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Flashcards in ch5 kawncehpts Deck (33):
1

The ______ measure of returns ignores compounding.


A. , geometric average

B. , arithmetic average

C. , IRR

D. , dollar-weighted

B. , arithmetic average

2

., If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.


A. , geometric average return

B. , arithmetic average return

C. , dollar-weighted return

D. , index return

C. , dollar-weighted return

3

Which one of the following measures time-weighted returns and allows for compounding?


A. , Geometric average return

B. , Arithmetic average return

C. , Dollar-weighted return

D. , Historical average return

A. , Geometric average return

4

Rank the following from highest average historical return to lowest average historical return from 1926 to 2010.

I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills

C. , I, III, II, IV

Small stocks Large stocks Long-term bonds T-bills

5

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.


A. , dollar-weighted return

B. , geometric average return

C. , arithmetic average return

D. , index return

C. , arithmetic average return

6

The complete portfolio refers to the investment in _________.


A. , the risk-free asset

B. , the risky portfolio

C. , the risk-free asset and the risky portfolio combined

D. , the risky portfolio and the index

C. , the risk-free asset and the risky portfolio combined

7

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?

B. , Geometric average return

8

The holding period return on a stock is equal to _________.


A. , the capital gain yield over the period plus the inflation rate

B. , the capital gain yield over the period plus the dividend yield

C. , the current yield plus the dividend yield

D. , the dividend yield plus the risk premium

B. , the capital gain yield over the period plus the dividend yield

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?


A. , Dollar-weighted return

B. , Geometric average return

C. , Arithmetic average return

D. , Mean holding-period return

A. , Dollar-weighted return

10

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


A. , dollar-weighted returns

B. , geometric returns

C. , excess returns

D. , index returns

B. , geometric returns

11

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010.

I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills


A. , I, II, III, IV

B. , III, IV, II, I

C. , I, III, II, IV

D. , III, I, II, IV

C. , I, III, II, IV

12

The dollar-weighted return is the _________.


A. , difference between cash inflows and cash outflows

B. , arithmetic average return

C. , geometric average return

D. , internal rate of return

D. , internal rate of return

13

The market risk premium is defined as __________.


A. , the difference between the return on an index fund and the return on Treasury bills

B. , the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index

C. , the difference between the return on the risky asset with the lowest returns and the return on Treasury bills

D. , the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

A. , the difference between the return on an index fund and the return on Treasury bills

14

The excess return is the _________.


A. , rate of return that can be earned with certainty

B. , rate of return in excess of the Treasury-bill rate

C. , rate of return to risk aversion

D. , index return

B. , rate of return in excess of the Treasury-bill rate

15

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.


A. , risky assets; Treasury bills

B. , Treasury bills; risky assets

C. , excess returns; risky assets

D. , index assets; bonds

B. , Treasury bills; risky assets

16

The reward-to-volatility ratio is given by _________.


A. , the slope of the capital allocation line

B. , the second derivative of the capital allocation line

C. , the point at which the second derivative of the investor's indifference curve reaches zero

D. , the portfolio's excess return

A. , the slope of the capital allocation line

17

During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes?


A. , Small U.S. stocks

B. , Large U.S. stocks

C. , Long-term U.S. Treasury bonds

D. , Bond world portfolio return in U.S. dollars

B. , Large U.S. stocks

18

During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset classes?


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

C. , Long-term U.S. Treasury bonds

19

During the 1926-2010 period which one of the following asset classes provided the lowest real return?


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

C. , Long-term U.S. Treasury bonds

20

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


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

B. , requires a risk premium to take on the risk

21

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms.


A. , the same

B. , lower

C. , higher

D. , none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

C. , higher

22

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


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

C. , small firms are riskier than large firms

23

., 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


A. , I only

B. , I and II only

C. , I and III only

D. , I, II, and III

B. , I and II only

24

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


A. , coefficient of variation of analysts' earnings forecasts

B. , variations in the risk-free rate over time

C. , average historical excess returns for the asset under consideration

D. , average abnormal return on the index portfolio

C. , average historical excess returns for the asset under consideration

25

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


A. , capital allocation line

B. , indifference curve

C. , investor's utility line

D. , security market line

A. , capital allocation line

26

Most studies indicate that investors' risk aversion is in the range _____.


A. , 1-3

B. , 1.5-4

C. , 3-5.2

D. , 4-6


B. , 1.5-4

27

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%:



An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis.


A. , only asset A is acceptable

B. , only asset B is acceptable

C. , neither asset A nor asset B is acceptable

D. , both asset A and asset B are acceptable

C. , neither asset A nor asset B is acceptable

28

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 ____.


A. , Stocks

B. , Bonds

C. , Money market funds

D. , Treasury bills

A. , Stocks

29

The formula SHARPE RATIO is used to calculate the _____________.


A. , Sharpe ratio

B. , Treynor measure

C. , Coefficient of variation

D. , Real rate of return

A. , Sharpe ratio

30

Security A has a higher standard deviation of returns than security B. We would expect that:

I. Security A would have a higher risk premium than security B.
II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B.
III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.


A. , I only

B. , I and II only

C. , II and III only

D. , I, II, and III

B. , I and II only

31

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 _________.


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
$1,100 = y × (1,000)(1.16) + (1 - y)1,000(1.06), so y =.4

A. , place 40% of your money in the risky portfolio and the rest in the risk-free asset

32

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?


A. , Money market fund

B. , U.S. T-bill

C. , Short-term corporate bonds

D. , U.S. T-bill whose return was indexed to inflation

D. , U.S. T-bill whose return was indexed to inflation

33

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?


A. , Long-term Treasury bonds

B. , Corporate bonds

C. , Common stocks

D. , Preferred stocks

C. , Common stocks