Question 1

Jim began his investing program with a $4,000 initial investment.The table below recaps his returns each year as well as the amounts he added to his investment account.What is his dollar-weighted average return? 
A)1.6 percent
B)2.2 percent
C)2.6 percent
D)3.2 percent
E)3.6 percent

Accepted Answer

Using the CashFlow worksheet in a financial calculator, the cashflows to be entered are:CF0 = -4000CF1 = -2800CF2 = -900CF3 = -1600CF4 = -2100CF5 = -2400CF6 = 15246.78 (see calculations below)Solve for IRR = 2.6%4000 * (1.10) = 4400(4400 + 2800) * (.95) = 6840(6840 + 900) * (1.02) = 7894.80(7894.80 + 1600) * (1.08) = 10254.38(10254.38 + 2100) * (.97) = 11983.75(11983.75 + 2400) * (1.06) = 15246.78

Question 2

You have studied the historical returns and risks of various securities over the period of 1926-2012.
Describe the historical returns and risks associated with bonds as compared to stocks over that time period.

Accepted Answer

The answer of You have studied the historical returns and...

Question 3

For the period 1926-2012,small-cap stocks outperformed large-cap stocks by a significant amount.
Given this,why do investors still purchase large-cap stocks?

Accepted Answer

The answer of For the period 1926-2012,small-cap stocks outperformed large-cap...

Question 4

The geometric return on an asset over the past 12 years has been 13.47 percent.The arithmetic return over the same period was 13.86 percent.What is the best estimate of the average return on this asset over the next 5 years?
A)13.47 percent
B)13.67 percent
C)13.72 percent
D)13.81 percent
E)13.86 percent

Accepted Answer

Projected return = {[(5 - 1)/(12 - 1)] × .1347} + {[(12 - 5)/(12 - 1)] × .1386} = 13.72 percent

Question 5

A stock produced annual returns of 5,-21,11,42,and 4 percent over the past five years,respectively.What is the geometric average return?
A)5.78 percent
B)6.03 percent
C)6.34 percent
D)7.21 percent
E)8.20 percent

Accepted Answer

Geometric average = [(1 + .05)(1 - .21)(1 + .11)(1 + .42)(1 + .04)]^1/5 - 1 = 6.34 percent

Question 6

Bill has been adding funds to his investment account each year for the past 3 years.He started with an initial investment of $1,000.After earning a 10% return the first year,he added $3,000 to his portfolio.In this year his investments lost 5%.Undeterred,Bill added $2,000 the next year and earned a 2% return.Last year,discouraged by the recent results,he only added $500 to his portfolio,but in this final year his investments earned 8%.What was Bill's dollar-weighted average return for his investments?
A)1.5 percent
B)2.0 percent
C)2.5 percent
D)3.0 percent
E)3.5 percent

Accepted Answer

Using the CashFlow worksheet in a financial calculator, the cashflows to be entered are:CF0 = -1000CF1 = -3000CF2 = -2000CF3 = -500CF4 = (((((1000 * 1.1) + 3000) * .95) + 2000) * (1.02)) + 500) * 1.08 = $7,033.93Solve for IRR = 3.0%

Question 7

An initial investment of $35,000 forty nine years ago is worth $1,533,913 today.What is the geometric average return on this investment?
A)7.47 percent
B)8.02 percent
C)9.23 percent
D)10.47 percent
E)11.08 percent

Accepted Answer

$35,000 (1 + R)⁴⁹ = $1,533,913; R = 8.02 percent

Question 8

A portfolio had an original value of $7,400 seven years ago.The current value of the portfolio is $11,898.What is the average geometric return on this portfolio?
A)7.02 percent
B)7.47 percent
C)7.59 percent
D)7.67 percent
E)7.88 percent

Accepted Answer

$7,400 (1 + R)⁷ = $11,898; R = 7.02 percent

Question 9

A stock had year end prices of $24,$27,$32,and $26 over the past four years,respectively.What is the geometric average return?
A)2.02 percent
B)2.18 percent
C)2.55 percent
D)2.70 percent
E)2.81 percent

