SET 2 PRACTICE QUESTIONS Returns and Bonds Chapters 6-9
CHAPTER 6:
1.Total return is defined as
a.a percentage return, calculated by dividing the sum of all price changes by the amount invested
b.the reciprocal of a return relative
c.the difference between the sale price and purchase price of an investment
d.a percentage return, calculated by dividing all cash flows received from an investment by its purchase price
2.The total return for a 12% bond purchased at 1005, held for six months and sold for 1050 is
a.3.3%.
b.16.42%.
c.5.7%.
d.none of the above
3.The total return on a bond purchased for $1000 that pays interest of $90 during the year and is sold for $910 at the end of one year is
a.0%
b.10%
c.-10%
d.1%
4.The relationship between the Total Return (TR) and the Return Relative (RR) is
a.RR = TR – 1
b.RR = 1/TR
c.RR = TR + 1
d.TR = RR + 1
5. The return relative for a stock bought at $46, sold at $34, and which pays a $1 dividend is
a..761
b..886
c..841
d.1.38
6.The return relative for a stock bought at $40, sold at $38, and paying a $1 dividend is
a..975
b.-.0732
c..927
d.1.0789
7.With regard to Total Return and Return Relative,
a.a -10% Total Return translates into a Return Relative of .90
b.a Total Return of -50% would translate into a Return Relative of 1.5
c.a Return Relative of 1.75 indicates a 0.75% Total Return
d.the income component of Total Return can be + or –
8.Assume the CWI for the period 1920-2002 was $3150. The cumulative income component was $30.41. The cumulative price component, in dollars, could be calculated as:
a.3150 – 30.41
b.3150 – (1.042)83
c.3150 / (1.042) 83
d.none of the above are correct
9.The arithmetic mean return
a.represents the typical or likely performance of an asset for a single period.
b.can be lower than the geometric mean if the returns are highly variable.
c.represents the true average return over multiple periods.
d.is used in measuring the wealth index.
10.The standard deviation of the annual rate of return on common stocks over the period 1920-2000 has been approximately
a.60%
b.35%
c.20%
d.12%
11The geometric mean is
a.The better measure of expected return for the next period.
b.Always less than or equal to the arithmetic mean.
c.A measurement of the arithmetic average rate of return over multiple periods.
d.Sometimes larger than the arithmetic mean for stocks.
12.The relationship between the geometric mean and the arithmetic mean is such that
a.as the standard deviation of returns increases, holding the arithmetic mean constant, the geometric mean decreases
b.the geometric mean can sometimes be larger that the arithmetic mean
c.(1 + A. M.)2 = (1 + G)2 - (S.D.)2
d.the variability of a series has no effect on the difference between these two means
13.Assume that the returns for two consecutive years for a stock are 16.76%and -2.0%. Which of the following statements regarding these two returns is CORRECT?
a.the geometric mean is 7.38%
b.$1 invested at the beginning of period 1 would have grown to $1.1530 by the end of period 2
c.the best estimate of the rate at which $1 would have grown over these two periods is 7.38%
d.$1 invested at the beginning of period 1 would have grown to $1.1442 by the end of period 2
14.Choose the CORRECT statement concerning the Cumulative Wealth Index
a.it is based on a multiplicative relationship
b.it can only be presented on a nominal basis
c.the CWI for corporate bonds is smaller than that for government bonds
d.it is similar to, but smaller than, the cumulative total return index
15.The CWI for common stocks for 1926-1997 was $1828.33. The geometric mean average annual return for common stocks was 11%, and for the price change component was 6.20%. The cumulative price change component was $76.07. The cumulative Dividend Yield Index, in dollars, for common stocks for this period, based on this information, was:
a.$1828.33 - $76.07
b.$1828.33/$76.07
c.11% - 6.20%
d.$1828.33 – [(6.20%)72]
16.With regard to the components of cumulative wealth, choose the INCORRECT statement:
a.CPC = CWI/CYI
b.CYI = CWI/CPC
c.CPC/CYI = CWI
d.(CYI)1/n – 1.0 = the geometric mean for the yield component
17.Assume that for the period 1920-2002 the geometric mean for the S&P 500 index was 9.9%, and that the geometric mean for the income component was 4.2%. When calculating the capital gains component for this index for this period, which of the following statements is CORRECT?
