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11
4) A rational investor will require the same return from a corporate security as from a
government security.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
5) Investors need to consider the effects of taxes and transaction fees when measuring portfolio
returns.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
6) Marianne is in the 30% marginal tax bracket. For her, a 5% return on a tax-exempt portfolio
is equivalent to a 6.5% return on a taxable portfolio.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
7) The calculation of returns on options and futures must consider income as well as capital
gains.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8) Only capital gains that have been realized should be included in the measurement of a
portfolio's return over a given period of time.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12
9) For a stock investment, the dividend yield is calculated by
A) dividing a stock's annual cash dividend by its price.
B) dividing a stock's price by its annual cash dividend.
C) multiplying a stock's semi-annual dividend by two.
D) dividing the annual change in the stock's price plus its annual dividend amount by the
beginning of the year price.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
10) The holding period return for mutual funds should be based on
A) net asset value exclusively.
B) dividend income exclusively.
C) capital gains distributions exclusively.
D) capital gains distributions, dividends and change in net asset value.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
11) The holding period return (HPR)
A) reflects only capital gains and losses for investment periods of one year or less.
B) calculates the annual dividend yield on stocks or current interest yield on bonds.
C) is the most appropriate measure of returns for an investment period exceeding one year.
D) can be used to determine the actual total return on stocks, bonds, and other investments for
periods of one year or less.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12) To compute the holding period return on a bond investment, the investor should divide the
purchase price of the bond into
A) any increase or decrease in the bond's price.
B) the annual coupon payment.
C) the bond's yield to maturity.
D) coupon payments received plus or minus any change in the bond's price.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13
13) Juan's investment portfolio was valued at $125,640 at the beginning of the year. During the
year, Juan received $603 in interest income and $298 in dividend income. Juan also sold shares
of stock and realized $1,459 in capital gains. Juan's portfolio is valued at $142,608 at the end of
the year. All income and realized gains were reinvested. No funds were contributed or
withdrawn during the year. What is the amount of income Juan must declare this year for
income tax purposes?
A) $0
B) $901
C) $2,360
D) $19,328
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14) On January 1, Stacy's portfolio was valued at $96,534. During the year Stacy received
$3,285 in interest and $4,100 in dividends. She also sold one stock at a gain of $850. The value
of the portfolio on December 31 of the same year was $113,201. At the end of June, Stacy
withdrew $5,000 from the portfolio. What is the holding period return for the year?
A) 25.1%
B) 25.8%
C) 26.5%
D) 27.2%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15) Six months ago, Suzanne purchased a stock for $28 a share. Today she sold the stock at a
price of $32 a share. During the time she owned the stock, she received a total of $1.30 in
dividends per share. What is her holding period return?
A) 16.6%
B) 18.9%
C) 33.2%
D) 37.8%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14
16) Twelve months ago, Javier purchased a stock for $28 a share. The stock pays a quarterly
dividend of $0.45 per share. Today, Javier sold the stock for $26.75 a share. What is his
holding period return?
A) -4.46%
B) 1.96%
C) 6.73%
D) 19.6%
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
17) Ten years ago, Taylor purchased 444.44 shares in a mutual fund for $22.50 per share. He
has never made an additional investment in this fund, but because of reinvested dividends and
capital gains, he now owns 1,200 shares with a net asset value of $25.88 per share. Ignoring
taxes, his compound average annual rate of return (IRR) is
A) 10.0%.
B) 12%.
C) 21%.
D) 31%.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
18) Tim purchased a stock ten months ago for $14 a share, received a $1 dividend per share last
month, and sold the stock today for $16 per share. Tim has a marginal tax rate of 30%. Both
capital gains for securities held more than one year and dividend income is taxed at 15%. What
is Tim's after-tax holding period return?
A) 14.1%
B) 15.9%
C) 16.1%
D) 18.2%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15
19) On February 19, 2016, Angela purchased 100 shares of BRD stock at a total cost of $3,425.
She received a total of $250.00 in dividends and sold the stock today, February 22, 2017 for
$3,692. Angela has a marginal tax rate of 28%. The tax rate on dividend income and long-
term capital gains is 15%. What is Angela's after-tax holding period return on her investment in
BRD stock?
A) 15.1%
B) 12.8%
C) 10.9%
D) 7.8%
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
20) An investor in the 25% marginal tax bracket purchased a bond for $983, received $85 in
interest, and then sold the bond for $955 after holding it for six months. The tax rate for capital
gains with holding periods in excess of one year is 15%. What are the pre-tax and post-tax
holding period returns?
A) 5.8%; 4.3%
B) 6.0%; 4.5%
C) 5.8%; 4.5%
D) 6.0%; 4.3%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
21) Investors who wish to minimize the effect of taxes on their investment returns should try to
avoid
A) dividend paying stocks.