Accepted Answer

($26/$24)^1/3 - 1 = 2.70 percent

Question 10

Lisa owns a stock that has an average geometric return of 11.34 percent and an average arithmetic return of 11.51 percent over the past six years.What average annual rate of return should Lisa expect to earn over the next four years?
A)11.38 percent
B)11.41 percent
C)11.44 percent
D)11.47 percent
E)11.51 percent

Accepted Answer

Projected return = {[(4 - 1)/(6 - 1)] × .1134} + {[(6 - 4)/(6 - 1)] × .1151} = 11.41 percent

Question 11

Joanne invested $15,000 six years ago.Her arithmetic average return on this investment is 8.72 percent,and her geometric average return is 8.50 percent.What is Joanne's portfolio worth today?
A)$23,989
B)$24,472
C)$26,409
D)$26,514
E)$26,766

Accepted Answer

FV = $15,000 × (1 + .085)⁶ = $24,472.01

Question 12

Over the past five years,an investment produced annual returns of 16.5,21,-18,4,and 17 percent,respectively.What is the geometric average return?
A)6.42 percent
B)7.06 percent
C)8.00 percent
D)15.60 percent
E)16.00 percent

Accepted Answer

Geometric average = [(1 + .165)(1 + .21)(1 - .18)(1 + .04)(1 + .17)]^1/5 - 1 = 7.06 percent

Question 13

A stock has an average arithmetic return of 10.55 percent and an average geometric return of 10.41 percent based on the annual returns for the last 15 years.What is projected average annual return on this stock for the next 10 years?
A)10.17 percent
B)10.21 percent
C)10.38 percent
D)10.46 percent
E)10.79 percent

Accepted Answer

Projected return = {[(10 - 1)/(15 - 1)] × .1041} + {[(15 - 10)/(15 - 1)] × .1055} = 10.46 percent

Question 14

Celsius stock had year end prices of $42,$37,$44,and $46 over the past four years,respectively.What is the arithmetic average rate of return?
A)3.17 percent
B)3.85 percent
C)4.28 percent
D)10.63 percent
E)11.79 percent

Accepted Answer

Annual returns are: ($37 - $42)/$42 = -.119048; ($44 - $37)/$37 = .189189;($46 - $44)/$44 = .045455Average = (-.119048 + .189189 + .045455)/3 = 3.85 percent

Question 15

Jim began his investing program with a $4050 initial investment.The table below recaps his returns each year as well as the amounts he added to his investment account.What is his dollar-weighted average return? 
A)1.5 percent
B)1.8 percent
C)2.0 percent
D)2.2 percent
E)2.5 percent

Accepted Answer

Using the CashFlow worksheet in a financial calculator, the cashflows to be entered are:CF0 = -4500CF1 = -2500CF2 = -1000CF3 = -2000CF4 = -1000CF5 = 11836.18 (see calculations below)Solve for IRR = 2.0%4500 * (1.089) = 4900.50(4950 + 2500) * (.94) = 6956.47(6956.47 + 1000) * (1.045) = 8314.51(8314.51 + 2000) * (1.08) = 11139.67(11139.67 + 1000) * (.975) = 11836.18

Question 16

Tom decides to begin investing some portion of his annual bonus,beginning this year with $6,000.In the first year he earns a 8% return and adds $3,000 to his investment.In the second his portfolio loses 4% but,sticking to his plan,he adds $1,000 to his portfolio.In this year his portfolio returns 2%.What is Tom's dollar-weighted average return on his investments?
A)0.34 percent
B)1.20 percent
C)1.54 percent
D)2.23 percent
E)2.58 percent

Accepted Answer

Using the CashFlow worksheet in a financial calculator, the cashflows to be entered are:CF0 = -6000CF1 = -3000CF2 = -1000CF3 = ((((6000 * 1.08) + 3000)*.96) + 1000) * (1.02) = $10,302.82Solve for IRR = 1.20%

