Business Question Answer

ee1. 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 ____. (SHOW CALCULATION)

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

3. Rank the following from highest average historical return to lowest average historical return from 1926-2008.
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

4. 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

5. 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

6. The arithmetic average of -11%, 15% and 20% is ________. (SHOW CALCULATION)

7. The geometric average of -12%, 20% and 25% is _________. (SHOW CALCULATION)

8. An investment earns 10% the first year, 15% the second year and loses 12% the third year. Your total compound return over the three years was ______. (SHOW CALCULATION)

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

10. 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 and 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 lowest yielding asset

11. 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

12. 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? (SHOW CALCULATION)

13. During the 1926 to 2008 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

14. 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

15. 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

16. 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?  (SHOW CALCULATION)

17. 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 _________.  (SHOW CALCULATION)

18. Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.  (SHOW CALCULATION)

19.  You have the following rates of return for a risky portfolio for several recent years:
  

If you invested $1,000 at the beginning of 2005 your investment at the end of 2008 would be worth ___________. (SHOW CALCULATION)

20. From 1926 to 2008 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. 
A. lower; higher
B. lower; lower
C. higher; lower
D. higher; higher

21. 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

22. If 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? 
A. 3.92%
B. 4.00%
C. 4.12%
D. 6.00%

23. 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

24. The buyer of a new home is quoted a mortgage rate of 0.5% per month. What is the APR on the loan? 
A. 0.50%
B. 5.0%
C. 6.0%
D. 6.5%

25. Which of the following are correct arguments supporting passive investment strategies?
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 
A. I only
B. I and II only
C. II and III only
D. I, II and III