Exam 1: The Investment Decision

A risk-averse investor will,all other things being equal,prefer investing in which of the following asset classes?

The returns for two assets,A and B,are 5% and 8% respectively.If a price-weighted portfolio were formed when shares in A were $9 and shares in B were $3,what is the continuously compounded price-weighted return for the portfolio?

$\begin{array}{|l|r|r|r}\hline \text { Asset } & \text { Number of shares } & \text { Initial price (\$) } & \text { End price (\$) } \\\hline \text { A } & 2000 & 6.00 & 6.10 \\\hline \text { B } & 5000 & 3.00 & 2.25 \\\hline \text { C } & 3000 & 12.00 & 11.50 \\\hline \text { D } & 12000 & 8.50 & 8.85 \\\hline\end{array}$ -An investor purchased the investment above.If continuously compounded returns are used,what is the equal-weighted return on the portfolio?

Zero volatility in returns results in identical arithmetic and geometric returns.

$\begin{array}{|c|c|c|}\hline \text { Asset } & \begin{array}{c}\text { Price at } \\\text { start of } \\\text { period (\$) }\end{array} & \begin{array}{c}\text { Price at } \\\text { end of } \\\text { period (\$) }\end{array} \\\hline \text { A } & \$ 3.25 & \$ 4.25 \\\hline \text { B } & \$ 4.12 & \$ 3.85 \\\hline & & \\\hline\end{array}$ -Given the prices for A and B at the start and end of the period,calculate the price-weighted return on a portfolio consisting of assets A and B.

Year Return Year 1 7\% Year 2 17\% Year 3 -2.4\% Year 4 2\% -The value of an investment at the end of each of four years is shown above.What is the geometric average return over the four years?

The excess kurtosis of a normal distribution is:

Year Return Year 1 7\% Year 2 17\% Year 3 -2.4\% Year 4 2\% -The value of an investment at the end of each of four years is shown above.What is the arithmetic average return over the four years?

An investor purchased an asset for $1675.This investment is worth $1742 after three months.What is the simple annualised return for the investment (simple annual return)?

An investor purchased an asset for $32 000 at the beginning of the year.This investment is worth $36 000 at the end of the year.What is the return for the year on the investment?

Year Return Year 1 7\% Year 2 17\% Year 3 -2.4\% Year 4 2\% -The value of an investment at the end of each of four years is shown above.What is the arithmetic cumulative return over the four years?

An advantage of covariance over correlation is that it is bound to be between positive and negative 1.

$\begin{array}{|c|c|c|}\hline \text { Asset } & \begin{array}{c}\text { Price at } \\\text { start of } \\\text { period (\$) }\end{array} & \begin{array}{c}\text { Price at } \\\text { end of } \\\text { period (\$) }\end{array} \\\hline \text { A } & \$ 3.25 & \$ 4.25 \\\hline \text { B } & \$ 4.12 & \$ 3.85 \\\hline & & \\\hline\end{array}$ -Given the prices for A and B at the start and end of the period,calculate the continuously compounded return on an equally weighted portfolio consisting of assets A and B.

A geometric return is always less than the corresponding arithmetic return.

An advantage of using discrete returns is to reduce the distorting effect a low share price may have on returns.

Which of the following holding periods is an active investor more likely to invest in?

An investor purchased an asset for $1675.This investment is worth $1742 after three months.What is the effective annualised return for the investment?

Which of the following is not a documented feature of equity returns in Australia?

Loredana has invested equal amounts in each of the shares of company A,company B and company C,which she purchased one year ago at prices of $10,$2 and $1,respectively.Loredana has recently sold her shares in company B for $2.50 and in company C for $1.15.If Loredana wishes to earn a continuously compounded return of 20% for the year,on her equally weighted portfolio,at what price will she need to sell her shares in company A?

Charles invests in a price-weighted portfolio of two shares,ABC and XYZ.His funds manager sends him a statement of his performance at the end of each year for his tax return.Unfortunately,some of the form was illegible,and all he could discern was that the price-weighted portfolio return was 10%,the returns on ABC and XYZ were 8% and 16%,respectively and that the purchase price of ABC was $10.Given this information,at what price did Charles purchase the shares in company XYZ?