Indicate the answer and explain why 1. An asset with a current price of $950 and
ID: 2782324 • Letter: I
Question
Indicate the answer and explain why
1. An asset with a current price of $950 and a promised payment of $1000 has a discount return
a. Which is negative
b. Of 1 percent
c. Of 5 percent
d. Greater than 5 percent
2. The geometricmean and the arithmeticmean returns on an asset
a. Are both means and are the same
b. Both depend only on the initial and final values of the asset
c. Can be used to calculate the final value for an investment from some initial amount, but only the geometric mean gives the exact final value
d. Can be used to estimate the volatility of the assets’ returns, but only the arithmetic mean gives the true volatility
3. Distributions of stock returns for indices and other averages of many stocks have (blank) volatility than typical individual stocks
a. Lower
b. About the same
c. Higher
d. None of the above
4. According to the meanvariance theory of portfolio selection, investors prefer (Blank) returns and (Blank) standard deviations of returns.
a. Higher returns and higher standard deviations of returns.
b. Higher returns and lower standard deviations of returns.
c. Lower returns and higher standard deviations of returns.
d. Lower returns and lower standard deviations of returns.
5. According to the meanvariance theory of portfolio selection, investors will hold the same portfolio of stocks
a. if their expected returns and variances for individual stocks are the same
b. if their preferences concerning expected return and variance are the same
c. if their expected returns and variances for individual stocks are the same and their preferences concerning expected return and variance are the same
d. always
6. Two stocks combined into a portfolio do not have a lower standard deviation than both of the individual stocks if
a. Both stocks have similar standard deviations
b. The correlation of the two stocks’ returns is one
c. Both stocks have similar average returns
d. The correlation of the two stocks’ returns is minus one
7. Event studies examine the effects of announcements on stock returns by
a. Examining the returns on the stock
b. Examining the excess return on the stock
c. Examining whether the excess return is different than would be expected given the market return
d. Examining the volatility of the excess return on the stock
8. Money markets are markets on which people buy and sell
a. Currency of different denominations
b. Shortterm fixedincome securities
c. Longterm fixedincome securities
d. Stocks in exchange for money
9. The repo shortterm money market is a market in which
a. A security is sold today with a promise to buy it back tomorrow
b. A market for securities backed by repossessed cars
c. A market in which the Federal Reserve is not allowed to participate
d. A market for trading reserves between banks
10. Characteristics of shortterm securities include
a. The currency in which the security is denominated
b. Fixed or floating interest rates
c. Whether or not the security is negotiable
d. All of the above
Explanation / Answer
Q = Question
Q Part 1. Choice c) of 5%
Current price = $950 = Purchase Price = PP
Promised Payment = $1000 = Par Value = PV
Discount Return = DR = (PV - PP ) / PV
= (1000 - 950 ) / 1000
= 50/1000
= 5/100
= 5%
Hence Choice c) Of 5 %
Q part 2) c) Only the geometric mean gives the exact final value
Geometric mean and arithmetic mean:
(1.7*1.15*1.15*1.3*0.3)^(1/5) - 1
= -0.02595 = -2.6%
This is very different from 12% - hence choice c) Geometric mean is more accurate depiction of the value
Q Part 3) a ) lower
Volatility = Chi = instability = the measure of unstableness = gauges the risk or calculated risk taking style;
But the Volatility for a single security will not indicate the amount of mean return from this invested security
The more the diversification, the less the instability; or diversification gives you better stability;
a) lower
So, higher the diversification by investing in many stocks, lower will be the volatility than individual stocks
Simply, do not put all your eggs in the same basket - diversify and survive
Q Part 4) b) Higher returns and lower standard deviations and variances
Mean Variance theory of portfolio selection:
Q Part 8) Choice b)
Money market is for short term while capital market is for long term