Exam 1 - Chapter 5 - [SLIDES]

Question 1

What are the two types of return

Answer 1

1. Dollar weighted return

2. Time weighted return

Question 2

What’s Holding-Period Return (HPR)

Answer 2

Rate of return over a given investment period

Question 3

Formula for Holding-Period Return

Answer 3

P^e - P^b + D
———————
P^b

Question 4

P^e =

Answer 4

Ending price

Question 5

P^b=

Answer 5

Beginning price

Question 6

What is ex-post?

Answer 6

After the fact

Question 7

What is ex-anti

Answer 7

Before the fact

Question 8

Risk

Answer 8

If there is a possibility that your prediction is wrong its called risky

Question 9

HPR risk-free

Answer 9

If we know the HPR at the time of investing

Question 10

HPR

Risky investment

Answer 10

If we do not know the HPR at the time of investing

Question 11

Why do we focus on the past?

Answer 11

To forecast the future

Question 12

What should you include in your forecast?

Answer 12

Small % of Error

Question 13

___ ______ as a predictor

Answer 13

Arthimetic average

Question 14

Geometric average as a ______ measure

Answer 14

Performance

Question 15

There are two ways of measuring

Answer 15

1. `Time-weighted rate of return

2. Dollar-weighted rate of return

Question 16

Time weighted return

Answer 16

Geometric average

Question 17

Dollar weighted return uses the

Answer 17

Internal rate of return

Question 18

The portfolio HPR is the

Answer 18

Weighted average of individual asset HPR

Question 19

Expectation is what type of figure?

Answer 19

AVERAGE

Question 20

R(S)

Answer 20

Rate of return

Question 21

We use standard deviation as a reason for?

Answer 21

Volatility

Question 22

___ is an incomplete risk measure

Answer 22

Sigma

Question 23

Risk averse investors are

Answer 23

reluctant to accept risk unless there is an enough compensation for the risk

Question 24

What’s the opposite of risk averse?

Answer 24

Risk lover

Question 25

Investor would require a _____ return for higher risk by asking for so-called risk premium (This is equivalent to asking for lowering the purchase price)

Answer 25

Higher

Question 26

Risk premium definition

Answer 26

An additional required return over risk-free rate for a risky asset is called risk premium for the asset

Question 27

Excess return or risk premium =

Answer 27

E[r] - r^f

Question 28

If you require 10% risk premium for taking 20% risk(std), what excess return per 1% risk(std) are you asking for ?

Answer 28

0.50

Question 29

Risk premium / standard deviation =

Answer 29

Sharpe ratio

Question 30

Sharpe ratio =

Answer 30

Risk premium / standard deviation

Question 31

Real returns have been much hire for _____ than for bonds

Answer 31

Stocks

Question 32

Sharpe ratios measures the

Answer 32

Excess return to standard deviation

Question 33

The higher the Sharpe ratio, the better the ______ ______

Answer 33

Average return

Question 34

_____ have had much hire Sharpe ratios than bonds

Answer 34

Stocks

Question 35

Complete portfolio

Answer 35

Spilt investment funds between safe and risky assets is called complete portfolio

Question 36

R^f

Answer 36

Risk free asset

Question 37

R^p

Answer 37

Risky portfolio

Question 38

Risk portfolio

Answer 38

Stock portfolio

Question 39

Risk free

Answer 39

T-bills or money market fund

Question 40

Example: your total wealth is $10,000. You put $2,500 in risk free t-bills and $7,500 in a stock portfolio. Thus,

Answer 40

Wp = 75%
Wf = 25%

Question 41

The portfolio including risk-free is called a “___ ____”

Answer 41

Complete portfolio

Question 42

The expected return and risk for complete portfolios are _______ in wp
(Important)

Answer 42

Wp

Question 43

Capital allocation line

Answer 43

-

Question 44

Greater levels of risk aversion lead investor to choose

Answer 44

Large proportions of the risk free rate

Question 45

Lower levels of risk aversion lead investor to choose

Answer 45

Large proportions of the portfolio of risky assets

Question 46

Willingness to accept high level of risk for

Answer 46

High levels of returns would result in leveraged combinations