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 geometric mean 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. large-cap stocks.

Nominal rates are averages of all possible real rates.

Which of the following is not a component of the required rate of 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 HPY for the portfolio.

The real risk-free rate is affected by two factors:

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The common stock of XMen Inc. had the following historic prices. -Refer to Exhibit 1.3. What was your geometric mean annual yield for the investment in XMen?

An investment is the current commitment of dollars over time to derive future payments to compensate the investor for the time funds are committed, the expected rate of inflation, and the uncertainty of future payments.

The two most common calculations investors use to measure return performance are arithmetic means and geometric means.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following information: Nominal return on risk-free asset = 4.5% Expected return for asset i = 12.75% Expected return on the market portfolio = 9.25% -Refer to Exhibit 1.9. Calculate the risk premium for the market portfolio.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The common stock of XMen Inc. had the following historic prices. -Refer to Exhibit 1.3. What was your annual holding period yield (Annual HPY)?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You purchased 100 shares of GE common stock on January 1, for $29 a share. A year later you received $1.25 in dividends per share and you sold it for $28 a share. -Refer to Exhibit 1.7. Calculate your holding period yield (HPY) for this investment in GE stock.

An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.

The security market line (SML) graphs the expected relationship between

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Assume you bought 100 shares of NewTech common stock on January 15, 2003 at $50.00 per share and sold it on January 15, 2004 for $40.00 per share. -Refer to Exhibit 1.1. What was your holding period return?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The common stock of XMen Inc. had the following historic prices. -Refer to Exhibit 1.3. What was your holding period return for the time period of 3/1/1999 to 3/1/2004?

Modern portfolio theory assumes that most investors are

If over the past 20 years the annual returns on the S&P 500 market index averaged 12 percent with a standard deviation of 18 percent, what was the coefficient of variation?

The uncertainty of investment returns associated with how a firm finances its investments is known as

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 2.