Chapter 05 Risk and Return: Past and Prologue

Chapter 05 - Risk and Return: Past and Prologue
Chapter 05
Chapter 05 Risk and Return: Past and Prologue Answer Key

Multiple Choice Questions

1. You put up $50 at the eginning o! the year !or an in"est#ent. $he "alue o! the in"est#ent
grows %& and you earn a di"idend o! $'.50. Your (PR was )))).
A. %.00&
*. '.50&
C. +.00&
D. 11.00&

Difficulty: Medium

,. $he )))))) #easure o! returns ignores -o#pounding.
A. geo#etri- a"erage
B. arith#eti- a"erage
C. .RR
/. dollar weighted

Difficulty: Easy

5-1

Difficulty: Medium

%. 0hi-h one o! the !ollowing #easure ti#e weighted returns1
.. 2eo#etri- a"erage return
... Arith#eti- a"erage return
.... /ollar weighted return
A. . only
*. .. only
C. . and .. only
/. . and ... only

Difficulty: Medium

5. Rank the !ollowing !ro# highest a"erage histori-al return to lowest a"erage histori-al
return !ro# 13,4-,005.
.. 6#all sto-ks
... 7ong ter# onds
.... 7arge sto-ks
.8. $-ills
A. .9 ..9 ...9 .8
*. ...9 .89 ..9 .
C. .9 ...9 ..9 .8
/. ...9 .9 ..9 .8

Difficulty: Medium

5-,
4. Rank the !ollowing !ro# highest a"erage histori-al standard de"iation to lowest a"erage
histori-al standard de"iation !ro# 13,4-,005.
.. 6#all sto-ks
... 7ong ter# onds
.... 7arge sto-ks
.8. $-ills
A. .9 ..9 ...9 .8
*. ...9 .89 ..9 .
C. .9 ...9 ..9 .8
/. ...9 .9 ..9 .8

Difficulty: Medium

+. You ha"e -al-ulated the histori-al dollar weighted return9 annual geo#etri- a"erage return
and annual arith#eti- a"erage return. .! you desire to !ore-ast per!or#an-e !or ne:t year9 the
est !ore-ast will e gi"en y the )))))))).
A. dollar weighted return
*. geo#etri- a"erage return
C. arith#eti- a"erage return
/. inde: return

Difficulty: Medium

5. $he -o#plete port!olio re!ers to the in"est#ent in ))))))))).
A. the risk-!ree asset
*. the risky port!olio
C. the risk-!ree asset and the risky port!olio -o#ined
/. the risky port!olio and the inde:

Difficulty: Easy

5-'
3. You ha"e -al-ulated the histori-al dollar weighted return9 annual geo#etri- a"erage return
and annual arith#eti- a"erage return. You always rein"est your di"idends and interest earned
on the port!olio. 0hi-h #ethod pro"ides the est #easure o! the a-tual a"erage histori-al
per!or#an-e o! the in"est#ents you ha"e -hosen1
A. /ollar weighted return
B. 2eo#etri- a"erage return
C. Arith#eti- a"erage return
/. .nde: return

Difficulty: Medium

10. $he holding period return on a sto-k is e;ual to ))))))))).
A. the -apital gain yield o"er the period plus the in!lation rate
B. the -apital gain yield o"er the period plus the di"idend yield
C. the -urrent yield plus the di"idend yield
/. the di"idend yield plus the risk pre#iu#

Difficulty: Easy

Difficulty: Medium

1,. Pulished data on past returns earned y #utual !unds are re;uired to e )))))).
A. dollar weighted returns
B. geo#etri- returns
C. e:-ess returns
/. inde: returns

Difficulty: Medium

5-%
1'. $he arith#eti- a"erage o! -11&9 15& and ,0& is )))))))).
A. 15.4+&
B. 5.00&
C. 11.,,&
/. 4.%5&

Difficulty: Easy

1%. $he geo#etri- a"erage o! -1,&9 ,0& and ,5& is ))))))))).
A. 5.%,&
*. 11.00&
C. 3.+0&
/. 15.55&

