Exam 5: Risk, Return, and the Historical Record

Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit after one year would be ________.

The ________ measure of returns ignores compounding.

The market risk premium is defined as ________.

In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns

Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.

According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return?

If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return?

Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ________.

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are ________ and ________ respectively.

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ________.

Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment?

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(r_A) = 10% σ_A = 20% Asset B E(r_B) = 15% σ_B = 27% An investor with a risk aversion of A = 3 would find that ________ on a risk-return basis.

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ________.

The rate of return on ________ is known at the beginning of the holding period, while the rate of return on ________ is not known until the end of the holding period.

You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. What is the geometric average return for the period?

Published data on past returns earned by mutual funds are required to be ________.

During the 1926-2013 period the geometric mean return on small-firm stocks was ________.

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero.

One method of forecasting the risk premium is to use the ________.

Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?