# FIN4504 Chapter 5

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### The holding period return is the rate at which the investor's funds have grown over the ______.

investment period

arithmetic

### A probability distribution for HPRs lets us derive measurements for the ______ of the investment.

a.risk
b.reward
c.both a and b above

square root

0.7%

### The _______ caused a very high spread between 3-month CDs and T-bills.

first OPEC oil crisis

2.5%

### The complete portfolio refers to the investment in __________.

a.the risk-free asset
b.the risky portfolio
c.the sum of a and b

stocks

### The holding period return on a stock is equal to __________.

the capital gain yield over the period plus the dividend yield

### The return on an asset over a period between portfolio revisions is called __________.

a holding period return

14%

15.7%

18.2%

### The dollar weighted return is the same as the __________.

internal rate of return

### Returns on assets with regular cash flows are usually quoted as __________.

annual percentage rates

(1+(APR/n))n-1

3.1%

12.2%

6.28%

### A scenario analysis provides __________.

a.a probability estimate of different states of the economy or scenario
b.a holding period return for each asset-class in each scenario
c.both a and b

### The risk-free rate is usually approximated by ___________.

the return on Treasury bills

### The market risk premium is defined as ___________.

the difference between the return on an index fund and the return on Treasury bills

### The excess return is _____.

the rate of return in excess of the Treasury bill rate

### The rate of return on _____ is known at the beginning of the holding period while the rate of return on ____ is not known until the end of the holding period.

Treasury bills, risky assets

### The reward/variability ratio is given by __________.

the slope of the capital allocation line

### The capital allocation line is also the __________.

investment opportunity set formed with a risky asset and a risk-free asset

### Historical records regarding returns on stocks, Treasury bonds, and Treasury bills between 1926 and 1998 show that __________.

stocks offered investors greater rates of return than bonds and bills

12.2%

3.8%

3.1%

20.3%

8.2%

10.5, 12.5

higher

### Historically small firm stocks have earned higher returns than large firm stocks. When viewed in the context of an efficient market, this suggests that ____________.

small firms are riskier than large firms

0.3, 13.1

8.74%

11.24%

### __________ is a true statement.

a.Risk-averse investors reject investments that are fair games
b.Risk-neutral investors judge risky investments only by their expected returns
c.both a and b

### A Treasury bill pays a 6% rate of return. A risk averse investor __________ invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because __________.

would not; because she is not rewarded any risk premium

### In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called __________.

the capital allocation line

### __________ is a true statement regarding risk averse investors.

They only accept investments that offer risk premium over the risk-free rate

### Investors wanting to reduce the risk of their portfolio should _____.

shift wealth from the risky portfolio to the risk-free asset

stocks

1945-1963

1964-1982

security A

25 percent

### A treasury bill pays 5%. __________ would definitely not be chosen by a risk averse investor.

An asset that pays 10% with a probability of 20% or 3.75% with a probability of 80%

\$2.00

9.6%, 8%

\$21.15

5%

\$7,000

57%

90%

### You invest \$100 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 12% and a standard deviation of 10% and a treasury bill with a rate of return of 5%. Reference: 6-2 A portfolio that has an expected outcome of \$115 could be formed if you __________.

borrow \$42.86 at the risk-free rate and invest \$142.86 in the risky asset

. 7

borrow \$375,000

16.00%

19%

60%, 24%, 16%

b.\$180, \$120

\$243, \$162, \$595

### The asset allocation decision does not help the investor _____.

identify specific securities to include in a portfolio

### The change from a straight to a kinked capital allocation line is a result of the ____.

borrowing rate exceeding the lending rate

### A standard deviation _____.

is the square root of the variance

a.0.5

Example: