Investments Lesson 3

Question 1

Holding Period Return

Answer 1

Selling price - purchase price +/- cash flows/purchase price or equity invested

Question 2

Items to remember when calculating HPR

Answer 2

Dividends received: added numerator
Margin interest paid: subtracted numerator
Taxes paid: only if asked for after tax gain/loss; subtracted from numerator
Purchased securities on margin: numerator-subtract interest paid; include total cost as subtraction- numerator; denominator-equity in trade

Question 3

Example Exam Question:
Bought 100 shares at $20/share. Initial margin of 60%. Charge 10% margin interest annually. One year later sold stock at $30/share. What is HPR?

A. 55%
B. 77%
C. 80%
D. 40%
E. 36.5%

Answer 3

B

Question 4

Effective Annual Rate

Answer 4

EAR = (1 + [i/n]^n) - 1

Question 5

Arithmetic Average (mean)

Answer 5

Simple average

Ignores compounding

Question 6

Geometric Average

Answer 6

Set of given stock prices over a period of time

*formula provided

Question 7

Example Exam Question:
Stock had following returns: 12%, 5%, -2%
What is geometric average?

A. 3.5%
B. 4.8%
C. 7.5%
D. 9.8%

Answer 7

B

Question 8

Example Exam Question:
What is average weighted beta of portfolio with $75000 in company a with beta of 1.35, $125000 in company b with beta of 1.8, $25000 in company c with beta of .65, $85000 in company d with beta of .8?

A. 1.28
B. 1.32
C. 1.47
D. 1.00

Answer 8

B

Question 9

If NPV = 0

Answer 9

Make the investment

Question 10

If NPV + __?
If NPV 0 __?
If NPV - __?

Answer 10

+: IRR > discount rate

0: IRR = discount rate
- : IRR < discount rate

Question 11

Mutual funds report on a

Answer 11

Time weighted basis

Question 12

Arbitrage Pricing Theory

Answer 12

Pricing imbalances cannot exist for any significant period of time
Multi-factor model that attempts to explain return based on factors
Attempts to take advantage of pricing imbalances
Inputs are factors such as inflation, risk premium, expected returns, & their sensitivity to those factors
STD & BETA NOT INPUTS

Question 13

Foreign Currency Translation

Answer 13

Step 1: Convert US dollars to foreign to determine cost
Step 2: Compute return utilizing HPR
Step 3: Convert back to US dollars

Question 14

Lesson 3 Review:
Stocks that have experienced volatility with both positive & negative returns through the investment period being tracked should is which to determine true returns?

A. Arithmetic average
B. Geometric average
C. Weighted average
D. Average appraised stock return

Answer 14

B

Question 15

Lesson 3 Review:
What investment information do weighted average portfolio return & weighted average portfolio beta respectively provide you as investment advisor?

A. Lowest possible risk available given any level of return to investor
B. Highest possible return on any investment given any level of risk available to investor
C. Risk involved in portfolio given certain level of return
D. Risk & return on a proportionate basis per unit of investments in overall portfolio

Answer 15

D

Question 16

Lesson 3 Review:
Required rate of return is 9%. Following estimates submitted. Using NPV, rank projects from best to worst:
W: -50, +30x5
X: -100, 0x4, 250
Y: -250, 0x4, 500
Z: -100, 55x4, 0

A. Z,Y,W,X
B. X,W,Y,Z
C. Y,Z,W,X
D. W,X,Y,Z

Answer 16

A

Question 17

Lesson 3 Review:
What is weighted average duration in bond portfolio with:
$5000 invested in bond a with duration of 4.4
$10000 invested in bond b with duration of 9.5
$15000 invested in bond c with duration of 20

A. 9.9
B. 13.9
C. 14.4
D. 20

Answer 17

B

Question 18

Lesson 3 Review:
Portfolio experiences following returns over 3 years. What is geometric average return?
12,-5,8

A. 4.7%
B. 5.0%
C. 8.0%
D. 8.7%

Answer 18

A

Question 19

Lesson 3 Review:
Invested $10000. First year had inflow of $7000. 2nd year purchased $4000 in materials & had $8000 inflows. Year 3 did not purchase & had cash flow of $5000. What is return on project?

A. 26.96%
B. 30.21%
C. 35.23%
D. 50.49%

Answer 19

B

Question 20

Lesson 3 Review:
Which of the following returns do mutual funds use when reporting 5 year historical return?

A. Time-weighted return
B. Dollar-weighted
C. Arithmetic mean
D. Holding period return

Answer 20

A