Which of the following arguments supporting passive investment strategies is (are) correct?

Which of the following arguments supporting passive investment strategies is (are) correct?

I. Active trading strategies may not guarantee higher returns but guarantee higher costs.
II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information.
III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.


A. I only

B. I and II only

C. II and III only

D. I, II, and III


Answer: B. I and II only

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______.

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______. 

A. SML

B. CAPM

C. CML

D. total return line


Answer: C. CML

A loan for a new car costs the borrower .8% per month. What is the EAR?

A loan for a new car costs the borrower .8% per month. What is the EAR? 

A. .80%

B. 6.87%

C. 9.6%

D. 10.03%


Answer: D. 10.03%

1.00812 - 1 = 10.03%

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?

 The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan? 

A. .50%

B. 5%

C. 6%

D. 6.5%


Answer: C. 6%

APR = .5% × 12 = 6%

According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return?

According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return? 

A. Long-term Treasury bonds

B. Corporate bonds

C. Common stocks

D. Preferred stocks


Answer: C. Common stocks

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment?

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? 

A. 3.92%

B. 4%

C. 4.12%

D. 6%


Answer: A. 3.92%


1 + r = (1 + R)/(1 + i) - 1
1 + r = 1.06/1.02 - 1 = .0392

What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%?

What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%? 

A. 8%

B. 8.33 %

C. 8.47%

D. 8.5 %


Answer: C. 8.47%


Return = (1.05 × 1.08 × 1.09 × 1.12).25 - 1 = .0847

What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%?

What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%? 

A. 3.72%

B. 4.23%

C. 4.74%

D. 4.90%


Answer: C. 4.74%


Return = (1.03 × 1.04 × 1.05 × 1.07).25 - 1 = .0474

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? 

A. Money market fund

B. U.S. T-bill

C. Short-term corporate bonds

D. U.S. T-bill whose return was indexed to inflation


Answer: D. US T-bill whose return was indexed to inflation

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct?

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct?

I. Your nominal return on the T-bills is riskless.
II. Your real return on the T-bills is riskless.
III. Your nominal Sharpe ratio is zero.


A. I only

B. I and III only

C. II only

D. I, II, and III


Answer: B. I and II only

The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year?

The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year? 

A. 6.58%

B. 8.86%

C. 14.47%

D. 18.66%


Answer: C. 14.47%


HPR = (41 - 38 + 2.50)/38 = .1447

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year? 

A. -3.64%

B. -6.36%

C. -6.44%

D. -11.74%


Answer: C. -6.44%


Nominal return on stock: (50 + 3)/55 - 1 = -3.64%
Real return: (1 + R) = (1 + r)(1 + i)
1 + r = (1 - .0364)/(1.03) = .935
R = .935 - 1 = -.0644

From 1926 to 2010 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks.

From 1926 to 2010 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. 

A. lower; higher

B. lower; lower

C. higher; lower

D. higher; higher



Answer: B. lower; lower

The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?

The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund? 

A. .8

B. .6

C. 9

D. 1


Answer: B. .6

(16 - 4)/20 = .6

A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____.

A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____. 

A. 68.26%

B. 95.44%

C. 99.74%

D. 100%


Answer: B. 95.44%


Note that the expected return minus 2 standard deviations is 18% - (2 × 23%) = -28% and the expected return plus 2 standard deviations is 18% + (2 × 23%) = 64%. The probability of a return falling within ± 2 standard deviations is 95.44%.

The annualized (geometric) average return on this investment is _____.

You have the following rates of return for a risky portfolio for several recent years:

2008 - 35.23%
2009 - 18.67%
2010 - -9.87%
2011 - 23.45%

The annualized (geometric) average return on this investment is _____. 

A. 16.15%

B. 16.87%

C. 21.32%

D. 15.60%


Answer: D. 15.60%


(1.17856)1/4 - 1 = 15.60%

If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be worth ___________.

You have the following rates of return for a risky portfolio for several recent years:

2008 - 35.23%
2009 - 18.67%
2010 - -9.87%
2011 - 23.45%

If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be worth ___________. 

A. $2,176.60

B. $1,785.56

C. $1,645.53

D. $1,247.87


Answer: B. $1,785.56


$1,000(1.3523)(1.1867)(1 + -.0987)(1.2345) = $1,785.56

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. 

A. $162; $595; $243

B. $243; $162; $595

C. $595; $162; $243

D. $595; $243; $162


Answer: B. $243; $162; $595

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________.

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________. 

A. $300; $450

B. $150; $100

C. $100; $150

D. $450; $300


Answer: B. $150; $100


X = 1,000(.25)(.6) = 150
Y = 1,000(.25)(.4) = 100

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively.

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. 

A. 0%; 60%; 40%

B. 25%; 45%; 30%

C. 40%; 24%; 16%

D. 50%; 30%; 20%


Answer: C. 40%; 24%; 16%



E(rp) = .6(14) + .4(10) = 12.4%
.08 = wrp(.124) + (1 - wrp)(.05)
wrp ˜ 40%
wx in complete portfolio = .40(.60) = 24%
wy in complete portfolio = .40(.40) = 16%