Question 1

The chance or possibility that outcomes may not turn out as expected is best described by:
A) risk
B) variance
C) diversification
D) standard deviation

Accepted Answer

Risk is the correct term for describing the chance or possibility that outcomes may not turn out as expected. It encompasses the idea of uncertainty in the outcome of an event or an action.

Question 2

Which of the following would not describe risk?
A) Uncertainty
B) The possibility of incurring harm or the chance of a loss
C) Chance that future outcomes may not turn out as expected
D) Depreciation in the price of an asset from some starting point in time

Accepted Answer

Risk involves uncertainty, the possibility of harm or loss, and the chance that outcomes may not meet expectations. Depreciation in asset prices, while potentially a result of risk, is more specifically related to value changes over time rather than the concept of risk itself.

Question 3

A potential investor looks up the historical returns for Capital World Growth and Income Fund. He finds that that as of the November 30, 2012 the 1-year return is 16.14 percent, the 3-year return is 5.65 percent, the 5-year return is -1.14 percent, the 10 year return is 9.80 percent, and the lifetime return is 10.71 percent. These returns are examples of:
A) capital yield.
B) income yield.
C) ex post return.
D) ex ante return.

Accepted Answer

Ex post return refers to the actual return an investment has generated over a specific period in the past, which matches the description of the historical returns provided for the Capital World Growth and Income Fund.

Question 4

Complete the following: Advertisements for mutual funds and other investments show historical or _____________ returns and then have a disclaimer that past returns do not necessarily reflect future or _____________ returns.
A) ex post; ex ante
B) ex ante; ex post
C) ex post; capital yield
D) capital yield; income yield

Accepted Answer

Ex post returns refer to historical returns, while ex ante returns refer to expected or future returns. These terms are commonly used in finance to differentiate between actual past performance and forecasts or expectations for the future.

Question 5

Which of the following statements is not true?
A) Expected return is the estimated future return.
B) Expected return is often estimated using historical averages.
C) Expected return can be calculated using weights to represent the probabilities of possible returns.
D) Using historical averages to calculate expected return is the best method to use for short-term forecasts.

Accepted Answer

Using historical averages to calculate expected return is not necessarily the best method for short-term forecasts because it assumes that past performance will predict future results, which may not always be accurate due to market volatility and unforeseen events.

Question 6

Which of the following statements is not true?
A) Expected return is the estimated future return.
B) Expected return is often estimated using historical averages.
C) Expected return can be calculated using weights to represent the probabilities of possible returns.
D) Using historical averages to calculate expected return is the best method to use for short-term forecasts.

Accepted Answer

Expected return can indeed be calculated using historical averages, but stating that using historical averages is the "best" method for short-term forecasts is not accurate. The effectiveness of historical averages for short-term forecasts can be limited due to market volatility and unpredictability in the short term. Other methods, such as technical analysis or more sophisticated statistical models, might be more appropriate for short-term forecasting.

Question 7

A member of your investment club tells you they are a day trader. This individual must:
A) follow a value investing philosophy.
B) work on one of the stock exchanges.
C) follow a buy and hold investing philosophy.
D) buy and sell based on intraday price movements.

Accepted Answer

Day trading involves buying and selling securities within the same trading day, focusing on taking advantage of intraday price movements rather than long-term investment strategies like value investing or buy and hold.

Question 8

Total return on your company's stock for 2012 was 9.0%. Income yield was 2.5%. The capital yield is closest to:
A) 6.5%
B) 9.00%
C) 11.5%

Accepted Answer

The answer of Total return on your company's stock for...

Question 9

Consider the following probability distribution of possible returns to a project:
 The expected return is closest to:
A) 0%
B) 4.5%
C) 6.5%

Accepted Answer

The answer of Consider the following probability distribution of possible...

Question 10

Consider the following probability distribution of possible returns to a project:
 The expected return is closest to:
A) -1%
B) 0%
C) 3%

Accepted Answer

The answer of Consider the following probability distribution of possible...

Question 11

Which of the following statements is incorrect?
A) Total Return = Income yield + capital gain (or loss) yield.
B) The trend over the past 30 years has been declining dividend yields.
C) Capital gain is the depreciation in the price of an asset from some starting point in time.
D) Dividend yield can change for two reasons - changes in the dividends per share or changes in the stock price.

Accepted Answer

Capital gain refers to the increase in the price of an asset from some starting point in time, not the depreciation. Depreciation would be considered a capital loss.

Question 12

When evaluating your portfolio at year end, you notice that the mutual fund you bought a year ago for $14 is now trading for $17. The mutual fund has recently paid a $1.00 dividend. Your total return is closest to:
A) 7.14%
B) 21.43%
C) 23.53%
D) 28.57%

Accepted Answer

The answer of When evaluating your portfolio at year end,...

Question 13

When evaluating your portfolio at year end, you notice that the mutual fund you bought a year ago for $18 is now trading for $16. The mutual fund has recently paid a $.50 dividend. The total return is closest to:
A) -8.33%
B) 2.78%
C) 8.33%
D) 15.63%

Accepted Answer

The total return is calculated as (Ending Price - Beginning Price + Dividend) / Beginning Price. Here, it is ($16 - $18 + $0.50) / $18 = -8.33%.

