Exam 1: The Investment Setting

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The annual rates of return of Stock Z for the last four years are 0.10, 0.15, -0.05, and 0.20, respectively. -Refer to Exhibit 1.8. Compute the arithmetic mean annual rate of return for Stock Z.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information Nominal annual return on U.S. government T-bills for year 2018 = 3.5% Nominal annual return on U.S. government long-term bonds for year 2018 = 4.75% Nominal annual return on U.S. large-cap stocks for year 2018= 8.75% Consumer price index January 1, 2018 = 165 Consumer price index December 31, 2018 = 169 -Refer to Exhibit 1.10. Calculate the annual real rate of return for U.S. long-term bonds.

Two factors that influence the nominal risk-free rate are

The line that reflects the combination of risk and return available on alternative investments is referred to as the security market line (SML).

The risk premium is a function of the volatility of operating earnings, sales volatility, and inflation.

Which of the following is least likely to move a firm's position to the right on the Security Market Line (SML)?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Suppose you bought a GM corporate bond on January 25, 2001 for $750 and solid it on January 25, 2004 for $650.00. -Refer to Exhibit 1.2. What was your annual holding period return?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Assume that you hold a two-stock portfolio. You are provided with the following information on your holdings: -Refer to Exhibit 1.6. Calculate the market weights for stock 1 and 2 based on period t values.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You have concluded that next year the following relationships are possible: -Refer to Exhibit 1.4. Compute the coefficient of variation for your portfolio.

The total risk for a security can be measured by its

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The annual rates of return of Stock Z for the last four years are 0.10, 0.15, -0.05, and 0.20, respectively. -Refer to Exhibit 1.8. Compute the standard deviation of the annual rate of return for Stock Z.

What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?

Sources of risk for an investment include

Which of the following is NOT a component of the risk premium?

The expected return is the average of all possible returns.

The geometric mean of a series of returns is always larger than the arithmetic mean, and the difference increases with the volatility of the series.

Given investments A and B with the following risk return characteristics, which one would you prefer and why?

The coefficient of variation is a measure of

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Assume that you hold a two-stock portfolio. You are provided with the following information on your holdings: -Refer to Exhibit 1.6. Calculate the HPY for stock 1.

The coefficient of variation is the expected return divided by the standard deviation of the expected return.