READING 1 RATES AND RETURNS

Question 1

What can interest rates be interpreted as?

Answer 1

Required return
Opportunity cost
Discount rate

Question 2

Theoretical rate on a single period loan that contains no expectation of inflation and zero probability of default

Answer 2

Real-risk free rate

Question 3

Referring to an investor’s increase in purchasing power after adjusting for inflation

Answer 3

Real rate of return

Question 4

T-Bills rates are nominal risk-free rates because they contain an inflation premium

What is the relation?

Answer 4

(1+ Nominal risk-free rate) = (1+ Real rate of return) (1+ Expected inflation rate)

Question 5

Securities may have one or more types of risks, and each added risk increase the required rate of return. these types of risks are as follows

Answer 5

Liquidity risk
Default risk
Maturity risk

Question 6

True or false

Longer-maturity bonds have more maturity risk than shorter-term bonds and require a maturity risk premium

Answer 6

True

Question 7

What is HPR?

Answer 7

Holding period return is simply the percentage increase in the value of an investment over a given period

P1 + Div / P0 - 1

Question 8

What is Arithmetic mean return?

Answer 8

Simple average of a series of periodic returns assuming theres no compounding

Question 9

What is Geometric mean return?

Answer 9

Compound rate, when rate of returns varies from period to period

Question 10

True or false

Arithmetic mean return will have a value less than the geometric mean return

Answer 10

False

Dumbass, it’s the opposite because geometric mean is a compound so obviously it’s going to be valued less than arithmetic

Question 11

What is Harmonic mean return?

Answer 11

Used for certain computations, such as the average cost of shares purchased over time or investments

Question 12

What is the relationship among arithmetic, geometric, and harmonic means?

Answer 12

Arithmetic X Harmonic = Geometric Squared

Question 13

Measures of average return can be affected by outliers, which are unusual observations
in a dataset

What is the two methods that deal with outliers?

Answer 13

Trimmed mean and Winsorized mean

Question 14

Appropriate uses for the various return measures

…. Include all values, including outliers

Answer 14

Arithmetic mean

Question 15

Appropriate uses for the various return measures

…. Compound the rate of returns over multiple periods

Answer 15

Geometric mean

Question 16

Appropriate uses for the various return measures

…. Calculate the average share cost from periodic purchases in a fixed money amount

Answer 16

Harmonic mean

Question 17

Appropriate uses for the various return measures

…. Decrease the effect of outliers

Answer 17

Trimmed or Winsorized mean

Question 18

True or false

The money-weighted rate of return is defined as the IRR on a portfolio

Answer 18

True

Question 19

….. is the interest rate at which a series of cash flows and outflows sum to zero when discounted to their present value. That is, they have a NPV of zero

Answer 19

IRR

Question 20

True or false

The time-weighted rate of return measures compound growth and is the rate at which $1 compounds over a specified performance horizon

Answer 20

True

Question 21

True or false

The money-weight rated isn’t affected by the timing of cash inflows and outflows

Answer 21

False

The time-weighted rate of return isn’t affected by the timing of cash inflows and outflows

Question 22

True or false

Interest rates and markets returns are typically stated semi-annual returns

Answer 22

False

Annualized returns

Question 23

What is the effect of an increase frequency of compounding on effective interest rate, FV, and PV?

Answer 23

Increases effective interest rate and FV
Decreases PV

Question 24

What is the mathematical limit of shortening the compounding period called?

Answer 24

Continuous compounding

Question 25

What is nominal return adjusted for inflation?

Answer 25

Real return

Question 26

A saver deposits $100 into a bank account. After 90 days, the account balance is $100.75. What is the saver’s annualized rate of return?

Answer 26

0.0308

Question 27

Compute the PV of $1,000 to be received one year from now using a stated annual interest rate of 6% with a semiannual compounding

Answer 27

942.60

Question 28

A stock was purchased for $100 and sold one year later for $120. Calculate the investor’s annual rate of return on a continuously compounded basis.

Answer 28

0.1823

Question 29

Identify the center, or average, of a dataset. This central point can then be used to represent the typical or expected value in the dataset

Answer 29

Measures of a central tendency

Question 30

If a stock is valued at €20 at the beginning of the period, pays €1 in dividends over the period, and at the end of the period is valued at €22, the HPR is:

Answer 30

0.15

Question 31

For the last three years, the returns for Acme Corporation common stock have been −9.34%, 23.45%, and 8.92%. Calculate the compound annual rate of return over the three-year period.

Answer 31

0.06824650488

Question 32

For the last four semiannual periods, the 6-month holding period returns on an investment were 2.0%, 0.5%, −1.0%, and 1.5%. Calculate the geometric mean and the annual rate of return.

Answer 32

Geometric mean = 0.007434611869
Annual return = 0.01492449719

Question 33

An investor purchases $1,000 of mutual fund shares each month, and over the last three months, the prices paid per share were $8, $9, and $10. What is the average cost per share?

Answer 33

8.925619835

Question 34

For four periods, the returns on an investment were 2.0%, 0.5%, −1.0%, and 1.5%. Calculate the harmonic mean of these returns

Answer 34

0.007368975209

Question 35

Assume an investor buys a share of stock for $100 at t = 0, and at the end of the year (t = 1), she buys an additional share for $120. At the end of Year 2, the investor sells both shares for $130 each. At the end of each year in the holding period, the stock paid a $2 per share dividend. What is the money-weighted rate of return?

Answer 35

Get back to this when you buy a financial calculator

Question 36

An investor purchases a share of stock at t = 0 for $100. At the end of the year, t = 1, the investor buys another share of the same stock for $120. At the end of Year 2, the investor sells both shares for $130 each. At the end of both Years 1 and 2, the stock paid a $2 per share dividend. What is the annual time weighted rate of return for this investment? (This is the same investment as the preceding example.)

Answer 36

0.1584472366