Formulas Flashcards
Bond A yields 7.5% when inflation is 3%. Bond B yields 8% when inflation is 4%. Which has a higher real interest rate?
Bond A. Bond A’s real interest rate is 4.5% (7.5% - 3%) and Bond B’s real interest rate is 4% (8% - 4%).
The interest rate on a U.S. T-bill is commonly used to measure an asset’s _________ rate of return
risk-free rate
Which return measures investment performance by including all cash inflows and outflows?
Dollar-weighted return
What is the formula for the P/E ratio?
Price ÷ EPS (Earnings Per Share)
What is the formula for determining a bond’s current yield?
Annual interest ÷ current market value of the bond
What rule can be used to determine how long it takes for an amount of money to double at a given rate of return?
The Rule of 72
What is the formula for calculating the risk premium?
Risk premium = total return - risk-free rate
The quick asset ratio is calculated by excluding _________ from a company’s current assets.
inventory
12 years ago, Tina invested $25,000 which has now grown to $100,000. What is the annual growth rate of her investment?
In 12 years, the money doubled twice (every six years). Using the Rule of 72, 72 divided six years = 12%.
Over the last three months, a stock rose from $50 to $51 and paid a $.25 dividend. What is its annualized return?
The three-month return is 2.5% ($1.25 ÷ $50). A quarterly return is annualized by multiplying by four (2.5% x 4 = 10%)
_______________ return allows an investor to measure the amount of money she has earned on her investments
Dollar-weighted
What type of mean is used to calculate the expected return?
weighted arithmetic mean
What is commonly used to measure an asset’s risk-free rate of return?
The interest rate on a U.S. T-bill
Sue bought a 6% bond at par. One year later, her bond’s value has fallen to $970. What is her annual return?
Sue received the 6% rate of interest, but her bond lost 3% of its value. (-$30 + 60) ÷ $1,000 = 3%
What is the formula for the Sharpe Ratio?
(Return on Investment - Risk-Free Return) ÷ Standard Deviation
Assuming a 12% rate of return, how long will it take $50,000 to double?
Six years. Using the Rule of 72, 72 divided by the rate of return determines the number of years (72 ÷ 12 = 6 years)
_____________ return allows an investor to compare the performance of two investment advisers
Time-weighted return
What is the present value of a perpetual monthly payment of $1,000 earning 5% per year?
$240,000 = ($1,000 x 12 mo)/.05
Over the last three months, a stock rose from $50 to $51 and paid a $.25 dividend. What is its annualized return?
The three-month return is 2.5% ($1.25 ÷ $50). A quarterly return is annualized by multiplying by four (2.5% x 4 = 10%)
What is the use of the Capital Asset Pricing Model (CAPM)?
To find an investor’s optimal portfolio by comparing expected risk with expected rates of return
$10,000 has become $80,000 in 36 years. What is the internal rate of return?
The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%
A bond is yielding 8% and the rate of inflation is 3%. What is the bond’s real interest rate?
8% - 3% = 5%. Real interest rate measures the true yield once inflation is factored out
The difference between an investment’s total return and the risk-free rate is the risk _______.
risk premium
What is the present value of an annuity that pays $2,000 per year and earns 5% per year?
$40,000 = $2,000/.05
