Quantitative Methods

Question 1

Real risk-free rate of interest

Answer 1

Theoretical rate on a single-period loan that contains no expectation of inflation and zero probability of default. In economic terms, it represents the time preference of consumption (substitution rate of current for future consumption)

Question 2

Default risk

Answer 2

Risk that a borrower will not make the promised payments in a timely manner

Question 3

Liquidity risk

Answer 3

A risk that a seller will receive less than fair value for an asset if it must be sold quickly

Question 4

Maturity risk

Answer 4

Volatility premium??

Question 5

Holding period return

Answer 5

Percentage increase in the value of an investment over a given period.

Question 6

Internal rate of return (IRR)

Answer 6

An interest rate at which a series of cash inflows and outflows sum to zero when discounted to their present value. Money-weighed rate of return is defined as an IRR on a portfolio.

Question 7

Time-weighted rate of return

Answer 7

A rate of return which measures compound growth and is the rate at which 1$ compounds over a specified performance horizon.

Question 8

Leveraged return

Answer 8

Refers to a return to an investor that is a multiple of the return on the underlying asset. The leveraged return is calculated as the gain or loss on the investment as a percentage of an investor’s cash investment.