Deck 1: The Investment Decision

Question 1

If two normal distributions are multiplied,the outcome distribution is normal.

Answer 1

False
Explanation: The outcome distribution is not normal.A normal distribution has several properties.Firstly,if returns from one normal distribution are mixed with returns from another normal distribution,the resultant distribution is normal.Secondly,when two normal distributions are added together this has the property of additive stability.If two normal distributions are multiplied the outcome distribution is not normal.

Question 2

The excess kurtosis of a normal distribution is:

Answer 2

A
Explanation: A normal distribution is defined as having a skewness of 0 and a kurtosis of 3.However,the excess kurtosis measure for a normal distribution is 0.

Question 3

An advantage of using discrete returns is to reduce the distorting effect a low share price may have on returns.

Answer 3

False
Explanation: The answer is false.As returns are calculated as the relative change in price,shares with low prices may appear to have relatively large returns.However,since continuously compounded returns are always less than discrete returns,the distorting effect of low prices is reduced by using compounding.For example,an investment that changes in value from $0.02 to $0.03 will have a discrete return of 50% [i.e.(0.03 - 0.02)/2],whereas the continuously compounded return will be approximately 41% [i.e.ln(0.03/0.02)].So,in fact it is the use of continuous compounding returns rather than discrete returns that will reduce the low price effect.Therefore,the answer is false.

Question 4

A risk-averse investor will,all other things being equal,prefer investing in which of the following asset classes?

Question 5

A continuously compounded return is always less than the equivalent discrete return.

Question 6

Which of the following holding periods is an active investor more likely to invest in?

Question 7

Which of the following best describes the changes in asset class composition that occur with increased age,according to the investor life cycle theory of Seigal (1991)?

Question 8

A geometric return is always less than the corresponding arithmetic return.

Question 9

The use of discrete returns ignores compounding.

Question 10

Which of the following is true regarding the investor's life cycle of Seigal (1991)?

Question 11

Under a normal distribution,what proportion of observations fall within two standard deviations of the mean?

Question 12

Steps involved in the asset allocation decision are considered to be:

Question 13

Which of the following statements is true when comparing the log normal distribution to the normal distribution?

Question 14

An advantage of covariance over correlation is that it is bound to be between positive and negative 1.

Question 15

Generally speaking,equity is the least risky of the asset classes.

Question 16

Investment assets differ in risk because of:

Question 17

Which of the following is not a documented feature of equity returns in Australia?

Question 18

Zero volatility in returns results in identical arithmetic and geometric returns.

Question 19

Investment returns are received from two sources;interest and dividends.

Question 20

The lognormal distribution is symmetrical.

Question 21

Which of the four investments has the highest coefficient of variation?

Question 22

The price at the start of the period for asset A is $5 and for asset B is $6.At the end of the period,asset A has fallen to $4 and asset B has risen to $6.50.Calculate the continuously compounded return on a price-weighted portfolio consisting of shares A and B.

Question 23

Given the prices for A and B at the start and end of the period,calculate the continuously compounded return on an equally weighted portfolio consisting of assets A and B.

Question 24

Given no other information other than the expected returns and risk,which asset would a risk-averse investor prefer?

Question 25

The returns for two assets,A and B,are 5% and 8% respectively.If an investor holds 25% of her wealth in asset A,what is the continuously compounded return of a value-weighted portfolio comprising assets A and B?

Question 26

Given the prices for A and B at the start and end of the period,calculate the price-weighted return on a portfolio consisting of assets A and B.

Question 27

An investor purchased an asset for $32 000 at the beginning of the year.This investment is worth $36 000 at the end of the year.What is the return for the year on the investment?

Question 28

An investor purchased the investment above.What is the value-weighted return on the portfolio?

Question 29

The value of an investment at the end of each of four years is shown above.What is the arithmetic cumulative return over the four years?

Question 30

The value of an investment at the end of each of four years is shown above.What is the geometric cumulative return over the four years?

Question 31

An investor purchased an asset for $1675.This investment is worth $1742 after three months.What is the effective annualised return for the investment?

Question 32

An investor purchased an asset for $1675.This investment is worth $1742 after three months.What is the simple annualised return for the investment (simple annual return)?

Question 33

An investment was purchased for $2985.After seven months this investment was worth $3245.What is the continuously compounded return on the investment over the seven-month period?

Question 34

The returns for two assets,A and B,are 5% and 8% respectively.If a price-weighted portfolio were formed when shares in A were $9 and shares in B were $3,what is the continuously compounded price-weighted return for the portfolio?

Question 35

The value of an investment at the end of each of four years is shown above.What is the geometric average return over the four years?

Question 36

Given the prices for A and B at the start and end of the period,if an investor holds 1000 shares in asset A and 5000 in asset B,what is her value-weighted return on the portfolio?

Question 37

An investor purchased the investment above.If continuously compounded returns are used,what is the equal-weighted return on the portfolio?

Question 38

The value of an investment at the end of each of four years is shown above.What is the arithmetic average return over the four years?

Question 39

Charles invests in a price-weighted portfolio of two shares,ABC and XYZ.His funds manager sends him a statement of his performance at the end of each year for his tax return.Unfortunately,some of the form was illegible,and all he could discern was that the price-weighted portfolio return was 10%,the returns on ABC and XYZ were 8% and 16%,respectively and that the purchase price of ABC was $10.Given this information,at what price did Charles purchase the shares in company XYZ?

Question 40

Loredana has invested equal amounts in each of the shares of company A,company B and company C,which she purchased one year ago at prices of $10,$2 and $1,respectively.Loredana has recently sold her shares in company B for $2.50 and in company C for $1.15.If Loredana wishes to earn a continuously compounded return of 20% for the year,on her equally weighted portfolio,at what price will she need to sell her shares in company A?