A portfolio of non-dividend-paying stocks earned a geometric mean return of $5\%$ between January 1, 2005, and December 31, 2011. The arithmetic mean return for the same period was $6\%$. If the market value of the portfolio at the beginning of 2005 was $\$100,000$, what was the market value of the portfolio at the end of 2011?

On May 30, 2015, Janice Kerr is considering the newly issued 10-year AAA corporate bonds shown in the following exhibit: $$ \begin{matrix} \text{Description} & \text{Coupon} & \text{Price} & \text{Callable} & \text{Call Price}\\ \text{Sentinal, due May 30, 2025} & \text{4.00\\%} & \text{100} & \text{Noncallable} & \text{NA}\\ \text{Colina, due May 30, 2025} & \text{4.20\\%} & \text{100} & \text{Currently callable} & \text{102}\\ \end{matrix} $$ Suppose that market interest rates decline by 100 basis points (i.e., 1%). Contrast the effect of this decline on the price of each bond.

On May 30, 2006, Janice Kerr is considering the newly issued 10-year AAA corporate bonds shown in the following exhibit:

Description	Coupon	Price	Callable	Call Price
Sentinal, due May 30,2016	6.00%	100	Noncallable	NA
Colina, due May 30,2016	6.20%	100	Currently calloble	102

a. Suppose that market interest rates decline by 100 basis points (i.e., 1%). Contrast the effect of this decline on the price of each bond.

b. Should Kerr prefer the Colina over the Sentinal bond when rates are expected to rise or to fall?

c. What would be the effect, if any, of an increase in the volatility of interest rates on the prices of each bond?

Which of the following statements about the standard deviation is/are true? A standard deviation:

i. Is the square root of the variance.

ii. Is denominated in the same units as the original data.

iii. Can be a positive or a negative number.

The ECB pays a market-based interest rate on required reserves and a lower rate on excess reserves. Explain why the system is structured this way.

Explain why both the Federal Reserve and the ECB use an overnight interest rate rather than a longer-term interest rate as their policy tool.

Given SSA (the ambiguous case), outline the four possible scenarios regarding the number of triangles that are possible.

What do you think would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks?

Your client wonders whether to switch the $70\%$ that is invested in your fund to the passive portfolio.

a. Explain to your client the disadvantage of the switch.

b. Show your client the maximum fee you could charge (as a percent of the investment in your fund deducted at the end of the year) that would still leave him at least as well off investing in your fund as in the passive one.

(Hint: The fee will lower the slope of your client’s CAL by reducing the expected return net of the fee.)

The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:$

$$\begin{matrix} \text{ } & \text{Dividend} & \text{Stock Price}\\ \text{Boom} & \text{2.00} & \text{50}\\ \text{Normal economy} & \text{1.00} & \text{43}\\ \text{Recession} & \text{0.50} & \text{34}\\ \end{matrix}$$

$ Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%.

XYZ stock price and dividend history are as follows:

$$\begin{matrix} \text{Year} & \text{Beginning-of-Year Price} & \text{Dividend Paid at Year-End}\\ \text{2010} & \text{100} & \text{4}\\ \text{2011} & \text{110} & \text{4}\\ \text{2012} & \text{90} & \text{4}\\ \text{2013} & \text{95} & \text{4}\\ \end{matrix}$$

An investor buys three shares of XYZ at the beginning of 2010, buys another two shares at the beginning of 2011, sells one share at the beginning of 2012, and sells all four remaining shares at the beginning of 2013. What are the arithmetic and geometric average time-weighted rates of return for the investor?

XYZ stock price and dividend history are as follows:

Year	Beginning-of-Year Price	Dividend Paid at Year-End
2005	100 dollars	4 dollars
2006	110 dollars	4 dollars
2007	90 dollars	4 dollars
2008	95 dollars	4 dollars

An investor buys three shares of XYZ at the beginning of 2005, buys another two shares at the beginning of 2006 , sells one share at the beginning of 2007 , and sells all four remaining shares at the beginning of 2008.

a. What are the arithmetic and geometric average time-weighted rates of return for the investor?

b. What is the dollar-weighted rate of return? Hint: Carefully prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1, 2005, to January 1, 2008. If your calculator cannot calculate internal rate of return, you will have to use a spreadsheet or trial and error.

The stock of Business Adventures sells for $\$40$ a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:

$$\begin{array}{|l|c|c|} \hline & \text{Dividend} & \text{Stock Price} \\ \hline \text{Boom} & \$2.00 & \$50 \\ \hline \text{Normal Economy} & 1.00 & 43 \\ \hline \text{Recession} & .50 & 34 \\ \hline \end{array}$$

a. Calculate the expected holding-period return and standard deviation of the holding period return. All three scenarios are equally likely.

b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is $4\%$.

Which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? Assume the firm uses debt in its capital structure.

A. This model considers a firm's rate of growth.
B. The model applies only to non-dividend-paying firms.
C. The model is dependent upon a reliable estimate of the market risk premium.
D. The model generally produces the same cost of equity as the dividend growth model.
E. This approach generally produces a cost of equity that equals the firm's overall cost of capital