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1. 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 ____.
2. The ______ measure of returns ignores compounding.
3. 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 __________.
4. Which one of the following measures time-weighted returns and allows for compounding?
5. Rank the following from highest average historical return to lowest average historical
return from 1926 to 2010.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
6. Rank the following from highest average historical standard deviation to lowest average
historical standard deviation from 1926 to 2010.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
7. 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 ________.
8. The complete portfolio refers to the investment in _________.
9. You have calculated the historical dollar-weighted return, annual geometric average
return, and annual arithmetic average return. You always reinvest your dividends and interest
earned on the portfolio. Which method provides the best measure of the actual average historical
performance of the investments you have chosen?
10. The holding period return on a stock is equal to _________.
11. 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?
12. Published data on past returns earned by mutual funds are required to be ______.
13. The arithmetic average of -11%, 15%, and 20% is ________.
14. The geometric average of -12%, 20%, and 25% is _________.
15. The dollar-weighted return is the _________.
16. An investment earns 10% the first year, earns 15% the second year, and loses 12% the
third year. The total compound return over the 3 years was ______.
17. Annual percentage rates can be converted to effective annual rates by means of the
following formula:
18. Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the
holding-period return for this investment?
19. Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the
annual percentage rate of return for this investment?
20. Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the
effective annual rate of return for this investment?
21. You have an APR of 7.5% with continuous compounding. The EAR is _____.
22. You have an EAR of 9%. The equivalent APR with continuous compounding is _____.
23. The market risk premium is defined as __________.
24. The excess return is the _________.
25. 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.
26. The reward-to-volatility ratio is given by _________.
27. 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?
28. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of
earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of
this investment?
29. During the 1926-2010 period the geometric mean return on small-firm stocks was ______.
30. During the 1926-2010 period the geometric mean return on Treasury bonds was
_________.
31. During the 1926-2010 period the Sharpe ratio was greatest for which of the following
asset classes?
32. During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset
classes?
33. During the 1926-2010 period which one of the following asset classes provided the lowest
real return?
34. Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor _______.
35. Historical returns have generally been __________ for stocks of small firms as (than) for
stocks of large firms.
36. Historically, small-firm stocks have earned higher returns than large-firm stocks. When
viewed in the context of an efficient market, this suggests that ___________.
37. In calculating the variance of a portfolio's returns, squaring the deviations from the mean
results in:
I. Preventing the sum of the deviations from always equaling zero
II. Exaggerating the effects of large positive and negative deviations
III. A number for which the unit is percentage of returns
38. If you are promised a nominal return of 12% on a 1-year investment, and you expect the
rate of inflation to be 3%, what real rate do you expect to earn?
39. 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?
