Arithmetic mean

Geometric Mean

A

5.33%

4.61%

B

4.61%

5.33%

C

12.00%

7.00%

D

7.00%

12.00%

2. Larry invested $5,000 in ABC mutual fund one year ago. The fund paid dividends of $100, $150, $50, and $100 at the end of each quarter, all of which were distributed to Larry. At the time of the last dividend payment, his fund had grown to 5.175. What was the dollar-weighted rate of return for this investment?

a. 2.85%

b. 3.50%

c. 11.38%

d. 14.00%

3. Arthur purchases 200 shares of Capital one bank stock for $23 per share. He then makes subsequent purchases at the end of the following years:

Year 1: 50 shares at $26 per share

Year 2: 75 shares at $29 per share

Year 3: 25 shares at $36 per share

At the end of the fourth year, capital one stock was trading at $41 per share. What is the annualized time-weighted return on the stock over the 4-year period? (Assume that no dividends were paid over the 4-year period)

a. 13.85%

b. 14.25%

c. 15.00%

d. 15.55%

4. Yaw bought 100 shares for $4/share and sold them for $7/share holding them for 3 years

a. What is Yaw's total return?

b. What is the Yaw's rate of return

c. What is Yaw's annualized holding period return?

5. Michael purchased 800 shares of ABC stock at $95 per share. The stock paid a $9.20 dividend per share at the end of the year. During this same year, there was a 2-for-1 stock split. If the value of Michael's investment at the end of the year was $96,000. What was his holding period rate of return (HPR?)

6. Patricia owns 100 shares of blue stock, which has a current market price of $100. She also owns 300 shares of red stock, which has a current market price of $6. If Blue Corporation undergoes a 2-for-1 stock split and Red Corporation undergoes a 1-for-3 reverse stock split, which row would correctly identify Patricia's holdings?

Blue

# of Shares = 200

Value of Shares = $10,000

Red

# of Shares = 100

Value of Shares = $1,800

Risk questions

7. Harold, a 55-year old corporate executive, is employed by a fortune 500 company. He wants to retire at age 65 and then expects to live for another 25 years. He has a stock portfolio and a bond portfolio. Harold is willing to accept enough risk to meet his goals, but he wants to neither accept additional risk, nor die with less than $1 million (in today's dollars) in his brokerage account (i.e., he hopes to have at least this much in his estate at the end of the 25-year retirement period).

Stock Portfolio

Bond Portfolio

Current market value

$592,160

$943,040

Average historic return

12%

7%

Standard deviation

15%

9%

Current YTM

N/A

Duration

N/A

5 - year

Correlation to the stock market

77.5%

N/A

Note: The correlation coefficient between Harold's stock portfolio and bond portfolio is 0.40.

What is the standard deviation of his total portfolio?

(592,160/1,535,200) x 0.15 + (943,040/1,535,200) x 0.09 = 11.31%

8. If the stock portfolio has a correlation coefficient with the market of 0.80, which of the following statements is (are) correct?

1. Sixty-four percent of the change in the account can be explained by the market

2. The entire account movement can be explained by the market

3. The portfolio is sufficiently diversified such that there is almost no unsystematic risk exposure within the portfolio

4. Unsystematic risk accounts for more than 33% of the total risk.

a. 2 only

b. 1 and 3

c. 1 and 4

d. 2 and 3

9. Harold has taken an active role in developing his financial goals by reading investors magazine. After reading about diversification, he has become concerned about the allocation of his stock portfolio. What portion of the risk in his stock portfolio is inherent to a specific business or industry if the correlation of the stock to the market is 0.65?

10. John's investment had a return of 7.5% in the previous year, whereas the market had a 9% return. The standard deviation of the investment and the market 12% and 10%, respectively. With a correlation coefficient of 0.50 between the investment and the market, what is the beta of john's investment?

11. Your client has a two-asset portfolio with equal weighting and the following characteristics:

Return

Risk ()

Asset A

5%

20%

Asset B

15%

40%

If the correlation coefficient between assets A and B is 0.5, what is the standard deviation of the 2-assst portfolio?