a.9.9% - 4.2%
b..099/.042
c.1.099/1.042 – 1.0
d.none of the above are correct
18.For a U. S. investor purchasing a foreign stock, beginning price is 50, income is 2, and ending stock price is 46. The foreign currency depreciates 4% against the dollar. The return to the U. S. investor after currency risk is accounted for is
a.-4%
b.-7.84%
c.-.0016%
d.+2%
A U. S. investor buys a French stock when the value of the franc stated in dollars is $0.20. Thecost of the stock is 250 francs. One year later the stock is at 300 francs, and the stock paid adividend of 10 francs. The franc is now at $0.19. Answer the next two questions.
19.Which of the following statements is CORRECT about exchange rates?
a.the dollar appreciated against the franc
b.the dollar depreciated against the franc
c.the francs from the investment buy more dollars when the investment proceeds are converted back from francs
d.this investment will experience a gain from the currency movement
20.Which statement is correct about the total return on this foreign investment:
a.the total return for a French investor in the stock is 20%
b.the total return for a U. S. investor after converting back to dollars was 24%
c.the total return for a U. S. investor after converting back to dollars was 22.8%
d.the total return for an American investor was 17.8%
CHAPTER 7:
21.Calculate the expected value of a security with possible outcomes of
10%, with a probability of .2
20%, with a probability of .5
-25%, with a probability of .3
a.4.5%
b.17.5%
c.19.5%
d.7.5%
22.Under the Markowitz formulation, how many factors determine the expected return on a portfolio?
a.4
b.2
c.3
d.1
23.A change in the correlation coefficientbetween the returns of two securities in a portfolio causes a change in
a.both the expected return and the risk of the portfolio.
b.only the expected return of the portfolio.
c.only the risk level of the portfolio.
d.neither the expected return nor the risk level of the portfolio.
24.According to Markowitz’s mean-variance model, the variance of the portfolio is equal to
a.the weighted average of the individual variances.
b.the weighted covariances between all unique pairs of securities.
c.the weighted variances plus the weighted covariances of all pairs of securities.
d.the weighted covariances plus the weighted betas of the securities.
Stock X has an expected return of 10% and a standard deviation of 14%. Stock Y has an expected return of 18% and a standard deviation of 20%. Use the above information to answer the following two questions.
25.If the correlation coefficient between X and Y’s return is 0.30, the expected return of an equally-weighted portfolio consisting of X and Y would be (round to no decimal place)
a.19%
b.16%
c.14%
d.17%
26.Assume now that the correlation coefficient between stocks X and Y is +1.0. Choose the investment below that represents the minimum risk portfolio.
a.100% investment in stock Y.
b.100% investment in stock X.
c.50% investment in stock X and 50% investment in stock Y.
d.80% investment in stock Y and 20% investment in stock X.
27.Regarding the variance-covariance matrix:
a.for a portfolio of 30 securities, there would be 900 covariances
b.for a portfolio of 30 securities, there would be 900 variances
c.for a portfolio of 30 securities, there would be 30 unique covariances
d.A portfolio of 30 securities would have 900 total terms in the variance-covariance matrix
28.Given the following information about two stocks:
standard deviation for stock x = 12%
standard deviation for stock y = 20%
expected return for stock x = 16%
expected return for stock y = 22%
correlation coefficient between x and y = 0.30
Calculate the covariance between these two stocks:
a..00125
b.72
c.240
d.39.6
29.Select the CORRECT statement about variances and covariaces from among the following:
a.for a portfolio of 20 securities, there would be 400 covariances
b.for a portfolio of 20 securities, there would be 400 variances
c.for a portfolio of 20 securities, there would be 190 unique covariances
d.for a portfolio of 20 securities, there would be 380 total terms in the variance- covariance matrix
30.In a 50 stock portfolio assumed to be well-diversified, market risk will account for approximately
a.0-15% of total risk
b.25-35% of total risk
c.55-65% of total risk
d.80-95% of total risk
31.In a 60-stock portfolio assumed to be well-diversified, nonmarket (nonsystematic) risk will account for approximately
a.0-10% of total risk.
b.25-35% of total risk.
c.55-65% of total risk.
d.80-95% of total risk.