Difficulty: Medium

5-5
14. An in"est#ent earns 10& the !irst year9 15& the se-ond year and loses 1,& the third year.
Your total -o#pound return o"er the three years was )))))).
A. %1.45&
B. 11.',&
C. '.4%&
/. 1'.00&
<1.10=<1.15=<1 - .1,= > 11.',&

Difficulty: Medium

1+. Annual per-entage rates -an e -on"erted to e!!e-ti"e annual rates y #eans o! the
!ollowing !or#ula:
A. <1 ? <APR@n==n - 1
*. <APR=<n=
C. <APR@n=
/. <periodi- rate=<n=

Difficulty: Easy

15. 6uppose you pay $39+00 !or a $109000 par $reasury ill #aturing in three #onths. 0hat is
the holding period return !or this in"est#ent1
A. '.01&
B. '.03&
C. 1,.%,&
/. 14.+1&

Difficulty: Easy

5-4
13. 6uppose you pay $39500 !or a $109000 par $reasury ill #aturing in two #onths. 0hat is
the annual per-entage rate o! return !or this in"est#ent1
A. ,.0%&
*. 1,.00 &
C. 1,.,%&
/. 1,.53&

Difficulty: Medium

,0. 6uppose you pay $39%00 !or a $109000 par $reasury ill #aturing in si: #onths. 0hat is
the e!!e-ti"e annual rate o! return !or this in"est#ent1
A. 4.'5&
*. 1,.++&
C. 1'.1+&
/. 1%.,5&

Difficulty: Medium

Difficulty: Medium

5-+

Difficulty: Medium

,'. $he #arket risk pre#iu# is de!ined as )))))))))).
A. the di!!eren-e etween the return on an inde: !und and the return on $reasury ills
*. the di!!eren-e etween the return on a s#all !ir# #utual !und and the return on the
6tandard and PoorAs 500 inde:
C. the di!!eren-e etween the return on the risky asset with the lowest returns and the return
on $reasury ills
/. the di!!eren-e etween the return on the highest yielding asset and the lowest yielding asset

Difficulty: Easy

,%. $he e:-ess return is the ))))))))).
A. rate o! return that -an e earned with -ertainty
B. rate o! return in e:-ess o! the $reasury ill rate
C. rate o! return to risk a"ersion
/. inde: return

Difficulty: Easy

,5. $he rate o! return on ))))) is known at the eginning o! the holding period while the rate
o! return on )))) is not known until the end o! the holding period.
A. risky assets9 $reasury ills
B. $reasury ills9 risky assets
C. e:-ess returns9 risky assets
/. inde: assets9 onds

Difficulty: Medium

5-5
,4. $he reward@"ariaility ratio is gi"en y ))))))))).
A. the slope o! the -apital allo-ation line
*. the se-ond deri"ati"e o! the -apital allo-ation line
C. the point at whi-h the se-ond deri"ati"e o! the in"estorAs indi!!eren-e -ur"e rea-hes Bero
/. port!olio e:-ess return

Difficulty: Easy

,+. Your in"est#ent has a ,0& -han-e o! earning a '0& rate o! return9 a 50& -han-e o!
earning a 10& rate o! return and a '0& -han-e o! losing 4&. 0hat is your e:pe-ted return on
this in"est#ent1
A. 1,.5&
*. 11.0&
C. 5.3&
D. 3.,&
<0.,=<'0&= ? <0.5=<10&= ? <0.'=<-4&= > 3.,&

Difficulty: Medium

,5. Your in"est#ent has a %0& -han-e o! earning a 15& rate o! return9 a 50& -han-e o!
earning a 10& rate o! return and a 10& -han-e o! losing '&. 0hat is the standard de"iation
o! this in"est#ent1
A. 5.1%&
*. +.53&
C. 3.,3&
/. 5.%'&

