&A Hero

Q: Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit after one year would be ________. A) $3,000 B) $7,000 C) $7,500 D) $10,000

Q: Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is ________. A) 1% B) 3% C) 6% D) 9%

Q: The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been ________. A) $28.50 B) $33.20 C) $31.50 D) $29.75

Q: An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are ________ and ________ respectively. A) 10%; 6.7% B) 12%; 22.4% C) 12%; 15.7% D) 10%; 35%

Q: 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 ________. A) $.25 B) $1 C) $2 D) $4

Q: Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a risk premium equal to security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B. A) I only B) II only C) II and III only D) I, II, and III

Q: 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) -3.57% B) -3.45% C) 4.31% D) 8.03%

Q: Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be ________. A) security A B) security B C) security C D) security D

Q: The formula is used to calculate the ________. A) Sharpe ratio B) Treynor measure C) coefficient of variation D) real rate of return

Q: 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 ________. A) stocks B) bonds C) money market funds D) Treasury bills

Q: Most studies indicate that investors' risk aversion is in the range ________. A) 1-3 B) 1.5-4 C) 3-5.2 D) 4-6

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: 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 1926-2013 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 1986-2013 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 1926-2013 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 1926-2013 period the geometric mean return on Treasury bonds was ________. A) 5.07% B) 5.56% C) 9.34% D) 11.43%

Q: During the 1926-2013 period the geometric mean return on small-firm stocks was ________. A) 5.31% B) 5.56% C) 9.34% D) 11.82%

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 2017. 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 2017. 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: Disadvantages of ETFs include all of the following except A) investors incur a bid-ask spread when purchasing. B) investors must pay a broker fee when purchasing. C) prices are only quoted once each day. D) prices can depart from NAV at times.

Q: Approximately what percentage of assets held in equity funds in 2017 was in index funds? A) 20% B) 33% C) 50% D) 60%

Q: Which type of fund generally has the lowest average expense ratio? A) actively managed bond funds B) hedge funds C) indexed funds D) actively managed international funds

Q: Which type of fund is often priced at a significant discount to net asset value? A) open-end fund B) closed-end fund C) hedge fund D) ETF

Q: The five-star Morningstar rating implies A) superior returns compared to risk. B) superior risk compared to return. C) lowest turnover compared to peers. D) lowest fees compared to peers.

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 2013 the average return on the Wilshire 5000 Index was ________ the return of the average mutual fund. A) identical to B) 1.0% higher than C) .9% 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