32.Choose the correct statement about Markowitz portfolio theory as he derived it.
a.the efficient frontier starts as an arc and becomes a straight line
b.diversification is determined by the number of securities in the portfolio
c.beta is the measure of risk to use
d.there are many efficient portfolios on the efficient frontier, which is an arc
33.Select the INCORRECT statement concerning the Markowitz model:
a.In a large portfolio, the covariance term will be the more important of the two terms for calculating portfolio variance
b.In a large portfolio, portfolio risk will consist primarily of securities' covariances with other securities
c.As the number of securities held in a portfolio increases, the importance of each individual security's risk decreases
d.As the number of securities held in a portfolio increases, the importance of the covariance relationships decrease
34.Select the CORRECT statement about Markowitz portfolio theory from among the following:
a.When adding a security to a portfolio, the covariance between it and the other securities in the portfolio is less important than the security's own risk
b.Having established the portfolio weights, the calculation of the expected return on the portfolio is independent of the calculation of portfolio risk
c.The risk of a portfolio is a weighted average of individual security risks
d.Combining two securities with perfect negative correlation will always eliminate all risk
35.Choose the statement below most closely associated with the work ofMarkowtiz.
a.Diversifying properly depends only upon the number of securities chosen.
b.Systematic risk can be identified and assessed.
c.The efficient frontier is an arc and not a straight line.
d.The Markowitz technique designates the one portfolio in the efficient set that is optimal for all investors
36.Select the INCORRECT statement about the Markowitz model from among the following:
a.combining two securities with perfect negative correlation will always eliminate risk altogether
b.the risk of a portfolio of five securities, using the Markowitz analysis, would consist of 20 covariances and 5 variances
c.the expected return on a portfolio is always a weighted average of the expected returns of the individual assets in the portfolio
d.COVAB = ABAB
37.Which input does not have to be provided by the investor to perform the Markowitz analysis?
a.Covariations between the rates of return on securities
b.Expected returns for every security
c.Standard deviations for every security
d.Exact percentages of investable funds to be invested in each security
38.Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by:
a.aggressive investors
b.conservative investors
c.highly risk-averse investors
d.defensive investors
39.Concerning the riskiness of a portfolio of two securities, using the Markowitz model, select the INCORRECT statement:
a.The riskiness depends on the variability of the securities in the portfolio.
b.The riskiness depends on the percentage of portfolio assets invested in each security.
c.The riskiness depends on the expected return of each security.
d.The riskiness depends on the amount of correlation among the security returns
40.For an investor who holds a one-stock portfolio, which statement is CORRECT?
a.the important measure of risk for this investor is beta
b.although the expected return doesn’t matter, the standard deviation would be important
c.only the return matters—the risk measure does not
d.the expected return matters, and the investor should use the standard deviation as the measure of risk
41.Investors who wish to generate efficient portfolios using the Markowitz analysis must supply which inputs?
a.an expected return for each security being considered
b.the standard deviation for each security being considered
c.the weights for each security
d.a and b, along with at least one other variable
e.a, b, and c
42.According to the Markowitz analysis, an efficient portfolio is one that
a.Has the largest expected return for the smallest level of risk
b.Has the smallest level of risk
c.has the minimum risk for a specified level of return
d.has the largest expected return and zero risk
43.Choose the portfolio from the following set that is NOT on the efficient frontier.
a.Portfolio A: expected return of 10% and standard deviation of 8%.
b.Portfolio B: expected return of 18% and standard deviation of 13%.
c.Portfolio C: expected return of 38% and standard deviation of 30%.
d.Portfolio D: expected return of 19% and standard deviation of 12%.
44.The required rate of return is
a.a return guaranteed to investors for assuming risk
b.a minimum realized return
c.the maximum return an investor expects to receive for investing in a stock with a particular amount of risk
d.a minimum expected rate of return
45.The expected return on the market for next period is 16%. The risk free rate is 7%, and IBM has a beta of 1.1. Its required rate of return is
a.17.6
b.16%
c.16.9%
d.none of the above
46.The expected return on the market for next period is 15%. The risk free rate of return is 6%, and Johnson Products Company has a beta that is 80% of the beta for the market as a whole. The required rate of return for this company is
a.9%
b.14%
c.13.2%
d.9.9%
47.The expected return on the market for next period is 16%. The risk free rate of return is 7%, and Johnson Products Company has a beta of 1.0. Johnson’s risk premium is
a.7%
b.9.9%
c.9%
d.none of the above
48.The expected return on the market for next period is 16%. The risk free rate of return is 7%, and Alpha Corp has a beta of 1.1. In using this information to estimate the required rate of return for Alpha, the market risk premium is
a.9.9%
b.7%
c.16%
d.none of these.
