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Exam 5: Risk, Return, and the Historical Record

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Question 1

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The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been ________.

A) $28.50
B) $33.20
C) $31.50
D) $29.75

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Question 2

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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

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A

Question 3

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Which measure of downside risk predicts the worst loss that will be suffered with a given probability?

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

During the 1926-2013 period the geometric mean return on Treasury bonds was ________.

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%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately ________.

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2017. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

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%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately ________ in the risky portfolio. This will mean you will also invest approximately ________ and ________ of your complete portfolio in security X and Y, respectively.

Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is ________.

The dollar-weighted return is the ________.

What is the VaR of a $10 million portfolio with normally distributed returns at the 5% VaR? Assume the expected return is 13% and the standard deviation is 20%.

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 ________.

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%. To form a complete portfolio with an expected rate of return of 11%, you should invest ________ of your complete portfolio in Treasury bills.

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

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

You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. What is the dollar-weighted return over the entire time period?

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 ________.

During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes?

The excess return is the ________.

The complete portfolio refers to the investment in ________.