12. Assume Michael has a diversified portfolio that had an actual an actual return of 17% last year. During the same time, the market returned 13%. The risk-free rate of return for this period was 8%, and the beta for Michael's portfolio was 1.65(or 25% more volatile than the market). What is Michael's risk-adjusted returns?

13. Howie, a security analyst, has used the concept of multiple regression to determine the sensitivity of a certain stock to various factors. He has found that the following factors are the most indicative of his stock's returns:

Factor

Factor Beta

Factor Risk Premium

Inflation

1.1

8%

Unemployment

0.9

9%

Industrial Production

0.6

6%

If the rate on 90-day T-bills is 2%, what is the expected return for this stock?

14. A portfolio has a standard deviation of 60% and the market has a standard deviation of 35%. Assume that the correlation coefficient between the portfolio and the market is 0.50,

a) What is the percentage of the total return of the portfolio is systematic risk and what portion is unsystematic risk?

b) What portfolio measure is best used to evaluate the performance of the portfolio?

15. Jane's stock investment of 4.5% standard deviation has 0.83 correlation coefficient with the market. The market has a standard deviation of 6% and a return of 10%. If the US Treasury bill and her stock investment returns are 3% and 11% respectively, what is the Jensen's alpha for her stock investment?

16. Vince, financial professional, is reviewing his new client's current financial status in preparation of developing a comprehensive investment plan. During his analysis, he discovered his client had inherited the following two-stock portfolio. These two stock portfolio exhibit the following returns over a five-year period

Year

Stock A

Stock B

1

12%

15%

2

-12%

-10%

3

6%

9%

4

7%

8%

5

-5%

-7%

The two stocks have a covariance of 0.008975. Compare the standard deviations of stocks A and B. Are they correlated?

Stock/bond Valuation questions

17. What is the difference between a preferred share and an ordinary share?

18. What is the difference between money market funds and money market account?

19. In case of a bankruptcy which of these group of in these pairs of investors receives the amount of invested money first?

Bondholders or common shareholder

20. Common shareholders or preferred shareholders

21. Bondholder or preferred shareholder

22. A JC Penney's share that pays an annual dividend of $5.5/share is selling for $20.4. If the required rate of return is 12% and the dividend is expected to grow at 5% per year,

What is the intrinsic value of JC Penney share?

23.Is the JC Penney share over-valued or undervalued?

24.Mrs. Cool bought JC Penny's share for $4 and sold it for $6 in 3 years later incurring $10 transactional cost and buying 10 shares in all:

a.What is her total return?

b.What is her rate of return?

c.What is her annualized holding period return?

25. When a company sells its shares at the primary market for the first time, it is called?

1. First-time share sales
2. Initial sales arrangement
3. Initial public offering
4. Initial private offering

26. Which of the following is not a systematic risk?

a. Purchasing power risk

b. Reinvestment risk

c. Market risk

d. Business risk

27. Which of the following are reasons why an investor would choose stocks over bonds?

1. A stockholder is not entitled to share in the earnings of the company

2. Bondholders do not have an ownership interest in the company

3. A stockholder has the right above a bondholder to assets of the corporation in case of liquidation

4. A stockholder is entitled to a proportionate share of the assets of the company

a. 1 and 2

b. 2 and 4

c. 1, 2 and 4

d. 2, 3 and 4

28. If the dividend of a stock is expected to grow for only three years at 6% annually and then 7% annually thereafter. Furthermore, assume that the investor's required rate of return has now changed to 9%, and the dividend is $2.00, therefore, we would be the intrinsic value of the stock?

29. Jerry Roberts purchased a 30-year junk bond for $977.36 with a stated coupon rate of 8.5%. What is the YTM for this bond if Jerry receives semiannual coupon payments and experts to hold the bond to maturity?

30. What is the value of a 4-year bond that offers 5% coupon rate when the market rate is 4%?

31. What is the market value of a bond that offers 5% coupon rate at the time the market rate is 6%? Is the bond selling at par, selling on discount or selling at a premium?

32. If a bond is quoted at 109, what is the value of the bond?

33. What is the value of a T-bill sold at 2% discount and what is the yield of the bill?