978-0134083308 Chapter 13 Part 2

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4) A rational investor will require the same return from a corporate security as from a

government security.

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5) Investors need to consider the effects of taxes and transaction fees when measuring portfolio

returns.

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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.

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7) The calculation of returns on options and futures must consider income as well as capital

gains.

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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.

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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.

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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.

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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.

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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.

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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

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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%

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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%

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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%

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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%.

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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%

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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%

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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%

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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.

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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%

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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%

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13.4 Learning Goal 4

1) Sharpe’s measure of portfolio performance adjusts for risk by dividing total portfolio return

by the portfolio beta.

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2) Sharpe’s measure of portfolio performance compares the risk premium on a portfolio to the

portfolio’s standard deviation of return.

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3) Sharpe’s measure is a measure of the risk premium per unit of total risk.

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4) Jensen’s measure of portfolio performance compares the return a portfolio to the beta

adjusted market return.

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5) Treynor’s measure and Jensen’s measure use the standard deviation of portfolio return in the

denominator.

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6) Sharpe measures total risk while Treynor and Jensen measure only systematic risk.

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7) A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.

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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.

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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

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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.

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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.

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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

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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.

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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.

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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%

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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.

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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%

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