Exam 1: The Investment Setting

Exhibit 1-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Assume that you hold a two stock portfolio. You are provided with the following information on your holdings. Stock Shares Price (t) Price (t+1) 1 15 10 12 2 25 15 16 -Refer to Exhibit 1-8. Calculate the HPY for Stock 1.

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

Which of the following is not a component of the required rate of return?

Exhibit 10 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 1-10. Compute the standard deviation of the annual rate of return for Stock Z.

If a significant change is noted in the yield of a T-bill, the change is most likely attributable to

Exhibit 1-7 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider the following information Nominal annual return on Canadian T-bills for year 2009 = 3.5% Nominal annual return on Canadian corporate bonds for year 2009= 4.75% Nominal annual return on Canadian large-cap stocks for year 2009 = 8.75% Consumer price index January 1, 2009 = 165 Consumer price index December 31, 2009 = 169 -Refer to Exhibit 1-7. Calculate the real rate of return for Canadian T-bills

Exhibit 1-6 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 1-6. Calculate the risk premium for the market portfolio

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

Sources of risk for an investment include

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?

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.

The ability to sell an asset quickly at a fair price is associated with

A decrease in the market risk premium, all other things constant, will cause the security market line to

Exhibit 1-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) You have concluded that next year the following relationships are possible: Economic Status Probability Rate of Return Weak Economy .15 -5\% Static Economy .60 5\% Strong Economy .25 15\% -Refer to Exhibit 1-4. Compute the coefficient of variation for your portfolio.

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

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

Exhibit 10 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 1-10. Compute the arithmetic mean annual rate of return for Stock Z.

Modern portfolio theory assumes that most investors are

Nominal rates are averages of all possible real rates.

Exhibit 1-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) You have concluded that next year the following relationships are possible: Economic Status Probability Rate of Return Weak Economy .15 -5\% Static Economy .60 5\% Strong Economy .25 15\% -Refer to Exhibit 1-4. Compute the standard deviation of the rate of return for the one year period.