Exam 20: Taxes, Inflation, and Investment Strategy

Suppose you purchase 100 shares of GM stock at the beginning of year 1,and purchase another 100 shares at the end of year 1.You sell all 200 shares at the end of year 2.Assume that the price of GM stock is $50 at the beginning of year 1,$55 at the end of year 1,and $65 at the end of year 2.Assume no dividends were paid on GM stock.Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock.

Most professionally managed equity funds generally _________.

The difference between the arithmetic average return and the geometric average return is __________ for stocks with a high variance of returns,compared to stocks with a low variance of returns.

The contribution of asset allocation across markets to the Highwater Marx Bros.'s total excess return was _________.

Define and discuss the Sharpe,Treynor,and Jensen measures of portfolio performance evaluation,and the situations in which each measure is the most appropriate measure.

An investor is a perfect market timer and decides at the beginning of each month to invest in cash equivalents or equities,whichever is projected to do better.If the investor started with $1,000 on January 1,1927 and reinvested all proceeds,the investor would have earned approximately __________ at the end of 1978.

Historically,the average arithmetic return of Hypothetically Prosperous Company has been 16% while the average geometric return has been 14%.If the returns have been normally distributed,the variance of returns of this stock has been _________.

The comparison universe is _________.

Suppose you earned an arithmetic return on a stock of exactly10% every year for 10 years.The geometric average return on the stock will be _________.

Your return will generally be higher using the __________ if you time your transactions well and your return will generally be higher using the __________ if you time your transactions poorly.

A pension fund that begins with $500,000 earns 15% the first year and 10% the second year.At the beginning of the second year,the sponsor contributes another $300,000.The dollar-weighted and time-weighted rates of return,respectively,were

Risk-adjusted mutual fund performance measures have decreased in popularity because

You want to evaluate three mutual funds using the Jensen measure for performance evaluation.The risk-free return during the sample period is 6%,and the average return on the market portfolio is 18%.The average returns,standard deviations,and betas for the three funds are given below. Average Return Standard Deviation Beta Fund A 17.6\% 10\% 1.2 Fund B 17.5\% 20\% 1.0 Fund C 17.4\% 30\% 0.8 The fund with the highest Jensen measure is _________.

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1,you receive a $1 dividend,and buy one more share for $72.At the end of year 2,you receive total dividends of $2 (i.e. ,$1 for each share),and sell the shares for $67.20 each.The dollar-weighted return on your investment is _________.

If an investor has a portfolio that has constant proportions in T-bills and the market portfolio,the portfolio's characteristic line will plot as a line with ____________;if the investor can time bull markets,the characteristic line will plot as a line with __________.

In measuring the comparative performance of different fund managers,the preferred method of calculating rate of return is _________.

If you wanted to evaluate Goldenlake Investors using the M2 measure,what percent of the adjusted portfolio would need to be invested in T-Bills?

Portfolio managers A and B each manage $1,000,000 funds.Portfolio manager A has perfect foresight and the call option value of his perfect foresight is $180,000.Portfolio manager B is an imperfect forecaster and correctly predicts 60% of all bull markets and 70% of all bear markets.The correct measure of timing ability for portfolio manager B is ______.

Rodney holds a portfolio of risky assets that represents his entire risky investment.To evaluate the performance of Rodney's portfolio,which in which order would you complete the steps listed? I.Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best portfolio. II.State your conclusions. III.Assume that past security performance is representative of expected performance. IV.Determine the benchmark portfolio that Rodney would have held if he had chosen a passive strategy.

The appropriate measure of forecasting ability is