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Homework answers / question archive / Royal Melbourne Institute of Technology BAFI 1045 Topic 1 1)The basic trade-off in investment process is? (2) The rate of exchange between future consumption and current consumption is? The the variance of return, everything else remaining constant, the thedispersion of expectation and the the risk

Royal Melbourne Institute of Technology

BAFI 1045

Topic 1

1)The basic trade-off in investment process is?

- The

thedispersion of expectation and the__ __the risk.

- The coefficient of variation is a measure of?
- The Nominal risk free rate of interest is a function of ?
- In the phrase "nominal risk free rate", nominal means?
- If a significant change is noted in the yield of a T-bill, the change is most likely attributable to ?
- The real risk-free rate is affected by a two factors:

- Which of the following is not a component of risk premium?
- The ability to sell an asset quickly at a fair price is associated with
- The variability of operating earnings is associated with?
- The uncertainty of investment returns associated with how a firm finances its investment is known as
- 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?
- A decrease in the market risk premium all other things constant will cause the security market line to
- A decrease in the expected real growth in the economy, all other things constant, will cause the security market line to
- Unsystematic risk refers to risk that is ?
- The security market line(SML) graphs the expected relationship between
- Two factors that influence the nominal risk-free rate are:

- Measures of risk for an investment include
- Sources of risk for an investment include
- Modern portfolio theory assumes that most investors are
- Which of the following is not a component of the required rate of return?
- All of the following are major sources of uncertainty EXCEPT
- The total risk for a security can be measured by its

Assume you bought 100 shares of NewTech common stock on January 15, 2003 at $50 per share and sold it on January 15, 2004 for $40 per share.

- refer to exhibit 1-1 What was your holding period return?
- Refer to Exhibit 1-1. What was your holding period yield?

Suppose you bought a GM corporate bond on January 25, 2001 for $750, on January 25, 2004 sold it for $650.00.

- Refer to exhibit 1-2. What was your annual holding period return?

- Refer to Exhibit 1-2 What was your annual holding period yield?

Common stock of Xmen had the following historic prices.

Time price of Xmen 3/01/1999 3/01/2000 3/01/2001 3/01/2002 3/012003 3/01/2004

50.00 47.00 76.00 80.00 85.00 90.00

- Refer to Exhibit 1-3, what was your holding period return for the time period 3/1/199 to 3/1/2004?
- what was your annual holding period yield (Annual HPY)?
- What was your arithmetic mean annual yield for the investment in Xmen?
- What was your geometric mean annual yield for the investment in Xmen?

You have concluded that next year the following relationships are possible: Economic Status Probability Rate of Return

Weak Economy 0.15 static economy 0.6 strong economy 0.25

-5% 5% 15%

- What is your expected rate of return [E(Ri)] for next year?
- Compute the standard deviation of the rate of return for the one year period.

- Compute the coefficient of variation for your portfolio.

- what are the real rates of return for each of these securities?
- If next year the real rates all rise by 10 percent while inflation climbs from 1.5 percent to 2.5 percent, what will be the nominal rate of return on each security?
- if over the past 20 years the annual returns on the S&P 500 market index averaged 12% with a standard deviation of 18%, what was the coefficient of variation?
- Given investments A and B with the following risk return characteristics, which one would you prefer and why?

Investment |
Expected Return |
Standard deviation of Expected Returns |

A |
12.2% |
7% |

B |
8.8% |
5% |

- Calculate the risk premium for asset i

- Calculate the risk premium for the market portfolio
- Compute the rate of inflation for the year 2000
- Calculate the real rate of return for U.S. T-bills
- Calculate the real rate of return for U.S. long-term bonds
- Calculate the real rate of return for U.S. large-cap stocks

- Calculate the HPY for stock 1
- Calculate the HPY for stock 2
- Calculate the market weights for stock 1 and 2 based on period t values

- Calculate the HPY for the portfolio
- Calculate your holding period return (HPR) for this investment in GE stock.
- Calculate your holding period yield (HPY) for this investment in GE stock
- Compute the arithmetic mean annual rate of return for Stock Z.
- Compute the standard deviation of the annual rate of return for stockZ.
- Compute the coefficient of variation for Stock Z.
- Compute the geometric mean rate of return for Stock Z.

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