Midterm: Investment and Common Stocks
Midterm Study Guide – FISV6056
Professor Tim Howes
Fall 2012
1. Definition of investment:
A current commitment of $ for a period of time in order to derive future payments that will compensate for:
The time the funds are committed
The expected rate of inflation
Uncertainty of future flow of funds
2. Geometric vs. arithmetic – understand and be able to calculate difference between the two.
HPR (Holding Period Return) =
HPY (Holding Period Yield) = HPR – 1
GM = * = the product of all the annual HPRs
AM = /n * = the sum of all the annual HPYs
3. The basic trade-off in the investment process is: between the anticipated rate of return for a given investment instrument and its degree of risk.
4. The larger the variance of returns, everything else remaining constant, the greater the dispersion of expectations and the higher the risk.
5. The nominal risk free rate of interest is a function of: the real risk free rate and the rate of inflation.
6. The ability to sell an asset quickly at a fair price is associated with: Liquidity risk
7. What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?
Shift up and have a steeper slope
8. Modern portfolio theory assumes that most investors are risk: Risk averse
The common stock of XMen Inc. had the following historic prices.
Time
Price of X-Tech
3/01/1999
50.00
3/01/2000
47.00
3/01/2001
76.00
3/01/2002
80.00
3/01/2003
85.00
3/01/2004
90.00
9. Refer to Exhibit. What was your arithmetic mean annual yield for the investment in XMen Industries.
HPR = 90/50=1.8
10. Refer to Exhibit. What was your geometric mean annual yield for the investment in XMen?
Annual HPY =
11. In constructing the portfolio, the manager should?
False) In constructing the portfolio, the manager should maximize the investo’s risk level.
12. Asset allocation
Professor Tim Howes
Fall 2012
1. Definition of investment:
A current commitment of $ for a period of time in order to derive future payments that will compensate for:
The time the funds are committed
The expected rate of inflation
Uncertainty of future flow of funds
2. Geometric vs. arithmetic – understand and be able to calculate difference between the two.
HPR (Holding Period Return) =
HPY (Holding Period Yield) = HPR – 1
GM = * = the product of all the annual HPRs
AM = /n * = the sum of all the annual HPYs
3. The basic trade-off in the investment process is: between the anticipated rate of return for a given investment instrument and its degree of risk.
4. The larger the variance of returns, everything else remaining constant, the greater the dispersion of expectations and the higher the risk.
5. The nominal risk free rate of interest is a function of: the real risk free rate and the rate of inflation.
6. The ability to sell an asset quickly at a fair price is associated with: Liquidity risk
7. What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?
Shift up and have a steeper slope
8. Modern portfolio theory assumes that most investors are risk: Risk averse
The common stock of XMen Inc. had the following historic prices.
Time
Price of X-Tech
3/01/1999
50.00
3/01/2000
47.00
3/01/2001
76.00
3/01/2002
80.00
3/01/2003
85.00
3/01/2004
90.00
9. Refer to Exhibit. What was your arithmetic mean annual yield for the investment in XMen Industries.
HPR = 90/50=1.8
10. Refer to Exhibit. What was your geometric mean annual yield for the investment in XMen?
Annual HPY =
11. In constructing the portfolio, the manager should?
False) In constructing the portfolio, the manager should maximize the investo’s risk level.
12. Asset allocation