49.Under the CAPM, the relationship between the required rate of return and risk is assumed to be ______and ______.
a.linear and downward sloping.
b.non-linear and downward sloping.
c.linear and upward sloping
d.non-linear and upward sloping.
50.If a certain stock has a beta less than 1.0, it means
a.that the stock’s return is more volatile than that of the market portfolio.
b.that an investor can eliminate the risk by combining it with another stock that has a negative beta.
c.that an investor will earn a higher return on his stock than that on the market portfolio.
d.That the stock’s return is less volatile than that of the market portfolio
51.Which of the following statements BEST summarizes the conclusions reached regarding the stability of betas?
a.Betas for individual securities and large portfolios are unstable.
b.Betas for individual securities are unstable.
c.Betas for individual securities and large portfolios are stable.
d.Betas for large portfolios are unstable.
52.Under the security market line approach, an investor who owns a stock with a beta of
–1.5 would expect the stock’s return to ______in a market that was expected to decline 10 percent, everything else remaining constant.
a.rise by 15 percent.
b.fall by 15 percent.
c.rise by 1.5 percent.
d.fall by 1.5 percent.
53.The SML can be used to analyze the relationship between risk and required return for
a.all assets.
b.inefficient portfolios.
c.only efficient portfolios.
d.only individual securities.
54.Select the INCORRECT statement concerning SML and beta.
a.The SML uses beta as the measure of risk.
b.The SML is a relationship between expected return and risk for efficient portfolios, inefficient portfolios and individual stocks.
c.The beta for a stock measures its contribution to the risk of the market portfolio.
d.The larger the beta for a security, the smaller its equilibrium expected return because of the increased risk.
CHAPTER 8:
55.Nominal interest rates
a.contain no adjustment for inflation
b.contain an adjustment for realized inflation
c.contain an adjustment for expected inflation
d.are also referred to as real rates
56.With regard to interest rates, if the real rate of interest is 2%, and the market interest rate for short-term risk free securities is 5%, then the remaining 3% is
a.the actual inflation rate.
b.the expected liquidity premium.
c.the expected inflation rate.
d.the actual liquidity rate.
57.Select the CORRECT statement concerning bonds.
a.Bond prices are quoted as a percentage of par value.
b.Bonds do not trade on an accrued interest basis.
c.With bond price quotes, 1 point = $1.
d.Current yield is the ratio of the coupon to the par value of the bond.
58.On one recent day, the 30-year Treasury bond price moved 1 3/32 as yields rose. This means that the bond price
a.Rose by $1.938
b.Declined by $10.938
c.Rose by $10.938
d.Declined by $1.938
59.Current yield
a.is equal to coupon divided by par value
b.is a measure of the promised rate of return on a bond
c.is always greater than the coupon rate for bonds selling at a discount
d.is a correct measure of the expected return on a bond
60.Select the INCORRECT statement concerning bonds.
a.Bond prices are quoted as a percentage of par value.
b.Bonds trade on an accrued interest basis.
c.Bonds sell at discounts when the stated coupons are less than the prevailing interest rate on a comparable new issue.
d.The most common type of secured bond is the debenture.
61.Which of the following is CORRECT regarding zero-coupon securities?
a.They eliminate re-investment rate risk.
b.The yield to be earned on them cannot be determined until these securities are held to maturity
c.They are only issued by corporations.
d.They offer minimum price volatility.
62.The YTM on a bond
a.Is an expected return in the probability distribution sense.
b.Is the true realized return an investor will earn
c.Is a promised return, and is subject to conditions being met
d.Is a measure of the true yield that a bond investor is assured of receiving barring default
63.The yield to maturity on a bond
a.is a promised yield
b.is calculated by assuming that investors reinvest all coupons received from a bond at a rate equal to the computed YTM on that bond
c.is a measure of the true yield that a bond investor is assured of receiving barring default because it takes compounding into effect
d.is almost always equal to the realized compound yield