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

investment period

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

a.risk

b.reward

c.both a and b above

### During the 1926 to 1998 period, the geometric mean return on Treasury bills exceeded the geometric mean rate of inflation by _______.

0.7%

### An investor with a degree of risk aversion A-5 will demand a risk premium of _____ on a portfolio with a standard deviation of 10%.

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

### Of the alternatives available, __________ typically have the highest standard deviation of returns.

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

### If you purchase a stock for $50, receive dividends of $2, and sell the stock at the end of the year for $55, what is your holding period return?

14%

### Annual percentage rates can be converted to effective annual rates by means of the following formula:

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

### Suppose you pay $9,700 for a Treasury bill maturing in three months. What is the holding period return for this investment?

3.1%

### Suppose you pay $9,800 for a Treasury bill maturing in two months. What is the annual percentage rate of return for this investment?

12.2%

### Suppose you pay $9,700 for a Treasury bill maturing in six months. What is the effective annual rate of return for this investment?

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 market risk premium is defined as ___________.

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

### 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 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

### During the 1926 to 2001 period, the standard deviation of returns on large firm stocks was __________.

20.3%

### During the 1926 to 2001 period, the standard deviation of returns on long-term government bonds was __________.

8.2%

### During the 1926 to 2001 period, the geometric average return on large stocks was ____ percent while the arithmetic average return on large stocks was ____ percent.

10.5, 12.5

### Historical returns have generally been __________ for stocks of small firms as/than for stocks of large firms.

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

### During the 1926 to 2000 period, the geometric average return on the largest decile NYSE/AMEX/NASDAQ stocks was _____ percent while the geometric average return on the smallest decile stocks was _____ percent.

0.3, 13.1

### If you are promised a nominal return of 12%, on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

8.74%

### If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with?

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

### Historically the best asset for the long term investor wanting to fend off the threats of inflation and taxes while making his money grow has been _____.

stocks

###
Consider a treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; σ2 = .0400

Security B: E(r) = .10; σ2 = .0225 Security C: E(r) = .12; σ2 = .1000 Security D: E(r) = .13; σ2 = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor would choose as part of his complete portfolio would be __________.

security A

### You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $24. Your holding-period return was __________.

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%

### The holding period return on a stock was 25%. Its ending price was $18 and its beginning price was $16. Its cash dividend must have been __________.

$2.00

### An investor invests 40% of his wealth in a risky asset with an expected rate of return of 15% and a variance of 4% and 60% in a treasury bill that pays 6%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively.

9.6%, 8%

### The holding period return on a stock was 30%. Its ending price was $26 and its cash dividend was $1.50. Its beginning price must have been __________.

$21.15

### Consider the following two investment alternatives. First, a risky portfolio that pays 15% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill that pays 6%. The risk premium on the risky investment is __________.

5%

### Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be __________.

$7,000

### 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 15% and a treasury bill with a rate of return of 5%. __________ of your money should be invested in the risky asset to form a portfolio with an expected rate of return of 9%

57%

###
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

__________ of your complete portfolio should be invested in the risk-free asset if you want your complete portfolio to have a standard deviation of 9%.

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

###
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

The slope of the capital allocation line formed with the risky asset and the risk-free asset is __________.

. 7

### You have $500,000 available to invest. The risk-free rate as well as your borrowing rate is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should __________.

borrow $375,000

### The return on the risky portfolio is 15%. The risk-free rate as well as the investor's borrowing rate is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is __________.

16.00%

###
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky securities X and Y. The weight of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%.

Reference: 6-1

To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in treasury bills.

19%

###
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky securities X and Y. The weight of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%.

Reference: 6-1

To form a complete portfolio with an expected rate of return of 8%, you should invest __________, __________ and __________ of your complete portfolio in the treasury bill, X, and Y respectively.

60%, 24%, 16%

###
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky securities X and Y. The weight of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%.

Reference: 6-1

The dollar values of your positions in X and Y respectively would be __________ and __________ if you decide to hold 30% of your complete portfolio in the risky portfolio and 60% in the treasury bills.

b.$180, $120

###
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky securities X and Y. The weight of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%.

Reference: 6-1

The dollar values of your positions in X, Y, and treasury bills respectively would be __________, __________ and __________ if you decide to hold a complete portfolio that has an expected return of 8%.

$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