Difficulty: Hard

5-3
,3. /uring the 13,4 to ,005 period the geo#etri- #ean return on s#all !ir# sto-ks was
)))))).
A. 5.'1&
*. 5.54&
C. 3.'%&
D. 11.%'&

Difficulty: Medium

'0. /uring the 13,4 to ,005 period the geo#etri- #ean return on $reasury ills was
))))))))).
A. 5.'1&
*. 5.54&
C. 3.'%&
/. 11.%'&

Difficulty: Medium

'1. /uring the 13,4 to ,005 period the 6harpe ratio was greatest !or whi-h o! the !ollowing
asset -lasses1
A. 6#all C.6. sto-ks
B. 7arge C.6. sto-ks
C. 7ong-$er# C.6. $reasury *onds
/. *ond 0orld port!olio return in C.6. dollars

Difficulty: Medium

',. /uring the 1355 to ,005 period the 6harpe ratio was greatest !or whi-h o! the !ollowing
asset -lasses1
*. 7arge C.6. sto-ks
D. D;uity world port!olio in C.6. dollars

Difficulty: Hard

5-10
''. /uring the 13,4 to ,005 period whi-h one o! the !ollowing asset -lasses pro"ided the
lowest real return1
*. 7arge C.6. sto-ks
/. D;uity world port!olio in C.6. dollars

Difficulty: Medium

'%. *oth in"estors and ga#lers take on risk. $he di!!eren-e etween an in"estor and a
ga#ler is that an in"estor ))))))).
A. is nor#ally risk neutral
B. re;uires a risk pre#iu# to take on the risk
C. knows he or she will not lose #oney
/. knows the out-o#es at the eginning o! the holding period

Difficulty: Easy

'5. (istori-al returns ha"e generally een )))))))))) !or sto-ks o! s#all !ir#s as@than !or
sto-ks o! large !ir#s.
A. the sa#e
*. lower
C. higher
/. $here is no e"iden-e o! a syste#ati- relationship etween returns on s#all !ir# sto-ks and
returns on s#all !ir# sto-ks

Difficulty: Easy

5-11
'4. (istori-ally s#all !ir# sto-ks ha"e earned higher returns than large !ir# sto-ks. 0hen
"iewed in the -onte:t o! an e!!i-ient #arket9 this suggests that ))))))))))).
A. s#all !ir#s are etter run than large !ir#s
*. go"ern#ent susidies a"ailale to s#all !ir#s produ-e e!!e-ts that are dis-ernile in sto-k
#arket statisti-s
C. s#all !ir#s are riskier than large !ir#s
/. s#all !ir#s are not eing a--urately represented in the data

Difficulty: Medium

'+. 0hen -al-ulating the "arian-e o! a port!olioAs returns s;uaring the de"iations !ro# the
#ean results in )))))))).
.. pre"enting the su# o! the de"iations !ro# always e;ualing Bero
... e:aggerating the e!!e-ts o! large positi"e and negati"e de"iations
.... a nu#er in units o! per-entage o! returns
A. . only
B. . and .. only
C. . and ... only
/. .9 .. and ...

Difficulty: Medium

'5. .! you are pro#ised a no#inal return o! 1,& on a one year in"est#ent9 and you e:pe-t the
rate o! in!lation to e '&9 what real rate do you e:pe-t to earn1
A. 5.%5&
B. 5.+%&
C. 3.00&
/. 1,.00&

Difficulty: Medium

5-1,
'3. .! you re;uire a real growth in the pur-hasing power o! your in"est#ent o! 5&9 and you
e:pe-t the rate o! in!lation o"er the ne:t year to e '&9 what is the lowest no#inal return that
you would e satis!ied with1
A. '.00&
*. 5.00&
C. 11.00&
D. 11.,%&

Difficulty: Medium

%0. Ene #ethod to !ore-ast the risk pre#iu# is to use the ))))))).
A. -oe!!i-ient o! "ariation o! analystsA earnings !ore-asts
*. "ariations in the risk !ree rate o"er ti#e
C. a"erage histori-al e:-ess returns !or the asset under -onsideration
/. a"erage anor#al return on the inde: port!olio

Difficulty: Medium

%1. $reasury ills are paying a %& rate o! return. A risk a"erse in"estor with a risk a"ersion o!
A > ' should in"est in a risky port!olio with a standard de"iation o! ,%& only i! the risky
port!olioAs e:pe-ted return is at least )))))).
A. 5.4+&
*. 3.5%&
C. 1,.4%&
/. 1%.45&

Difficulty: Hard

5-1'
%,. .n the #ean-standard de"iation graph9 the line that -onne-ts the risk-!ree rate and the
opti#al risky port!olio9 P9 is -alled ))))))))).
A. the -apital allo-ation line
*. the indi!!eren-e -ur"e
C. the in"estorAs utility line
/. the se-urity #arket line

Difficulty: Medium

%'. Fost studies indi-ate that in"estorsA risk a"ersion is in the range ))))).
A. 1-'
B. ,-%
C. '-5
/. %-4

Difficulty: Medium

%%. $wo assets ha"e the !ollowing e:pe-ted returns and standard de"iations when the risk-!ree
rate is 5&:

An in"estor with a risk a"ersion o! A > ' would !ind that ))))))))))))))))) on a risk
return asis.
A. only Asset A is a--eptale
*. only Asset * is a--eptale
C. neither Asset A nor Asset * is a--eptale
/. oth Asset A and Asset * are a--eptale

Difficulty: Hard

5-1%
%5. (istori-ally the est asset !or the long ter# in"estor wanting to !end o!! the threats o!
in!lation and ta:es while #aking his #oney grow has een )))).
A. sto-ks
*. onds
C. #oney #arket !unds
/. $reasury ills

Difficulty: Easy

%4. $he !or#ula is used to -al-ulate the ))))))))))))).
A. 6harpe #easure
*. $reynor #easure
C. Coe!!i-ient o! "ariation
/. Real rate o! return

Difficulty: Easy

%+. A port!olio with a ,5& standard de"iation generated a return o! 15& last year when $-
ills were paying %.5&. $his port!olio had a 6harpe #easure o! )))).
A. 0.,,
*. 0.40
C. 0.%,
/. 0.,5

Difficulty: Medium

5-15
%5. Consider a treasury ill with a rate o! return o! 5& and the !ollowing risky se-urities:
6e-urity A: D<r= > .15G "arian-e > .0%00
6e-urity *: D<r= > .10G "arian-e > .0,,5
6e-urity C: D<r= > .1,G "arian-e > .1000
6e-urity /: D<r= > .1'G "arian-e > .04,5
$he in"estor #ust de"elop a -o#plete port!olio y -o#ining the risk-!ree asset with one o!
the se-urities #entioned ao"e. $he se-urity the in"estor should -hoose as part o! his
-o#plete port!olio to a-hie"e the est CA7 would e ))))))))).
A. se-urity A
*. se-urity *
C. se-urity C
/. se-urity /
A has the steepest slopeG !ound as:

Difficulty: Medium

%3. You pur-hased a share o! sto-k !or $,3. Ene year later you re-ei"ed $,.,5 as di"idend and
sold the share !or $,5. Your holding-period return was ))))))))).
A. -'.5+&
*. - '.%5&
C. %.'1&
/. 5.0'&

Difficulty: Medium

5-14
50. 6e-urity A has a higher standard de"iation o! returns than 6e-urity *. 0e would e:pe-t
that )))))).
.. 6e-urity A would ha"e a higher risk pre#iu# than 6e-urity *
... the likely range o! returns !or 6e-urity A in any gi"en year would e higher than the likely
range o! returns !or 6e-urity *
.... the 6harpe #easure o! A will e higher than the 6harpe #easure o! *.
A. . only
B. . and .. only
C. .. and ... only
/. .9 .. and ...