Question 17

You invested $5,000 eight years ago.The arithmetic average return on your investment is 10.6 percent and the geometric average return is 10.23 percent.What is the value of your portfolio today?
A)$9,092
B)$10,623
C)$10,899
D)$10,947
E)$11,195

Accepted Answer

FV = $5,000 × (1 + .1023)⁸ = $10,899

Question 18

The geometric return on a stock over the past 10 years was 7.9 percent.The arithmetic return over the same period was 8.8 percent.What is the best estimate of the average return on this stock over the next 5 years?
A)8.40 percent
B)9.05 percent
C)9.08 percent
D)9.13 percent
E)9.47 percent

Accepted Answer

Projected return = {[(5 - 1)/(10 - 1)] × .0790} + {[(10 - 5)/(10 - 1)] × .0880} = 8.40 percent

Question 19

We have studied three different "average return measures" - the arithmetic average return,the geometric average return and the dollar-weighted average return.Briefly outline what information each metric provides.

Accepted Answer

The answer of We have studied three different "average return...

Question 20

RedStone Mines stock returned 7.5,15.3,-9.2,and 11.5 percent over the past four years,respectively.What is the geometric average return?
A)5.84 percent
B)6.36 percent
C)7.75 percent
D)9.94 percent
E)10.33 percent

Accepted Answer

Geometric average = [(1 + .075)(1 + .153)(1 - .092)(1 + .115)]^1/4 - 1 = 5.84 percent

Quiz 1: A Brief History of Risk and Return

Jim began his investing program with a $4,000 initial investment.The table below recaps his returns each year as well as the amounts he added to his investment account.What is his dollar-weighted average return?

You have studied the historical returns and risks of various securities over the period of 1926-2012. Describe the historical returns and risks associated with bonds as compared to stocks over that time period.

For the period 1926-2012,small-cap stocks outperformed large-cap stocks by a significant amount. Given this,why do investors still purchase large-cap stocks?

The geometric return on an asset over the past 12 years has been 13.47 percent.The arithmetic return over the same period was 13.86 percent.What is the best estimate of the average return on this asset over the next 5 years?

A stock produced annual returns of 5,-21,11,42,and 4 percent over the past five years,respectively.What is the geometric average return?

An initial investment of $35,000 forty nine years ago is worth $1,533,913 today.What is the geometric average return on this investment?

A portfolio had an original value of $7,400 seven years ago.The current value of the portfolio is $11,898.What is the average geometric return on this portfolio?

A stock had year end prices of $24,$27,$32,and $26 over the past four years,respectively.What is the geometric average return?

Lisa owns a stock that has an average geometric return of 11.34 percent and an average arithmetic return of 11.51 percent over the past six years.What average annual rate of return should Lisa expect to earn over the next four years?

Joanne invested $15,000 six years ago.Her arithmetic average return on this investment is 8.72 percent,and her geometric average return is 8.50 percent.What is Joanne's portfolio worth today?

Over the past five years,an investment produced annual returns of 16.5,21,-18,4,and 17 percent,respectively.What is the geometric average return?

A stock has an average arithmetic return of 10.55 percent and an average geometric return of 10.41 percent based on the annual returns for the last 15 years.What is projected average annual return on this stock for the next 10 years?

Celsius stock had year end prices of $42,$37,$44,and $46 over the past four years,respectively.What is the arithmetic average rate of return?

Jim began his investing program with a $4050 initial investment.The table below recaps his returns each year as well as the amounts he added to his investment account.What is his dollar-weighted average return?

You invested $5,000 eight years ago.The arithmetic average return on your investment is 10.6 percent and the geometric average return is 10.23 percent.What is the value of your portfolio today?

The geometric return on a stock over the past 10 years was 7.9 percent.The arithmetic return over the same period was 8.8 percent.What is the best estimate of the average return on this stock over the next 5 years?

We have studied three different "average return measures" - the arithmetic average return,the geometric average return and the dollar-weighted average return.Briefly outline what information each metric provides.

RedStone Mines stock returned 7.5,15.3,-9.2,and 11.5 percent over the past four years,respectively.What is the geometric average return?