Question 1

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 2

Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
 \text { Real Returns } \
\begin{array}{lc}
 \text {INVESTMENT  } & \text { REAL ANNUAL RETURN } \
\hline\text { Large company stock } & 6.50 \% \
\text { Small capitalization stock } & 8.60 \% \
\text { Long-term corporate bonds } & 3.60 \% \
\text { Long-term government bonds } & 2.80 \% \
\text { Canadian Treasury bills } & 1.03 \%
\end{array}\end{array}$ 
The annual rate of inflation is 2.5%
-Refer to Exhibit 3-2. What is the T-bill nominal return?

Accepted Answer

The answer of Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE...

Question 3

Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
 \text { Real Returns } \
\begin{array}{lc}
 \text {INVESTMENT  } & \text { REAL ANNUAL RETURN } \
\hline\text { Large company stock } & 6.50 \% \
\text { Small capitalization stock } & 8.60 \% \
\text { Long-term corporate bonds } & 3.60 \% \
\text { Long-term government bonds } & 2.80 \% \
\text { Canadian Treasury bills } & 1.03 \%
\end{array}\end{array}$ 
The annual rate of inflation is 2.5%
-Refer to Exhibit 3-2. What is the long term Treasury bond nominal return?

Accepted Answer

The nominal return is calculated by adding the inflation rate to the real return. For long-term government bonds, the real return is 2.80%. Adding the inflation rate of 2.5% gives a nominal return of 5.30%, which is not an option, so the closest provided option is 5.37%.

Question 4

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 5

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

Question 6

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 7

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 8

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 9

Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}
 \text { Real Returns } \
\begin{array}{lc}
 \text {INVESTMENT  } & \text { REAL ANNUAL RETURN } \
\hline\text { Large company stock } & 6.50 \% \
\text { Small capitalization stock } & 8.60 \% \
\text { Long-term corporate bonds } & 3.60 \% \
\text { Long-term government bonds } & 2.80 \% \
\text { Canadian Treasury bills } & 1.03 \%
\end{array}\end{array}$ 
The annual rate of inflation is 2.5%
-Refer to Exhibit 3-2. What is the small capitalization stock nominal return?

Accepted Answer

The answer of Exhibit 3-2
USE THE FOLLOWING INFORMATION FOR THE...

Question 10

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 11

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%

Quiz 3: Selecting Investments in a Global Market