Difficulty: Medium

51. $he holding period return on a sto-k was ,5&. .ts ending pri-e was $15 and its eginning
pri-e was $14. .ts -ash di"idend #ust ha"e een ))))))))).
A. $0.,5
*. $1.00
C. $,.00
/. $%.00

Difficulty: Medium

5,. An in"estor in"ests +0& o! her wealth in a risky asset with an e:pe-ted rate o! return o!
15& and a "arian-e o! 5& and she puts '0& in a $reasury ill that pays 5&. (er port!olioAs
e:pe-ted rate o! return and standard de"iation are )))))))))) and )))))))))) respe-ti"ely.
A. 10.0&9 4.+&
*. 1,.0&9 ,,.%&
C. 1,.0&9 15.+&
/. 10.0&9 '5.0&

Difficulty: Medium

5-1+
5'. $he holding period return on a sto-k was ',&. .ts eginning pri-e was $,5 and its -ash
di"idend was $1.50. .ts ending pri-e #ust ha"e een ))))))))).
A. $,5.50
*. $''.,0
C. $'1.50
/. $,3.+5

Difficulty: Medium

5%. Consider the !ollowing two in"est#ent alternati"es. Hirst9 a risky port!olio that pays 15&
rate o! return with a proaility o! %0& or 5& with a proaility o! 40&. 6e-ond9 a treasury
ill that pays 4&. $he risk pre#iu# on the risky in"est#ent is ))))))))).
A. 1&
B. '&
C. 4&
/. 3&

Difficulty: Medium

5-15
55. Consider the !ollowing two in"est#ent alternati"es. Hirst9 a risky port!olio that pays ,0&
rate o! return with a proaility o! 40& or 5& with a proaility o! %0&. 6e-ond9 a treasury
ill that pays 4&. .! you in"est $509000 in the risky port!olio9 your e:pe-ted pro!it would e
))))))))).
A. $'9000
B. $+9000
C. $+9500
/. $109000

Difficulty: Medium

54. You in"est $109000 in a -o#plete port!olio. $he -o#plete port!olio is -o#posed o! a risky
asset with an e:pe-ted rate o! return o! 15& and a standard de"iation o! ,1& and a treasury
ill with a rate o! return o! 5&. (ow #u-h #oney should e in"ested in the risky asset to
!or# a port!olio with an e:pe-ted return o! 11&1
A. $49000
*. $%9000
C. $+9000
/. $'9000
15: ? 5<1 - := > 11G : > 40&G 0.40<109000= > $49000

Difficulty: Hard

You in"est $19000 in a -o#plete port!olio. $he -o#plete port!olio is -o#posed o! a risky
asset with an e:pe-ted rate o! return o! 14& and a standard de"iation o! ,0& and a treasury
ill with a rate o! return o! 4&.

5-13
5+. )))))))))) o! your -o#plete port!olio should e in"ested in the risky port!olio i! you
want your -o#plete port!olio to ha"e a standard de"iation o! 3&.
A. 100&
*. 30&
C. %5&
/. 10&

Difficulty: Easy

55. A port!olio that has an e:pe-ted "alue in one year o! $19100 -ould e !or#ed i! you
))))))))).
A. Pla-e %0& o! your #oney in the risky port!olio and the rest in the risk !ree asset
*. Pla-e 55& o! your #oney in the risky port!olio and the rest in the risk !ree asset
C. Pla-e 40& o! your #oney in the risky port!olio and the rest in the risk !ree asset
/. Pla-e +5& o! your #oney in the risky port!olio and the rest in the risk !ree asset
$1100 > :<1000=<1.14= ? <1 - :=1000<1.04=

Difficulty: Hard

53. $he slope o! the -apital allo-ation line !or#ed with the risky asset and the risk-!ree asset
is ))))))))).
A. 1.%0
*. 0.50
C. 0.50
/. 0.%0

Difficulty: Medium

5-,0
40. You ha"e $5009000 a"ailale to in"est. $he risk-!ree rate as well as your orrowing rate is
5&. $he return on the risky port!olio is 14&. .! you wish to earn a ,,& return9 you should
))))))))).
A. in"est $1,59000 in the risk-!ree asset
*. in"est $'+59000 in the risk-!ree asset
C. orrow $1,59000
D. orrow $'+59000

