1. Rates and Returns

Question 1

Continuously compounded return

Answer 1

The natural logarithm of 1 plus the holding period return, or equivalently, the natural logarithm of the ending price over the beginning price.

Question 2

Cost averaging

Answer 2

The periodic investment of a fixed amount of money.

Question 3

Default risk premium

Answer 3

An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.

Question 4

Harmonic mean

Answer 4

A type of weighted mean computed as the reciprocal of the arithmetic average of the reciprocals.

Question 5

Holding period return

Answer 5

Return earned from holding an asset for a single period of time.

Question 6

Inflation premium

Answer 6

An extra return that compensates investors for expected inflation.

Question 7

Interest rate

Answer 7

A rate of return that reflects the relationship between differently dated cash flows; a discount rate.

Question 8

Internal rate of return

Answer 8

The discount rate that makes net present value equal 0; the discount rate that makes the present value of an investment’s costs (outflows) equal to the present value of the investment’s benefits (inflows).

Question 9

Liquidity premium

Answer 9

The compensation for liquidity risk that increases in proportion to the investment’s illiquidity.

Question 10

Maturity premium

Answer 10

An extra return that compensates investors for the increased sensitivity of the market value of debt to a change in market interest rates as maturity is extended.

Question 11

Money-weighted return

Answer 11

The internal rate of return on a portfolio, taking account of all cash flows.

Question 12

Opportunity cost

Answer 12

The value that investors forgo by choosing a particular course of action; the value of something in its best alternative use.

Question 13

Real risk-free interest rate

Answer 13

The single-period interest rate for a completely risk-free security if no inflation were expected.

Question 14

Time-weighted rate of return

Answer 14

The compound rate of growth of one unit of currency invested in a portfolio during a stated measurement period; a measure of investment performance that is not sensitive to the timing and amount of withdrawals or additions to the portfolio.

Question 15

Trimmed mean

Answer 15

A mean computed after excluding a stated small percentage of the lowest and highest observations.

Question 16

Winsorized mean

Answer 16

A mean computed after assigning a stated percentage of the lowest values equal to one specified low value and a stated percentage of the highest values equal to one specified high value.