Question 1

A holding period return is defined as

Accepted Answer

The holding period return (HPR) is calculated by taking the sum of the ending price and any income generated (such as dividends or interest) minus the beginning price, all divided by the beginning price. This formula captures both capital gains or losses and income returns on the investment.

Question 2

Jones bought stock for $5000, sold it for $6500, and received no dividends. His holding period return is

Accepted Answer

The holding period return (HPR) is calculated as (Ending Value - Beginning Value) / Beginning Value. Here, it is ($6500 - $5000) / $5000 = $1500 / $5000 = 0.30 or 30%.

Question 3

Jones bought stock for $5000, sold it for $6500, and received $235 in dividends. His holding period return is

Accepted Answer

The holding period return (HPR) is calculated as the total return received from holding an asset or portfolio of assets over a period of time, expressed as a percentage of the initial investment. The formula for HPR is: HPR = [(Ending Value - Beginning Value) + Income] / Beginning Value. In this case, the beginning value is $5000, the ending value is $6500, and the income from dividends is $235. Thus, HPR = [($6500 - $5000) + $235] / $5000 = $1735 / $5000 = 0.347 or 34.70%.

Question 4

Jones bought stock for $5000, sold it for $4600, and received $400 in dividends. His holding period return is

Accepted Answer

The answer of Jones bought stock for $5000, sold it...

Question 5

Jones bought stock for $5000, sold it for $6500, and received $235 in dividends. His income yield was

Accepted Answer

The income yield is calculated based on the dividends received relative to the initial investment. Here, Jones received $235 in dividends on an initial investment of $5000. The income yield is ($235 / $5000) * 100 = 4.70%.

Question 6

The holding period return is a function of all of the following except

Accepted Answer

The holding period return (HPR) is calculated based on the purchase price, sales price, and any income received during the holding period. The time the security was held does not directly affect the calculation of HPR; rather, it's the changes in value and income received during that time that are relevant.

Question 7

Smith sold 100 shares of Microsoft (which pays no dividends) for $120 each. Her three-year holding period return was about 77%. At what price did she purchase the stock?

Accepted Answer

The answer of Smith sold 100 shares of Microsoft (which...

Question 8

What is the most you would pay for a $100 per year ordinary annuity over ten years using an 8% annual interest rate.

Accepted Answer

The present value of an ordinary annuity can be calculated using the formula PV = PMT * [(1 - (1 + r)^-n) / r], where PV is the present value, PMT is the annual payment ($100), r is the annual interest rate (8% or 0.08), and n is the total number of payments (10 years). Plugging in the values, we get PV = $100 * [(1 - (1 + 0.08)^-10) / 0.08] ≈ $671.

Question 9

Calculate the present value of a $100 per year ordinary annuity over five years using a 7% annual interest rate.

Accepted Answer

The answer of Calculate the present value of a $100...

Question 10

A bank pays 6% interest per year, compounded quarterly. What is the effective annual rate?

Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: $$EAR = \left(1 + \frac{r}{n}\right)^n - 1$$ where $r$ is the annual interest rate (as a decimal) and $n$ is the number of compounding periods per year. For this question, $r = 0.06$ and $n = 4$, so $$EAR = \left(1 + \frac{0.06}{4}\right)^4 - 1 = \left(1 + 0.015\right)^4 - 1 \approx 0.0614$$ or 6.14%.

Question 11

A bank pays 6% interest per year, compounded quarterly. How much will $100 grow to after two years?

Accepted Answer

The formula for compound interest is A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount (the initial amount of money), r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the time the money is invested for in years. For this problem, P = $100, r = 6% or 0.06, n = 4 (since interest is compounded quarterly), and t = 2 years. Plugging these values into the formula gives A = 100(1 + 0.06/4)^(4*2) = 100(1.015)^8 ≈ $112.65.

Question 12

Tom purchased 100 shares of EDS at $34 and sold it for $41 two years later. If EDS paid a $.15/share dividend over the eight quarters of investment, what was the annualized annual rate of return that Tom earned on the investment?

Accepted Answer

Tom's total profit from the sale is $(41 - 34) * 100 = $700. The total dividend income is $.15 * 8 * 100 = $120. The total return is $700 + $120 = $820. The initial investment was $34 * 100 = $3400. The annualized rate of return is calculated using the formula for compound annual growth rate (CAGR): $$CAGR = \left(\frac{Final Value}{Initial Value}\right)^{\frac{1}{Number of Years}} - 1$$ Substituting the values: $$CAGR = \left(\frac{3400 + 820}{3400}\right)^{\frac{1}{2}} - 1 = \left(\frac{4220}{3400}\right)^{\frac{1}{2}} - 1 \approx 0.222$$ or 22.2%.

Question 13

Another name for the effective annual rate is the

Accepted Answer

The effective annual rate (EAR) is also known as the compound annual return, which reflects the interest rate on an investment or loan on an annual basis, taking into account the effect of compounding.

Question 14

A stock rises 2.5% in one week. What is the annualized return?

Accepted Answer

The answer of A stock rises 2.5% in one week....

Question 15

An investor purchased stock priced at $30 and sold the stock for $34 two years later. The holding period return on the stock was _____ and the effective annual rate was _____?

Accepted Answer

The holding period return (HPR) is calculated as (P1 - P0 + D) / P0, where P1 is the ending price, P0 is the beginning price, and D is dividends received. In this case, assuming no dividends, HPR = ($34 - $30) / $30 = 13.3%. The effective annual rate (EAR) can be calculated using the formula [(1 + HPR)^(1/n)] - 1, where n is the number of years. Here, EAR = [(1 + 0.133)^(1/2)] - 1 = 6.46%.

Question 16

All of the following statements are true except

Accepted Answer

The variance is not always larger than the standard deviation; it's the other way around. The standard deviation is the square root of the variance, so the variance is the square of the standard deviation. This means that for any positive variance, the standard deviation will be smaller, except when both are zero.

Question 17

A data series has a variance of 64%. The standard deviation is

Accepted Answer

The standard deviation is the square root of the variance. Therefore, the standard deviation of a data series with a variance of 64% is the square root of 64%, which equals 8%.

Question 18

Which one of the following statements is true?

Accepted Answer

Sample variance can be greater than population variance because it is calculated from a subset of the population and may not accurately reflect the variability of the entire population.

Question 19

An investment earns 10% during the first six months of the year, and then loses 10% during the second six months. For the year, the holding period return was

Accepted Answer

The investment first grows by 10%, and then decreases by 10%. If we start with an initial investment of $100, after a 10% increase, it becomes $110. A 10% loss on $110 is $11, so the investment is worth $99 at the end of the year. This is a 1% loss from the original $100, hence a -1% return.

Question 20

Which of the following statements is most accurate?

Accepted Answer

The answer of Which of the following statements is most...

Quiz 2: Understanding Risk and Return