Question 1

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

Accepted Answer

A)  6.38% 
B)  12.77% 
C)  13.17% 
D)  14.25%

Question 2

Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ________.

Accepted Answer

A)  small firms are better run than large firms 
B)  government subsidies available to small firms produce effects that are discernible in stock market statistics 
C)  small firms are riskier than large firms 
D)  small firms are not being accurately represented in the data

Question 3

You have the following rates of return for a risky portfolio for several recent years:
2013 35.23%
2014 18.67%
2015 −9.87%
2016 23.45%
If you invested $1,000 at the beginning of 2013, your investment at the end of 2016 would be worth ________.

Accepted Answer

A)  $2,176.60 
B)  $1,785.56 
C)  $1,645.53 
D)  $1,247.87

Question 4

Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ________.

Accepted Answer

A)  stocks 
B)  bonds 
C)  money market funds 
D)  Treasury bills

Question 5

Rank the following from highest average historical return to lowest average historical return from 1926 to 2017.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills

Accepted Answer

A)  I, II, III, IV 
B)  III, IV, II, I 
C)  I, III, II, IV 
D)  III, I, II, IV

Question 6

The normal distribution is completely described by its ________.

Accepted Answer

A)  mean and standard deviation 
B)  mean 
C)  mode and standard deviation 
D)  median and variance

Question 7

The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been ________.

Accepted Answer

A)  $.25 
B)  $1 
C)  $2 
D)  $4

Question 8

You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was ________.

Accepted Answer

A)  -3.57% 
B)  -3.45% 
C)  4.31% 
D)  8.03%

Question 9

Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

Accepted Answer

A)  dollar-weighted return 
B)  geometric average return 
C)  arithmetic average return 
D)  mean holding-period return

Question 10

The geometric average of -12%, 20%, and 25% is ________.

Accepted Answer

A)  8.42% 
B)  11% 
C)  9.7% 
D)  18.88%

Question 11

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment?

Accepted Answer

A)  3.92% 
B)  4% 
C)  4.12% 
D)  6%

Question 12

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor ________.

Accepted Answer

A)  is normally risk neutral 
B)  requires a risk premium to take on the risk 
C)  knows he or she will not lose money 
D)  knows the outcomes at the beginning of the holding period

Question 13

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

Accepted Answer

A)  -3.64% 
B)  -6.36% 
C)  -6.44% 
D)  -11.74%

Question 14

You have an APR of 7.5% with continuous compounding. The EAR is ________.

Accepted Answer

A)  7.5% 
B)  7.65% 
C)  7.79 % 
D)  8.25%

Question 15

Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment?

Accepted Answer

A)  3.01% 
B)  3.09% 
C)  12.42% 
D)  16.71%

Question 16

A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is ________.

Accepted Answer

A)  68.26% 
B)  95.44% 
C)  99.74% 
D)  100%

Question 17

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the ________.

Accepted Answer

A)  capital allocation line 
B)  indifference curve 
C)  investor's utility line 
D)  security market line

Question 18

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?

Accepted Answer

A)  dollar-weighted return 
B)  geometric average return 
C)  arithmetic average return 
D)  index return

Question 19

Your great aunt Zella invested $100 in 1925 in a portfolio of large U.S. stocks that earned a compound return of 10% annually.If she left that money to you, how much would be in the account 92 years later in 2017?

Accepted Answer

A)  $1,000 
B)  $9,900 
C)  $642,875.74 
D)  $5,843,325

Question 20

You have the following rates of return for a risky portfolio for several recent years:
2013 35.23%
2014 18.67%
2015 −9.87%
2016 23.45%
The annualized (geometric) average return on this investment is ________.

Accepted Answer

A)  16.15% 
B)  16.87% 
C)  21.32% 
D)  15.60%

Exam 5: Risk, Return, and the Historical Record