B) short-term capital gains.
C) long-term capital gains.
D) municipal bonds.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
16
22) Maria purchased $5,000 of no-load mutual fund shares just over a year ago. She received
$136 in dividend income and $201 in long-term capital gains distributions. Today she sold her
shares for $5,062. Maria is in the 25% marginal tax bracket. Capital gains with holding periods
in excess of one year and dividend income are taxed at 15%. What is Maria's after-tax holding
period return?
A) 6.0%
B) 6.6%
C) 6.8%
D) 8.0%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
23) On January 1, Tim's portfolio was valued at $432,098. During the year Tim received
$10,563 in interest and $15,060 in dividends. He also sold stock at a net loss of $12,870 and
used the proceeds to purchase another stock. Tim did not contribute any more funds nor
withdraw any funds during the year. On December 31 of the same year, Tim's portfolio was
valued at $398,189. What is the holding period return for the year?
A) -5.3%
B) -4.9%
C) -2.1%
D) -1.9%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13.4 Learning Goal 4
1) Sharpe's measure of portfolio performance adjusts for risk by dividing total portfolio return
by the portfolio beta.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
2) Sharpe's measure of portfolio performance compares the risk premium on a portfolio to the
portfolio's standard deviation of return.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
17
3) Sharpe's measure is a measure of the risk premium per unit of total risk.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
4) Jensen's measure of portfolio performance compares the return a portfolio to the beta
adjusted market return.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
5) Treynor's measure and Jensen's measure use the standard deviation of portfolio return in the
denominator.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
6) Sharpe measures total risk while Treynor and Jensen measure only systematic risk.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
7) A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
8) Portfolio revision is the ongoing process of systematically studying the issues in the portfolio
and selling certain issues and purchasing others as the means of maintaining a portfolio that
best meets the investor's objectives.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
18
9) Which of the following are reasons to consider selling an investment that is currently in a
portfolio?
I. The investment has met the original objective.
II. Better investment opportunities currently exist.
III. The outlook for the investment has improved.
IV. The investment has not met expectations and no change is expected.
A) I, II and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
10) Zachary holds 15 stocks in his portfolio. The portfolio's return last year was 11%, but one
stock, RJH, doubled in value. What should Zachary do if he wants to be as diversified as he
was at the beginning of the year?
A) Sell some of the RJH because it now constitutes a higher percentage of his holdings.
B) Sell the worst performing stock and use the proceeds to buy more RJH.
C) Wait for the price for RJH and the remaining stocks to rise so the proportions are
reestablished.
D) Sell the RJH and buy a cheaper stock in the same industry.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
11) Allison's portfolio has an expected return of 14% and a standard deviation of 20%.
Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The
risk-free rate is 3%. According to the Sharpe measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) the portfolio's are equally desirable.
D) the answer depends on Allison and Brianna's risk tolerance.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
19
12) Ella's portfolio has a beta of 1.34 and a standard deviation of 16.4%. The portfolio has a
total return of 14.8%. The market risk premium is 8.5%, while the return on the market
portfolio was 12.0%. What is the value of Sharpe's measure for Ella's portfolio?
A) 0.21
B) 0.38
C) 0.69
D) 0.90
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
13) Sharpe's measure of portfolio performance compares the risk premium on a portfolio to
A) a broad-based market index such as the S&P 500 index.
B) the portfolio's standard deviation of return.
C) the portfolio's beta.
D) the prevailing risk-free rate of return.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
14) The Sharpe's measure for Jane Smith's investment portfolio is 0.40, while the Sharpe's
measure for the market is 0.30. This information suggests that Smith's portfolio
A) exhibits superior performance because its risk premium per unit of risk is above that of the
market.
B) exhibits poor performance because its risk premium per unit of risk is below that of the
market.
C) is inadequately diversified, and more securities should be added to the portfolio in order to
bring it in line with the market.
D) is overly diversified, and some securities should be sold to bring the portfolio in line with
the market.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
20
15) Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the
standard deviation is 13%. Currently, the risk-free rate of return is 4% and the overall market
has a total return of 11%. What is the value of Treynor's measure for Phil's portfolio?
A) 2.1%
B) 6.2%
C) 7.1%
D) 8.9%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
16) Allison's portfolio has an expected return of 14% and a beta of 1.37. Brianna's portfolio
has an expected rate of return of 11% and a beta of 1. The risk-free rate is 3%. According to
the Treynor measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) the portfolio's are equally desirable.
D) the answer depends on Allison and Brianna's risk tolerance.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
17) A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%. If
the risk free rate is 4.5% and the market return is 10.2%, then Treynor's measure of this
portfolio's performance is
A) 2.8%
B) 3.7%
C) 6.5%
D) 9.4%
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 4
