Question 1

Only capital gains that have been realized should be included in the measurement of a portfolio's return over a given period of time.

Accepted Answer

Portfolio return measurement can include both realized and unrealized capital gains to give a comprehensive view of performance over a given period. Unrealized gains (or losses) reflect the current market value of investments that have not yet been sold.

Question 2

For a stock investment, the dividend yield is calculated by

Accepted Answer

The dividend yield is calculated by dividing the stock's annual cash dividend by its current price, which provides investors with a percentage that indicates how much they earn in dividends relative to the stock's price.

Question 3

Returns for periods greater than one year should be measured using the internal rate of return.

Accepted Answer

The internal rate of return (IRR) is a preferred method for measuring returns over periods longer than one year because it accounts for the time value of money and provides a consistent rate of return that can be compared across different types of investments.

Question 4

Several indexes are available to monitor the performance of stocks, but nothing similar is available for bonds or mutual funds.

Accepted Answer

There are several indexes available for monitoring the performance of bonds (such as the Bloomberg Barclays US Aggregate Bond Index) and mutual funds (such as the Lipper Mutual Fund Indexes), similar to how stock indexes track the performance of stocks.

Question 5

The holding period return (HPR) of one's portfolio should be compared to investment goals
I. to determine whether the rate of return is commensurate with the risk involved.
II. to be sure one's portfolio is outperforming the S&P 500 Index.
III. to isolate any problem investments.
IV. to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite Index.

Accepted Answer

The holding period return (HPR) of a portfolio is compared to investment goals primarily to determine if the return is appropriate for the risk taken (I) and to identify any investments that are underperforming or problematic (III). Comparing to the S&P 500 or changing benchmarks may be part of broader investment strategy considerations but are not directly related to assessing the HPR against investment goals.

Question 6

Investors need to consider the effects of taxes and transaction fees when measuring portfolio returns.

Accepted Answer

Taxes and transaction fees can significantly impact the net returns of an investment portfolio, thus they must be considered for an accurate measurement of portfolio performance.

Question 7

The holding period return measures only the capital appreciation of an investment.

Accepted Answer

The holding period return measures both the capital appreciation and any income (such as dividends or interest) received from the investment during the holding period.

Question 8

Which of the following are required to measure the performance of a diversified stock portfolio?
I. Price changes
II. Dividend payments
III. An appropriate index to use as a benchmark
IV. The risk-free interest rate

Accepted Answer

To measure the performance of a diversified stock portfolio accurately, it is essential to consider price changes (I) and dividend payments (II) as they directly affect the portfolio's return. Additionally, comparing the portfolio's performance against an appropriate index (III) is crucial for assessing its relative performance. The risk-free interest rate (IV) is not a direct requirement for measuring a stock portfolio's performance, although it might be considered in broader investment strategy and risk assessment contexts.

Question 9

The calculation of returns on options and futures must consider income as well as capital gains.

Accepted Answer

Options and futures are derivatives that derive their value from an underlying asset, and their returns are primarily based on the capital gains or losses from the changes in the prices of these contracts, not on income like dividends or interest payments.

Question 10

A rational investor will require the same return from a corporate security as from a government security.

Accepted Answer

A rational investor typically requires a higher return from a corporate security due to the higher risk compared to a government security, which is generally considered to be safer.

Question 11

If an investor's portfolio is comprised of a broad range of common stocks, the best measure to use as a basis of comparison of performance is the

Accepted Answer

The S&P 500 index is the best measure for comparing the performance of a diversified portfolio of common stocks because it includes a broad representation of the market by incorporating 500 of the largest companies across various industries in the United States.

Question 12

Indexes specifically for the performance of various types of mutual funds are published by

Accepted Answer

Lipper, a subsidiary of Thomson Reuters, specializes in the analysis and rating of mutual funds, including the publication of mutual fund indexes that track the performance of various types of mutual funds.

Question 13

Holding period return (HPR) captures total return performance by considering current income and capital gains and is most appropriate for holding periods of one year or less.

Accepted Answer

Holding period return (HPR) measures the total return of an investment, including income and capital gains, and is typically used for short-term investments, often one year or less.

Question 14

Changes in securities prices are not important when measuring portfolio performance unless gains or losses are realized.

Accepted Answer

Changes in securities prices are important when measuring portfolio performance because they affect the market value of the portfolio, even if the gains or losses are not realized. Unrealized gains or losses reflect the current value of the investments and are crucial for performance evaluation.

Question 15

Investors need to monitor economic and market activity to assess the potential impact these factors can have on their investment portfolios.

Accepted Answer

Economic and market activities can significantly influence the performance of investment portfolios, affecting asset values, interest rates, and overall investment returns. Monitoring these factors helps investors make informed decisions to manage risk and capitalize on opportunities.

Question 16

Marianne is in the 30% marginal tax bracket. For her, a 5% return on a tax-exempt portfolio is equivalent to a 6.5% return on a taxable portfolio.

Accepted Answer

The answer of Marianne is in the 30% marginal tax...

Question 17

Most investment professionals consider the Dow Jones Industrial Average (DJIA) to be the most appropriate comparative gauge for evaluating the investment performance of a broadly based common stock portfolio.

Accepted Answer

The S&P 500 is generally considered the most appropriate benchmark for evaluating the performance of a broadly based common stock portfolio due to its larger and more diverse set of constituents compared to the DJIA.

Question 18

The best index to assess the performance of a portfolio diversified among several asset classes such as stocks, bonds and real estate is

Accepted Answer

No single index can accurately reflect the performance of a diversified portfolio across multiple asset classes like stocks, bonds, and real estate because each index typically focuses on a specific sector or market.

Question 19

The holding period return (HPR)

Accepted Answer

The holding period return (HPR) considers all sources of investment income, including capital gains, dividends, and interest, over any investment period, not limited to one year or less, making it a comprehensive measure of total return.

Question 20

The S & P 500 Index is an appropriate benchmark for

Accepted Answer

The S&P 500 Index is a market-capitalization-weighted index of 500 of the largest publicly traded companies in the U.S. It is most appropriate as a benchmark for diversified portfolios of large company stocks, as it reflects the performance of major industries and is considered a leading indicator for the U.S. economy.

Quiz 13: Managing Your Own Portfolio