Difficulty: Hard

41. $he return on the risky port!olio is 15&. $he risk-!ree rate as well as the in"estorAs
orrowing rate is 10&. $he standard de"iation o! return on the risky port!olio is ,0&. .! the
standard de"iation on the -o#plete port!olio is ,5&9 the e:pe-ted return on the -o#plete
port!olio is ))))))))).
A. 4.00&
*. 5.+5 &
C. 10.00&
D. 14.,5&

Difficulty: Hard

You are -onsidering in"esting $19000 in a -o#plete port!olio. $he -o#plete port!olio is
-o#posed o! treasury ills that pay 5& and a risky port!olio9 P9 -onstru-ted with , risky
se-urities I and Y. $he opti#al weights o! I and Y in P are 40& and %0& respe-ti"ely. I
has an e:pe-ted rate o! return o! 1%& and Y has an e:pe-ted rate o! return o! 10&.

5-,1
4,. $o !or# a -o#plete port!olio with an e:pe-ted rate o! return o! 11&9 you should in"est
)))))))))) o! your -o#plete port!olio in treasury ills.
A. 13&
*. ,5&
C. '4&
/. 50&

Difficulty: Hard

4'. $o !or# a -o#plete port!olio with an e:pe-ted rate o! return o! 5&9 you should in"est
appro:i#ately )))))))))) in the risky port!olio. $his will #ean you will also in"est
appro:i#ately )))))))))) and )))))))))) o! your -o#plete port!olio in se-urity I and Y
respe-ti"ely.
A. 0&9 40&9 %0&
*. ,5&9 %5&9 '0&
C. %0&9 ,%&9 14&
/. 50&9 '0&9 ,0&

Difficulty: Hard

5-,,
Difficulty: Hard

You ha"e the !ollowing rates o! return !or a risky port!olio !or se"eral re-ent years:

44. .! you in"ested $19000 at the eginning o! ,005 your in"est#ent at the end o! ,005 would
e worth ))))))))))).
A. $,91+4.40
B. $19+55.54
C. $194%5.5'
/. $19,%+.5+
$1<1.'5,'=<1.154+=<1 ? -.035+=<1.,'%5= > $1.+554

Difficulty: Medium

4+. $he annualiBed a"erage return on this in"est#ent is
A. 14.15&
*. 14.5+&
C. ,1.',&
D. 15.40&

Difficulty: Hard

5-,'
45. A se-urity with nor#ally distriuted returns has an annual e:pe-ted return o! 15& and
standard de"iation o! ,'&. $he proaility o! getting a return etween -,5& and 4%& in any
one year is
A. 45.,4&
B. 35.%%&
C. 33.+%&
/. 100.00&

Difficulty: Medium

5-,%
43. $he Fanhawkin Hund has an e:pe-ted return o! 14& and a standard de"iation o! ,0&.
$he risk !ree rate is %&. 0hat is the reward-to-"olatility ratio !or the Fanhawkin Hund1
A. 0.5
B. 0.4
C. 3.0
/. 1.0

Difficulty: Medium

+0. Hro# 13,4 to ,005 the world sto-k port!olio o!!ered ))))) return and ))))) "olatility
than the port!olio o! large C.6. sto-ks.
A. lowerG higher
B. lowerG lower
C. higherG lower
/. higherG higher

Difficulty: Medium

+1. $he pri-e o! a sto-k is $55 at the eginning o! the year and $50 at the end o! the year. .!
the sto-k paid a $' di"idend and in!lation was '&9 what is the real holding period return !or
the year1
A. -'.4%&
*. -4.'4&
C. -4.%%&
/. -11.+%&
Jo#inal return on sto-k:
Real return

