Question 1

What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%?

Accepted Answer

A)  3.72% 
B)  4.23% 
C)  4.74% 
D)  4.90%

Question 2

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?

Accepted Answer

A)  .50% 
B)  5% 
C)  6% 
D)  6.5%

Question 3

You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?

Accepted Answer

A)  $6,000 
B)  $4,000 
C)  $7,000 
D)  $3,000

Question 4

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

Accepted Answer

A)  5.48% 
B)  8.74% 
C)  9% 
D)  12%

Question 5

The formula  is used to calculate the ________.

Accepted Answer

A)  Sharpe ratio 
B)  Treynor measure 
C)  coefficient of variation 
D)  real rate of return

Question 6

The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?

Accepted Answer

A)  .8 
B)  .6 
C)  9 
D)  1

Question 7

If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with?

Accepted Answer

A)  3% 
B)  8% 
C)  11% 
D)  11.24%

Question 8

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ________.

Accepted Answer

A)  SML 
B)  CAPM 
C)  CML 
D)  total return line

Question 9

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be ________, ________, and ________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.

Accepted Answer

A)  $162; $595; $243 
B)  $243; $162; $595 
C)  $595; $162; $243 
D)  $595; $243; $162

Question 10

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?

Accepted Answer

A)  12.8% 
B)  11% 
C)  8.9% 
D)  9.2%

Question 11

A loan for a new car costs the borrower .8% per month. What is the EAR?

Accepted Answer

A)  .80% 
B)  6.87% 
C)  9.6% 
D)  10.03%

Question 12

You have an EAR of 9%. The equivalent APR with continuous compounding is ________.

Accepted Answer

A)  8.47% 
B)  8.62% 
C)  8.88% 
D)  9.42%

Question 13

Consider a Treasury bill with a rate of return of 5% and the following risky securities:
Security A: E(r) = .15; variance = .0400
Security B: E(r) = .10; variance = .0225
Security C: E(r) = .12; variance = .1000
Security D: E(r) = .13; variance = .0625
The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be ________.

Accepted Answer

A)  security A 
B)  security B 
C)  security C 
D)  security D

Question 14

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you ________.

Accepted Answer

A)  place 40% of your money in the risky portfolio and the rest in the risk-free asset 
B)  place 55% of your money in the risky portfolio and the rest in the risk-free asset 
C)  place 60% of your money in the risky portfolio and the rest in the risk-free asset 
D)  place 75% of your money in the risky portfolio and the rest in the risk-free asset

Question 15

What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%?

Accepted Answer

A)  8% 
B)  8.33 % 
C)  8.47% 
D)  8.5 %

Question 16

The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year?

Accepted Answer

A)  6.58% 
B)  8.86% 
C)  14.47% 
D)  18.66%

Question 17

During the 1986-2013 period, the Sharpe ratio was lowest for which of the following asset classes?

Accepted Answer

A)  small U.S. stocks 
B)  large U.S. stocks 
C)  long-term U.S. Treasury bonds 
D)  equity world portfolio in U.S. dollars

Question 18

An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ________.

Accepted Answer

A)  41.68% 
B)  11.32% 
C)  3.64% 
D)  13%

Question 19

Annual percentage rates can be converted to effective annual rates by means of the following formula:

Accepted Answer

A)  [1 + (APR/n)]n - 1 
B)  (APR)(n) 
C)  (APR/n) 
D)  (periodic rate)(n)

Question 20

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be ________ and ________.

Accepted Answer

A)  $300; $450 
B)  $150; $100 
C)  $100; $150 
D)  $450; $300

Exam 5: Risk, Return, and the Historical Record