Chapter 5 In Class

Question 1

How to calculate rate of return using Holding-Period Return

Answer 1

HPR= [PS − PB + CF] / PB
PS = Sale price
PB = Buy price
CF = Cash flow during holding period

Question 2

Next few problems are ways of Measuring Investment Returns over Multiple Periods
.

Answer 2

.

Question 3

Sum of returns in each period divided by number of periods

Answer 3

arithmetic average

Question 4

Single per-period return; gives same cumulative performance as sequence of actual returns
Compound period-by-period returns; find per-period rate that compounds to same final value

Answer 4

Geometric average see slide 5-5 for example

Question 5

Internal rate of return on investment

Answer 5

Dollar-weighted average return

Question 6

Per-period rate × Periods per year

Answer 6

APR

Question 7

Rate of return that can be earned with certainty

Answer 7

Risk Free Rate

Question 8

(1 + Rate per period)n^N

Answer 8

1 + EAR

Question 9

Rate of return over and above the risk free rate

Answer 9

Risk Premium

Question 10

Reluctance to accept risk

Answer 10

Risk aversion

Question 11

Ratio of risk premium to variance

Answer 11

Price of Risk

Question 12

The Sharpe (Reward-to-Volatility) Ratio

Answer 12

Ratio of portfolio risk premium to standard deviation

S= Risk Prem./standard deviation of portfolio

Question 13

rf:

Answer 13

rate of return on risk-free asset

Question 14

rp:

Answer 14

actual rate of return

Question 15

E(rp):

Answer 15

expected rate of return

Question 16

y:

Answer 16

proportion invested in risky portfolio

Question 17

σp:

Answer 17

standard deviation

Question 18

E(rC):

Answer 18

return on complete portfolio

Question 19

E(rC) =

Answer 19

yE(rp) + (1 − y)rf

Question 20

σC =

Answer 20

yσrp + (1 − y) σrf

Question 21

Cost and Benefits of Passive Investing

Answer 21

Passive investing is inexpensive and simple

Expense ratio of active mutual fund averages 1%