Measures of Investment Returns

Question 1

Holding Period Return

Answer 1

(Pe-Pb+D)/Pb

Question 2

Arithmetic Mean

Answer 2

(a1+a2+a3+…an)/n - not as meaningful if volatile

Question 3

Geometric Mean

Answer 3

(n root of (1+r1)x(1+r2)x…(1+rn))-1

Question 4

Total return components

Answer 4

Capital appreciation/depreciation and dividends/interest

Question 5

After tax return

Answer 5

Total Return * (1-tax bracket)

Question 6

Real (Inflation adjusted) return

Answer 6

((1+rate of return)/(1+rate of inflation))-1

Question 7

YTM

Answer 7

PV of all future cash flow/compounded rate of return of a bond

Question 8

YTC

Answer 8

Yield up to first date that the yield can be called

Question 9

Terminal value

Answer 9

sum of the maturity value and FV of the coupon payments reinvested at a rate chosen by investor

Question 10

TEY

Answer 10

r/(1-t)

Question 11

Current yield

Answer 11

Coupon Interest in Dollars/Bond’s current Market Price

Question 12

Dollar weighted average

Answer 12

(r)=semi-annual rate of return

Question 13

Annual return

Answer 13

(Dollar weighted average + 1) squared - 1

Question 14

The “compound average rate of return” is also known as the

Answer 14

The compound average rate of return (geometric return) is similar to the arithmetic mean return, except the geometric return, because it does take compounding into account, will always be less than the arithmetic return. The compound average rate of return is also called the geometric mean return (GMR), where the GMR is computed over n successive time periods.

Question 15

When making an investment decision on a bond, the investor should consider which yield?

Answer 15

Yield to Worst (YTW) is the appropriate yield you consider when evaluating fixed income.

Question 16

Difficulties are encountered when deposits or withdrawals occur sometime between the beginning and end of the period. One method that has been used for calculating a portfolio’s return in this situation is the ____________ return.

Answer 16

Dollar-weighted return is what an investor should use to determine how well their investment performed.

Question 17

Place the following yields in order from lowest to highest on a discount bond.

Answer 17

Yields on a discount bond, from lowest to highest, are as follows:

Nominal Yield
Current Yield
Yield to Maturity
Yield to Call
https://learn.bostonifi.com/content/course/421/lesson/1605/content/32656

Question 18

Over a period, the S&P 500 returned 11%. During the same period, the risk-free rate of return was 0.5%. If a portfolio manager returned 9% while maintaining a Beta of 0.64 to the S&P 500, did they provide an adequate amount of return given the risk they assumed?

Answer 18

αp = 0.09 − [0.005 + (0.11 − 0.005) 0.64]
αp = 0.09 − 0.0722
αp = 0.0178 = 1.78%
A positive alpha indicates outperformance.

Question 19

An investor purchased a AAA-rated bond with a 4.5% coupon at par. Several months later, comparable market yields have increased. The current yield on the bond is 5.25%. Identify the Yield to Maturity (YTM).

Answer 19

This question describes a discount bond. Yields on a discount bond, from lowest to highest, are as follows:

Nominal Yield
Current Yield
Yield to Maturity
Yield to Call
Since the Current Yield on the discount bond is 5.25, the Yield to Maturity must be higher. Therefore, the only viable option is 5.50%.

Question 20

Beatrice purchased 200 shares of BIFi, a blue-chip stock, for $2,750. BIFi stock is currently paying $75 of annual dividend income to Beatrice. Dividends are expected to grow 5.5% annually. Beatrice has a required rate of return of 6%.

Identify the intrinsic value of the BIFi.

Answer 20

Use constant growth dividend discount formula to solve.

V=D1/(r−g)

V = Value (intrinsic)

D1 = Dividend (D0 x (1 + g))

r = Required rate of return

g = fixed, stable growth rate

$75 ÷ 200 = $0.375 dividend/share

V= (0.375(1.055))/(0.06−0.055)
$79.12= 0.3956/0.005

Question 21

Over a 3-year period, Angus makes the following purchases of GrowCo stock:

Beginning of Year 1: Buy 100 shares at $50/share Total shares owned: 100 End of year 1 Total FMV: $6,000
Beginning of Year 2: Buy 100 shares at $60/share Total shares owned: 200 End of year 2 Total FMV: $14,000
Beginning of Year 3: Buy 100 shares at $70/share Total shares owned: 300 End of year 3 Total FMV: $24,000
GrowCo did not pay any dividends over the holding period.

If Angus liquidates his position in GrowCo at the end of year 4 at a FMV of $24,000, which of the following statements is CORRECT?

Answer 21

The money-weighted return for GrowCo is 16.00%.

The dollar-weighted return
(5,000), CF0
(6,000), CF1
(7,000), CF2 4, N
$24,000, CF3
Solve IRR
0.16, or 16%

The time-weighted return
(50), PV
80, FV
Solve I/YR
0.1247, or 12.47%

Question 22

Citigroup (C) has a beta to the S&P 500 of .92. If the S&P 500 is expected to return 12% while T-bills are yielding 1%, what would be Citigroup’s stock premium?

Answer 22

StockPremium i=(.12−.01).92=.1012=10.12%