Question 14

When interested in the rate of return performance of an investment over time it is best to use:
A) the arithmetic mean.
B) the geometric mean.
C) either the arithmetic mean or the geometric mean.
D) neither the arithmetic mean nor the geometric mean.

Accepted Answer

The geometric mean is best for measuring the rate of return over time because it accounts for the compounding effect of investments, unlike the arithmetic mean which could overestimate performance by not considering the impact of volatility and the sequence of returns.

Question 15

Consider a project that provides a return of 2 percent in the first year, 10 percent in the second year, 15 percent in the third year, and 3 percent in the fourth year. The geometric mean return over these four years is closest to:
A) 1.07%
B) 7.37%
C) 7.50%
D) 32.90%

Accepted Answer

The geometric mean return is calculated by multiplying the returns (expressed as a decimal plus one), taking the nth root (where n is the number of returns), and then subtracting one and converting back to a percentage. Here, it's ((1.02 * 1.10 * 1.15 * 1.03)^(1/4)) - 1, which is approximately 0.0737 or 7.37%.

Question 16

Consider a project that provides a return of -2 percent in the first year, 10 percent in the second year, 15 percent in the third year, and -3 percent in the fourth year. The geometric mean return over these four years is closest to:
A) 4.72%
B) 5.00%
C) 7.37%

Accepted Answer

The geometric mean return is calculated by multiplying the returns (expressed as a fraction of 1), taking the nth root (where n is the number of years), and subtracting 1. Here, it's ((1-0.02)*(1+0.10)*(1+0.15)*(1-0.03))^(1/4) - 1 ≈ 4.72%.

Question 17

When evaluating your portfolio at last year's end, you notice that the value of your portfolio was $100,000. The value of your portfolio at this year's end is $112,000, and you received cash dividends of $1,000 at the end of the first six months of this year and $1,200 in cash dividends at year end. The total return and the holding period yield (i.e., internal rate of return) are closest to:
A) 13.2 percent and 13.73 percent, respectively
B) 13.2 percent and 13.79 percent, respectively
C) 14.2 percent and 13.73 percent, respectively
D) 14.2 percent and 13.79 percent, respectively

Accepted Answer

The total return is calculated as (Ending Value - Beginning Value + Dividends) / Beginning Value = ($112,000 - $100,000 + $1,000 + $1,200) / $100,000 = 14.2%. The holding period yield (IRR) accounts for the timing of cash flows and is approximately 13.79%.

Question 18

The measure of dispersion calculated as the difference between the maximum and minimum values is best described as the:
A) range.
B) variance.
C) standard deviation.
D) ex post standard deviation.

Accepted Answer

The range is the measure of dispersion that is calculated as the difference between the maximum and minimum values in a dataset.

Question 19

Which of the following is not a measure of dispersion?
A) range.
B) variance.
C) weighted mean.
D) standard deviation.

Accepted Answer

Weighted mean is not a measure of dispersion; it is a type of average that gives different weights to different values, focusing on the central tendency rather than the spread of data.

Question 20

Which of the following statements is incorrect?
A) The range is a measure of dispersion.
B) The standard deviation is a more common measure of risk than range.
C) The range is calculated as the difference between the maximum and minimum values.
D) The range is a good measure of risk because it captures the variability of returns between the maximum and minimum values.

Accepted Answer

The range, while it does measure the spread between the maximum and minimum values, does not capture all the variability or the distribution of values between these two points, making it a less comprehensive measure of risk compared to other metrics like standard deviation.

Quiz 8: Risk, Return, and Portfolio Theory

The chance or possibility that outcomes may not turn out as expected is best described by:

Which of the following would not describe risk?

Complete the following: Advertisements for mutual funds and other investments show historical or _ returns and then have a disclaimer that past returns do not necessarily reflect future or _ returns.

Which of the following statements is not true?

Which of the following statements is not true?

A member of your investment club tells you they are a day trader. This individual must:

Total return on your company's stock for 2012 was 9.0%. Income yield was 2.5%. The capital yield is closest to:

Consider the following probability distribution of possible returns to a project: The expected return is closest to:

Consider the following probability distribution of possible returns to a project: The expected return is closest to:

Which of the following statements is incorrect?

When evaluating your portfolio at year end, you notice that the mutual fund you bought a year ago for $14 is now trading for $17. The mutual fund has recently paid a $1.00 dividend. Your total return is closest to:

When evaluating your portfolio at year end, you notice that the mutual fund you bought a year ago for $18 is now trading for $16. The mutual fund has recently paid a $.50 dividend. The total return is closest to:

When interested in the rate of return performance of an investment over time it is best to use:

Consider a project that provides a return of 2 percent in the first year, 10 percent in the second year, 15 percent in the third year, and 3 percent in the fourth year. The geometric mean return over these four years is closest to:

Consider a project that provides a return of -2 percent in the first year, 10 percent in the second year, 15 percent in the third year, and -3 percent in the fourth year. The geometric mean return over these four years is closest to:

The measure of dispersion calculated as the difference between the maximum and minimum values is best described as the:

Which of the following is not a measure of dispersion?

Which of the following statements is incorrect?