Question 1

What range of returns would an investor expect to achieve 99% of the time on an investment with an expected return of 11% and a standard deviation of 16%?

Accepted Answer

Assuming the returns are normally distributed a 99% confidence interval is constructed by 11% plus or minus three times the standard deviation.
11% - 3(16%)to 11% + 3(16%)= -37% to 59%

Question 2

Exhibit 3.2.
Use the Information Below for the Following Problem(S)
                                                Real Retums
$\begin{array}{lc}
\text { Investment } & \text { Real Returns } \
\hline \text { Large company stock } & \text { Real Annual Return } \
\text { Small capitalization stock } & 6.50 \% \
\text { Long-term corporate bonds } & 8.60 \% \
\text { Long-term government bonds } & 3.60 \% \
\text { U.S. Treasury bills } & 2.80 \% \
\text { 1.03\% }
\end{array}$
 
The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2.What is the small capitalization stock nominal return?

Accepted Answer

Nominal return on small cap stocks = 11.32% = [(1.086)(1.025)] - 1

Question 3

Exhibit 3.2.
Use the Information Below for the Following Problem(S)
                                                Real Retums
$\begin{array}{lc}
\text { Investment } & \text { Real Returns } \
\hline \text { Large company stock } & \text { Real Annual Return } \
\text { Small capitalization stock } & 6.50 \% \
\text { Long-term corporate bonds } & 8.60 \% \
\text { Long-term government bonds } & 3.60 \% \
\text { U.S. Treasury bills } & 2.80 \% \
\text { 1.03\% }
\end{array}$
 
The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2.What is the large company stock nominal return?

Accepted Answer

Nominal return on large cap stocks = 9.16% = [(1.065)(1.025)] - 1

Question 4

Exhibit 3.2.
Use the Information Below for the Following Problem(S)
                                                Real Retums
$\begin{array}{lc}
\text { Investment } & \text { Real Returns } \
\hline \text { Large company stock } & \text { Real Annual Return } \
\text { Small capitalization stock } & 6.50 \% \
\text { Long-term corporate bonds } & 8.60 \% \
\text { Long-term government bonds } & 3.60 \% \
\text { U.S. Treasury bills } & 2.80 \% \
\text { 1.03\% }
\end{array}$
 
The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2.What is the long term Treasury bond nominal return?

Accepted Answer

Nominal return on long term government bonds = 5.37% = [(1.028)(1.025)] - 1

Question 5

If the real return for corporate bonds was 4% and the inflation rate was 2%,what is the nominal return for corporate bonds?

Accepted Answer

(1.04)(1.02)- 1 = 0.068 or 6.08%

Question 6

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%.Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time?

Accepted Answer

The range of returns is between 12.8 - 3(7.8)and 12.8 + 3(7.8)= -10.6 and 36.2

Question 7

Exhibit 3.1
Use the Information Below for the Following Problem(S)
 $\begin{array}{lc}
\text { Security } & \text { Annual Percentage Return } \
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small canitalization common stocks } & 15.60
\end{array}$
 
The annual rate of inflation is 2%.
-Refer to Exhibit 3.1.What is the real return on long-term corporate bonds?

Accepted Answer

Real return on long term corporate bonds = 4.71% = [(1.068)/(1.02)] - 1

Question 8

You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%.Assuming all other factors are the same and you are in the 28% tax bracket,which bond should you choose and why?

Accepted Answer

The municipal bond has an equivalent taxable yield of 0.475/(1 - 0.28)= 0.066.This is higher than the bond yield of .0625.

Question 9

Exhibit 3.2.
Use the Information Below for the Following Problem(S)
                                                Real Retums
$\begin{array}{lc}
\text { Investment } & \text { Real Returns } \
\hline \text { Large company stock } & \text { Real Annual Return } \
\text { Small capitalization stock } & 6.50 \% \
\text { Long-term corporate bonds } & 8.60 \% \
\text { Long-term government bonds } & 3.60 \% \
\text { U.S. Treasury bills } & 2.80 \% \
\text { 1.03\% }
\end{array}$
 
The annual rate of inflation is 2.5%
-Refer to Exhibit 3.2.What is the T-bill nominal return?

Accepted Answer

Nominal return on T-bills = 3.56% = [(1.0103)(1.025)] - 1

Question 10

Exhibit 3.1
Use the Information Below for the Following Problem(S)
 $\begin{array}{lc}
\text { Security } & \text { Annual Percentage Return } \
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small canitalization common stocks } & 15.60
\end{array}$
 
The annual rate of inflation is 2%.
-Refer to Exhibit 3.1.What is the real return on small capitalization stocks?

Accepted Answer

Real return on small cap stocks = 13.33% = [(1.156)/(1.02)] - 1

Question 11

Exhibit 3.1
Use the Information Below for the Following Problem(S)
 $\begin{array}{lc}
\text { Security } & \text { Annual Percentage Return } \
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small canitalization common stocks } & 15.60
\end{array}$
 
The annual rate of inflation is 2%.
-Refer to Exhibit 3.1.What is the real return on T-bills?

Accepted Answer

Real return on T-bills = 1.02% = [(1.034)/(1.02)] - 1

Question 12

An individual with only $10,000 to invest is most likely better off investing in:

Accepted Answer

With only $10,000 to invest, the best option would be to invest in ETFs to increase diversification. This will offer exposure to multiple asset classes while minimizing risk. Mutual funds may have higher fees and individual equities or bonds may not provide enough diversification with such a small amount of money to invest.

Question 13

Exhibit 3.1
Use the Information Below for the Following Problem(S)
 $\begin{array}{lc}
\text { Security } & \text { Annual Percentage Return } \
\hline \text { U.S. government T-bills } & 3.04 \
\text { Long-term government bonds } & 5.75 \
\text { Long-term corporate bonds } & 6.80 \
\text { Large capitalization common stocks } & 13.50 \
\text { Small canitalization common stocks } & 15.60
\end{array}$
 
The annual rate of inflation is 2%.
-Refer to Exhibit 3.1.What is the real return on large capitalization stocks?

Accepted Answer

Real return on large cap stocks = 11.27% = [(1.135)/(1.02)] - 1

Question 14

What type of mutual fund issues "redeemable securities" meaning that the fund stands ready to buy or sell the shares at their net asset value with a transaction fee?

Accepted Answer

The answer of What type of mutual fund issues "redeemable...

Question 15

If the nominal return on an investment of common stocks was 11% and inflation was 2.5% annually,what was the real return on common stock?

Accepted Answer

(1.11)/(1.025)- 1 = 0.0829 or 8.3%

Question 16

A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%.Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 90% of the time?

Accepted Answer

The range of returns is between 12.8 - 2(7.8)and 12.8 + 2(7.8)= -2.8 and 28.4

Question 17

A return series has an arithmetic mean of 10.5% and standard deviation of 13%.Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 90% of the time?

Accepted Answer

The range of returns is between 10.5 - 2(13)and 10.5 + 2(13)= -15.5 and 36.5.

Question 18

What is the 95 percent confidence interval for an investment with an expected return of 9 percent and a standard deviation of 15%?

Accepted Answer

95% confidence interval is 2 standard deviations from the mean
9% - 2(15%)to 9% + 2(15%)
-21% to 39%

Question 19

A return series has an arithmetic mean of 10.5% and standard deviation of 13%.Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time?

Accepted Answer

The range of returns is between 10.5 - 3(13)and 10.5 + 3(13)= -28.5 and 49.5

Quiz 3: The Global Market Investment Decision