Difficulty: Hard

5-,5
+,. $he pri-e o! a sto-k is $'5 at the eginning o! the year and $%1 at the end o! the year. .!
the sto-k paid a $,.50 di"idend what is the holding period return !or the year1
A. 4.55&
*. 5.54&
C. 1%.%+&
/. 15.44&
(PR > <%1 - '5 ? ,.50=@'5 > 0.1%%+

Difficulty: Easy

+'. You in"est all o! your #oney in one year $-ills. 0hi-h o! the !ollowing state#ents is@are
-orre-t1
.. Your no#inal return on the $-ills is riskless.
... Your real return on the $-ills is riskless.
.... Your no#inal 6harpe #easure is Bero.
A. . only
B. . and ... only
C. .. only
/. .9 .. and ...

Difficulty: Medium

+%. 0hi-h one o! the !ollowing would e -onsidered a risk-!ree asset in real ter#s as opposed
to no#inal1
A. Foney #arket !und
*. C.6. $-ill
C. 6hort ter# -orporate onds
D. C.6. $-ill whose return was inde:ed to in!lation

Difficulty: Medium

5-,4
+5. 0hat is the geo#etri- a"erage return o! the !ollowing ;uarterly returns: '&9 5&9 %&9 and
+&9 respe-ti"ely1
A. '.+,&
*. %.,'&
C. %.+%&
/. %.30&
Return > <1.0' : 1.0% : 1.05 : 1.0+=
.,5
- 1 > .0%+%

Difficulty: Medium

+4. 0hat is the geo#etri- a"erage return o"er one year i! the ;uarterly returns are 5&9 3&9
5&9 and 1,&9 respe-ti"ely1
A. 5.00&
*. 5.'' &
C. 5.%+&
/. 5.50 &
Return > <1.05 : 1.05 : 1.03 : 1.1,=
.,5
- 1 > .05%+

Difficulty: Medium

++. .! no#inal rate o! return on in"est#ent is 4& and in!lation is ,& o"er a holding period9
what is the real rate o! return on this in"est#ent1
A. '.3,&
*. %.00&
C. %.1,&
/. 4.00&

Difficulty: Medium

5-,+
+5. A--ording to histori-al data9 o"er the long run whi-h o! the !ollowing assets has the est
-han-e to pro"ide the est a!ter in!lation9 a!ter ta: rate o! return1
A. 7ong ter# $reasury onds
*. Corporate onds
C. Co##on sto-ks
/. Pre!erred sto-ks

Difficulty: Easy

Difficulty: Hard

5-,5
51. $he CA7 pro"ided y -o#inations o! one #onth $-ills and a road inde: o! -o##on
sto-ks is -alled the )))))).
A. 6F7
*. CAPF
C. CF7
/. $otal Return 7ine

Difficulty: Easy

5,. 0hi-h o! the !ollowing are -orre-t argu#ents supporting passi"e in"est#ent strategies1
.. A-ti"e trading strategies #ay not guarantee higher returns ut guarantee higher -osts
... Passi"e in"estors -an !ree ride on the a-ti"ity o! knowledge in"estors whose trades !or-e
pri-es to re!le-t -urrently a"ailale in!or#ation
.... Passi"e in"estors are guaranteed to earn higher rates o! return than a-ti"e in"estors o"er
su!!i-iently long ti#e horiBons
A. . only
B. . and .. only
C. .. and ... only
/. .9 .. and ...

Difficulty: Medium

You ha"e the !ollowing rates o! return !or a risky port!olio !or se"eral re-ent years. Assu#e
that the sto-k pays no di"idends

5-,3
5'. 0hat is the geo#etri- a"erage return !or the period1
A. ,.5+&
*. 0.+%&
C. ,.40&
/. ,.,1&
K<1.10=<1 ? -.0+,+=<1.0555=L
M
- 1 > ,.40&

Difficulty: Hard

5-'0

Chapter 05 Risk and Return: Past and Prologue

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Chapter 05 Risk and Return: Past and Prologue

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Chapter 05 - Risk and Return: Past and Prologue

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